Canada

A brave new world

Paul Martin is taking the country into an era of no deficits

MARY JANIGAN February 23 1998
Canada

A brave new world

Paul Martin is taking the country into an era of no deficits

MARY JANIGAN February 23 1998

A brave new world

Paul Martin is taking the country into an era of no deficits

MARY JANIGAN

JOHN GEDDES

Canada

For four years, through hints and leaks, Paul Martin has used the same shrewd, no surprises strategy to pre-sell his annual budget. And even with good news to deliver, as the federal finance minister heads into his fifth budget on Feb. 24, that tactic is still the order of the day. It seems difficult to remember those not-so-far-away days when federal budgets could flabbergast voters—and throw financial markets into overnight turmoil. The previous Conservative government trundled unsuspecting and unprepared Canadians from one crisis to another, springing announcements with little advance warning.

Martin, in contrast, has a different philosophy. As Liberal pollster Michael Marzolini, chairman of POLLARA notes,

“Canadians have got to feel that they are working in partnership with government. What has always made Martin’s budgets work is that there are as few surprises as possible: you know where he is going.”

This time, the finance minister is heading into a realm that once seemed out of reach. After more than two decades of annual federal deficits, Martin will likely announce that the 19971998 federal budget is balanced—although he will stress that final numbers will not be available until this fall. He will unveil a balanced 1998-1999 budget— which offers tax breaks for low-income taxpayers and renewed social spending. And he will begin to pay down the country’s $583-billion debt—an event that many Canadians never believed they would see after so many years of ever-increasing red ink.

Then, he will repeatedly drive home his “no surprises” message for the next four years of Liberal government. There will be something for everyone ahead—as the so-called fiscal dividend grows. But that pay-off is narrowly defined: with the budget balanced and revenues rising, it is the money that Ottawa will have available to devote each year to new programs, debt reduction and tax breaks, using the tax measures and the program spending outlined in the February, 1997, budget as a base for calculations. Those amounts are still relatively small—roughly $4 billion in additional funds in 1997-1998—and Martin is doing everything within his power to downplay the initial size of the dividend. And although most economists predict that the cumulative dividend could surpass tens of billions of dollars throughout the first decade of the 21st century, assuming no major economic catastrophes occur, the finance minister will maintain that no one should expect him to throw caution to the wind. “The most important signal we want to get out is fiscal prudence,” says a senior finance official. “We can start making investments in our future—but we are going to be very cautious about how we proceed.”

This year, the budget’s “big ticket” investment in the future is the Millennium Fund: federal scholarships for postsecondary students squeezed by rising tuition fees. The personal project of Prime Minister Jean Chrétien, the fund was announced last fall and could go as high as $3 billion—providing assistance to both needy and academically gifted pupils. It will be a sinking fund: that is, rather than simply distributing the interest earned on the committed funds, it will hand out both principal and interest so that the money in the fund will eventually disappear—unless new money is added. It will be paid for out of the 1997-1998 fiscal dividend—even though it will likely not become law before that fiscal year ends on March 31. And it will be the centrepiece of a budgetary education package that includes more help for students with dependants. “It makes no sense to ask students to start their working lives with debts of $25,000 to $50,000,” Martin told a student audience earlier this month. “It’s counterproductive to anything any government holds true.”

But the Liberals’ pleasure in such announcements is tempered by the ironic knowledge that their economic success has created formidable political problems. The Millennium Fund has put them on a collision course with many provinces bitter over repeated federal cuts in cash transfers for health, postsecondary education and welfare. Now, those provinces contend, Ottawa should not launch showy federal initiatives in areas of provincial jurisdiction such as education; instead, it should replenish those transfer payments so that the provinces can restore their basic programs.

