So, Greg Mills, this is your chance to play finance minister. The federal deficit is going down faster than expected: what should Ottawa do with the unexpected windfall? Mills, 38, is torn between options, his pent-up frustration with politicians seeping into each selection. “Get the deficit down further,” he says first. “Keep going, boys. As long as we are in debt, we are in trouble.” Then, Mills, the technical representative for a Chester, N.S., firm that makes plastic processing machinery, remembers his own tax tab. “No, on second thought, being a very taxed person, give it back to me,” he asserts. “Everything has gone up. Governments are inefficient—we are getting ripped off.” He explains that he and his wife, Karen, have shopped much more carefully since the arrival of their 17-month-old son, John Peter. They watch for sales. They migrate towards stores that offer to pay the Goods and Services Tax themselves. Despite Mills’s bonuses, their taxes always seem to grow faster than their income. “At the very least, there should be no tax increases,”
Mills finally declares. “I don’t really hold out any hope of a break.” Such acceptance is perhaps the most favorable emotion that Finance Minister Paul Martin can hope to evoke as he prepares his forthcoming low-key, hold-th e-line budget. Maclean’s has learned that there will be no new spending cuts—although previously announced cuts continue until March 31, 1999—and no new tax increases. But contrary to the advice of some economists and some of his own Liberal colleagues, Martin will not institute either acrossthe-board tax cuts or lavish spending programs. The budget’s tax breaks will be modest, phased in over several years and targeted at specific groups such as impoverished children or parents saving for their children’s education. Martin told Maclean’s that he does not want to offer generous income tax cuts until the deficit is conquered. If he is too generous before then, he notes, nervous financial markets might decide that he had abandoned his crusade against the deficit—and shy away from Canada. That would force the Bank of Canada to raise interest rates to attract foreign lenders. “We will be reducing taxes—let there be no doubt about that,” he said. “But when you do a tax cut, you want it to be permanent. We
The next federal budget will offer little tax relief
have a huge responsibility to make sure that low interest rates stay low. We can’t jeopardize those by bringing in some kind of premature tax cut.”
Martin’s steady, undramatic approach evokes decidedly mixed reactions among Liberals. They are unlikely to persuade the finance minister to change his budget, which is expected in late February or early March. But Maclean’s has learned that party strategists are debating whether they should raise the prospect of future across-the-board income tax cuts during the next federal election, which Liberal organizers have tentatively scheduled for early June. After all, finance department officials say that Martin will likely exceed this year’s deficit target—which was $24.3 billion—by about $5 billion. In the coming 1997-1998 fiscal year, barring a catastrophe, those officials believe that the deficit will probably come in at least $3.5 billion below Martin’s long-standing $17-billion goal.
If the government keeps to that track, the federal deficit is likely to disappear in the 1999-2000 budget year. After 27 years of continuous deficits, that is good news—but it does not quite match the political thrill of a tax cut. Liberal polls show that 70 per cent of Canadians want lower taxes. Still, three-quarters of those also acknowledge that the ■"fy government cannot afford such an initiative. Such sentiments present the Liberals with daunting choices, at a time when Environics 1 Jg Research Group Ltd. re^ ports that their popular } support has dipped to 47 per cent from 50 per cent last October. Rattled by that erosion, and unnerved by the fact that both the Reform party and the Conser□ vatives have promised tax 5 breaks, they do not want to 1 appear like complacent penny-pinchers oblivious to the voters’ pain. But lavish promises could damage their reputation for economic competence—and remove the key difference between them and the opposition. “The question is: does our commitment to deficit reduction look weak if we offer tax breaks?” asks a senior Liberal adviser. “Or, if we do, are we simply showing that there will be a payoff after the pain? The jury is still out on this one.”
While the strategists agonize, Martin is crafting a restrained budget that weaves the theme of increased security in income and health through every initiative. Finance officials reason that the federal government cannot create jobs for Canada’s 1.1 million unemployed— or guarantee the jobs of the country’s 11.7 million workers. Instead, Ottawa’s scarce resources will be aimed at social needs. The budget’s centrepiece will be an increase in the Child Tax Benefit. In 19961997, families with incomes of less than $25,921 received the full credit of $1,020 per child—at an estimated cost of $5 billion. Ottawa will boost that amount in 1997-1998—and specify further increases over future years. If negotiations with the provinces are successful, the budget may also announce a so-called National Child Benefit, which would combine the enlarged federal credit with the provinces’ diverse, and possibly enlarged, payments to poor children. As Martin told Maclean’s: “By God, we can do a helluva lot better than now. If we don’t, we are going to pay a huge price.”
In addition, the forthcoming budget will likely feature an increase in the current $2,000 annual limit on Registered Education Savings
Plans. Ottawa may also raise the $42,000 lifetime limit on those contributions. The current tax credit of $100 per month that taxpayers can apply against the cost of their education or retraining will almost certainly increase—to encourage more Canadians to update rusty skills. The federal government will devote more funds to youth internship programs. Ottawa is also likely to scratch together the funds to maintain the Network of Centres of Excellence, a program that unites universities and companies in research ventures.
Such limited measures are certain to dash the hopes of those who believe that the economy will not thrive without bigger tax breaks or greater government spending. But Martin insists that low interest rates will pay off soon. Over the past two years, the pivotal Bank of Canada rate has plummeted eight times, to 3.25 per cent from 8.23. As consumers renegotiate their mortgages and loans, their lowered payments should tuck an extra $4 billion to $5 billion into their pockets—with some of that money finding its way back into the economy. If, however, Ottawa lapses into its old-style spending habits, Finance officials argue that interest rates will skyrocket.
In fact, Finance officials are particularly worried that some
market analysts and Liberal supporters have seriously overestimated the extent of the government’s progress against the deficit—and are making dangerous demands on the treasury. “There are people in the Liberal party who think we have to have sexy things to go to the polls with,” argues a senior Liberal. “But one of the reasons that people have supported large cuts is that they believed we were going to fix this problem, once and for all. If we are re-elected, they don’t want to hear about the deficit.”
Such reasoning cannot quell the economic and political debate about big spending or big tax cuts—because unemployment remains stubbornly high at 9.7 per cent. But Martin has resisted intense pressure for cuts in Employment Insurance premiums—viewed by many as a vital prerequisite for job creation. On Jan. 1, those premiums declined from $2.95 per $100 of employee income to $2.90. Some business groups cherished the futile hope that Martin would announce further El premium reductions, beginning on July 1, in his budget, if only because the surplus in the El Fund hit $5.6 billion on Dec. 31. “That five-cent cut in El premiums was a token,” argues Catherine Swift, president of the Canadian Federation of Independent Business. “We felt a reduction in the order of 25 cents to 50 cents was feasible. The job side of the economy needs a positive kick in the pants.”
In the longer term, what the Liberals promise during an election campaign depends on such factors as the unemployment rate in mid-spring, Martin’s attitude—and the voters’ patience. So far, that patience appears to be holding. High taxes infuriate Doug Loughran, the president of an appliance parts distributor in Coquitlam, B.C. Although his firm, Reliable Parts Ltd., has seven thriving outlets in Canada and six in the United States, all of his 1997 expansion will be south of the border—largely because the taxes are lower. But when he is asked what Martin should do, Loughran is adamant. “Pay down the deficit,” he says. “It’s the biggest single reason that they are looking for money to grab in the first place.” The upcoming campaign could hinge on such advice. □
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