The situation is especially volatile in Quebec—because the budget appears mere days after this week’s Supreme Court of Canada hearing on the question of Quebec’s right to unilaterally declare independence. With tensions already high, Quebec Premier Lucien Bouchard will almost certainly charge that Ottawa is plucking money from hard-pressed Quebec taxpayers—and using it to raise its own profile within the province. “The Millennium Fund is really going to put the cat among the pigeons,” observes Thomas d’Aquino, president of the influential Business Council on National Issues. “It will set the stage for a very tough and, at times, very bitter battle. And the only way Ottawa can win the argument is to say, ‘Look, Canada is a modern industrialized nation. The fund is a very direct way to give a helping hand to young people across the nation, to ensure that they have globally competitive skills.’ ”

Worse, a clash with the provinces could distract attention from Martin’s central task: he must convince Canadians that his go-slow approach is justified in a deficit-free climate. The finance minister has vowed that one-half of the fiscal dividend over the life of the government will be devoted to increased social and economic spending, while the other half will be put towards the debt and tax reductions. So far, voters appear to accept that strategy. In a recent Liberal poll, 1,200 respondents were asked how they would distribute $100 of surplus budgetary revenue: on average, $44 was put towards increased funding for health care, education and pensions; $33 went towards the national debt; and only $23 was reserved for tax cuts. So Martin’s three-pronged approach appears to suit the public mood—at the moment.

But there is no guarantee that such patience will hold as the size of the potential fiscal dividend becomes clearer. Liberal insiders view the upcoming budget as a challenge. They note that, for the first time in the 1990s, their polls indicate that no single issue is preoccupying the public. Fewer than 30 per cent of Canadians—a low level in the insecure 1990s—say that the most important issue is jobs, while no rival problem, such as national unity, even approaches that level of concern. Canadians are relaxing, floating between issues.

The budget offers a golden opportunity to fill the void—to ensure that the Liberals’ issues become the public’s issues. As a result, next week’s budget will focus attention on the formidable problems of the $583billion debt. It will apply the $3-billion contingency reserve in the 1997-1998 budget—plus some additional funds—towards reducing that debt. (The size of the 1997-1998 debt will actually decline in relation to the size of the economy for the second consecutive year—which is also the second decline in 26 years.) And, over the protests of many provinces, Ottawa will reassure Canadians that there will be more strategic federal spending on health and education— as the fiscal dividend grows and, not coincidentally, the next federal election approaches.

Among other budgetary issues:

• There will be modest breaks for low-income taxpayers—although finance department officials were still finalizing the mechanism late last week. Martin may raise the basic personal credit of $6,450—or he may lower the three-per-cent surtax that is now applied to each taxpayer’s federal tax. In either case, the initial change will be small—and insiders say it will be structured to assist only lowincome taxpayers.

• Despite criticism from social policy groups, Martin will not increase his current 1998-1999 contribution of $850-million to the National Child Tax Benefit, which is slated to come into existence on July 1. Instead, the budget will simply reaffirm Ottawa’s intention to double that amount over the next few years to ensure increased assistance for low-income working families.

• To dampen public expectations, Martin will “back-load” many future spending items into the 1997-1998 budget in order to ensure that there is no surplus. In addition to the Millennium Fund, this could include up to $1 billion in additional expenditures, among them about $350 million for ice storm compensation, another $350 million for a native healing fund, payments to Canadians who contracted hepatitis C from tainted blood products and a $100-million donation to the international campaign against land mines. That approach is certain to draw the ire of Auditor General Denis Desautels, who sternly denounced a similar move last year as “contrary to the stated accounting policies of the government of Canada.”

• The 1998-1999 budget will feature new spending of at least $1.5 billion. That includes $1.06 billion for the 27 promises— such as an extra $60 million for grants to students with dependants—which the Liberals made during last year’s federal election campaign. It also includes a wage increase for civil servants—and about $300 million for such programs as technology research.

• There will be few health-care announcements: $25 million to provide tax credits to Canadians who care for infirm family members at home; funds for an Aboriginal Health Institute; and research into breast cancer, AIDS and tobacco dependency.

It is difficult to start new federal programs because health care is a field of provincial jurisdiction—and the provinces have insisted that Ottawa restore funds to the basic system before it tackles new schemes such as pharmacare.

That modest something-for-everyone approach frustrates the Liberals’ opponents.

Martin’s strongest critic, the Reform party, argues that the finance minister’s accounting ploys actually conceal heavy spending—distributed over several fiscal years. Instead, finance critic Monte Solberg is pushing for further debt reduction. “Canadians are sending a powerful message about what they want: pay the debt down,” he said.

FACING THE FUTURE WITH ROOM TO MANOEUVRE

The budget Finance Minister Paul Martin will deliver on Feb. 24 is widely viewed as a watershed—a deficit-free federal fiscal plan after 28 years of red ink on Ottawa’s books. But in an interview in his Parliament Hill office last week with Maclean’s Ottawa correspondent John Geddes, Martin’s tone was business as usual. Excerpts:

Maclean’s: How is the budget-making job different this time around, compared to 1994 when you set out to eliminate the deficit?

Martin: Obviously, our backs are not against the wall the way they were then. But that in no way removes the absolute

necessity of controlling spending. What’s happening is we’re getting the margin to manoeuvre.

Maclean’s: Will part of that manoeuvring involve cutting taxes?

Martin: I’ve said I want to begin the process in this mandate of lowering taxes, primarily for lowand middle-income Canadians, and whether we do it in this budget or in another budget, obviously we are getting closer to that.

Maclean’s: Why not celebrate eliminating the deficit with some across-the-board tax relief now?

Martin: The day after you balance the books you don’t all of a sudden have the kind of money that would allow you to do that. Until you have the money, you do your tax cuts where the impact is going to be the greatest and where people need it the most.

Maclean’s: Polls suggest Canadians are not enthusiastic about Ottawa embarking on new spending. But there are reports of

cabinet ministers clamoring for new initiatives. Are they out of touch?

Martin: Cabinet ministers know there are needs to be filled. But those same cabinet ministers, when you talk about priorities, are very much at one with the Canadian people. They are not saying, ‘Let’s

spend all this money tomorrow.’ What they are saying is, ‘Let’s build a long-term plan that will enable us to fulfil these needs when it is right and proper to do so.’ Maclean’s: Is cabinet distracted by speculation that you and other senior ministers are jockeying for position to run for the Liberal leadership when the Prime Minister retires? Martin: It is a total nonissue. Essentially, what you’ve got is a government with individual ministers very actively at work in their own portfolios. Nobody has a lot of time for extracurricular activities.

Maclean’s: The budget is expected to contain some big education initiatives. Isn’t that a provincial responsibility?

Martin: We’re going to respect provincial jurisdiction. But the problem of student debt is a responsibility of both levels of government. I don’t believe it makes any sense for us to reduce the national debt by increasing debt on the generation that is going to determine whether this country is going to succeed in the next century. Maclean’s: This is being called the budget to usher in a new era. Do you feel that way about it?

Martin: I don’t see the transition. Yes, this is a new mandate and the financial circumstances are different. Sure, we’re going to have a little more to spend on high-priority areas. And, yes, we can begin to contemplate some tax reduction. And, yes, it is a lot healthier to be retiring some debt than reducing the deficit.

When we took office, we had a plan—it is unfolding.

But the critics are not unified—the Tories are emphasizing the need for tax cuts, while the New Democrats and the Bloc Québécois want additional social spending. Such mixed opposition messages leave the Liberals where they always crave to be and where the most votes usually lie—in the middle. Tim O’Neill, chief economist at the Bank of Montreal, notes that the fiscal dividend could balloon as high as $11 billion in 1999-2000—but he cautions that Martin should not abandon his stance of fiscal rectitude even with the prospect of that bonanza. “If there were a dramatic shift in the direction of spending, I think the markets would see that as something of a problem,” he says. So far, given Martin’s caution and accounting practices, that is unlikely to be the case.