Can Diefenbaker fulfill his election promises?
He said he’d cut taxes and boost spending; turn “tight money” loose and reverse the housing slump. The odds against him aren’t as great as his enemies hope
Some years ago when John Diefenbaker was a private MP on the opposition side, he met a civil servant one evening as he left the House of Commons after a speech. Half in fun, the official reproached him: “You shouldn't make all those promises. What if you got into power and had to carry them out?”
Diefenbaker’s reply was equally facetious.
"We can promise anything we like," he said. "It will be your job to deliver for us.”
Today the word spoken in jest has come true. The Diefenbaker government came in on a platform of promises. Civil servants have been instructed to carry them out. and they think they will be able to do it. Their doubt is about the effect; will these exploits do good or harm in the long run?
Aside from the big general objectives like “restoring the sovereignty of parliament” and “developing Canada’s resources,” the Conservatives arc pledged to do certain things immediately:
RAISE: Oi l) AGE PENSIONS.
MAKE ADVANCE PAYMENTS IN CASH ON I A R M - S T O R E D G R AIN.
GIVE MORE MONEY TO PROVINCES AND MUNICIPALITIES.
( ALL A COMMONWEALTH CONFERENCE TO BUILD UP COMMONWEALTH TRADE..
The trade conference plan brought the first demonstration of how the climate has changed in Ottawa.
At the June meeting in London the new Prime Minister had been somewhat taken aback by the lukewarm reception given to his proposal. Australia's Robert Menzies publicly called it "quite premature." The British were polite, but they wanted to know' more precisely what Canada had in mind.
The fact was that the new' Canadian government had nothing precise in mind. A Commonwealth trade conference had been a good election plank, because everybody in Canada thinks Commonwealth trade is a good thing. The Liberals, too. used to make intermittent efforts to build it up. and often asked their officials whether a conference on it should be called.
“They always gave us a dozen good reas-
ons why a conference wouldn’t accomplish anything,” a Liberal ex-minister said recently. "and we took their advice because that's what we thought, too.”
These officials are now advising the Conservatives. but when Prime Minister Diefenbaker got home from London he didn't wait for them to tell him that a Commonwealth trade conference w'ould do no good. It was he who did the telling. He told them to draft an agenda with definite proposals for a Commonwealth trade conference, and to have it ready before Prime Minister Menzies’ visit (then scheduled for late July, later postponed to August).
So pious it’s funny
The trade experts were dumbfounded. Most of them felt in their hearts that it couldn't be done. The whole trend of western policy since the war had been awaiy from preferential arrangements, and toward general freedom of trade with all other free nations. The obvious devices for diverting trade into the Commonwealth were forbidden by the general agreement on tariffs and trade (GAIT) signed ten years ago at Geneva. Of course GATT has loopholes and escape clauses, but the Commonwealth nations had tried to use these sparingly and do their very best to make GATT work.
And of all the apostles of freer multilateral trade. Canadians had been the most vocal and the most pious. At one meeting of GATT members a few years ago. the Australian delegate brought down the house thus: "Unlike the Canadians, we in Australia are not without sin.”
These were the men assigned bv their new government to draw up specific proposals for the stimulation of trade within the Commonwealth. What they have drafted is a closely-held secret at the time of waiting, though it may be published any day now'. The interesting fact is not so much what they have drafted, but that they have drafted something. They have been compelled, for better or worse, to re-examine a set of assumptions that they and Canada's government had taken for granted since 1935.
The same agonizing reappraisal has taken place in financial
continued on page 36
Shaping up: conflict in the cabinet, pressure from retailers, back-talk from the Bank of Canada
and economic policy, with something of the same result. Already it is evident that some radically different measures are possible: the question whether they are advisable is still open.
Many of the Conservatives’ promises were expensive, so expensive that the Grits had great fun with them during the campaign.
“Diefenbaker says he’ll give money here and give money there, and still collect less money to do it with,” they cried. “Who does he think he is, the prophet Elisha?”
When they cast up accounts after the election, some Tories were privately inclined to agree. They were committed to raise pensions, pay cash advances to farmers, bail out the provinces, and still reduce taxes and avoid deficit financing —a tall order. The new Minister of Finance, Donald Fleming, belying his reputation as a sobersides, had a wry joke with friends in the early weeks in office: “If I had known we were going to win, I’d have been a lot more careful what I said.”
On the surface it did look as if they had talked themselves into a corner. The current budget forecast a $ 150-million surplus, but a boost in civil service pay ate up $110 millions of that. How could they do all these costly things for $40 millions?
It would take that much to raise old age pensions from $46 to $50. Conservatives hadn't promised any stated amount, but a four-dollar increase is the least they can hope to get away with.
They didn't say how much they’d cut taxes, either, but the cut will be no help in a 1958 election unless it’s big enough to be visible in an ordinary pay envelope. One popular way would be to raise the exemptions for income tax from $1,000 and $2.000 (for single and married) to $1.200 and $2,400. That would reduce the income tax take by $195 millions.
Conservatives are also pledged to reduce, and would dearly like to abolish, the special excise tax on automobiles. That would lop off at least $70 millions.
Cash advances on farm-stored grain wouldn’t affect the budget. If prairie farmers have 135 million bushels on their hands this autumn, Fleming will need about $100 millions to pay for it, but the cash won’t have to come out of current revenue—these are loans, to be repaid when the grain is sold. He’ll have
to find the money somehow, of course, but that’s another and quite different problem.
What will affect the budget, and no mistake, is the extra money promised to provincial governments. How much it will be is anybody’s guess, but it’s sure to be plenty. Premier Leslie Frost of Ontario has been asking no less than $100 millions more for Ontario alone, on a new formula that would split as much again among the other nine provinces. He may be willing to wait a bit, but Ottawa tax experts are afraid he will insist at least on getting an interim adjustment. They figure the inescapable minimum at $30 millions for Ontario, $30 millions for the rest of the country, plus $20 millions in equalization payments to bring the poorer provinces up to Ontario’s level of tax revenue per head — $80 millions altogether.
Ontario demands more money because she is so rich. Maritime provinces demand more because they are so poor. Apparently in one campaign speech John Diefenbaker said something about an “Atlantic Provinces adjustment grant”— Ottawa has no text, but New Brunswick’s Provincial Treasurer Don Patterson has the words written down in his notebook. The Ottawa brain trusters will haggle as bravely as they can. but they are resigned to paying about $20 millions extra to the Atlantic region.
Add all these items and you get quite a tidy sum:
Old age pension .... $40 millions
Extra to provinces .. $100 millions
Income tax cut .... $195 millions
Auto tax cut ...... $70 millions
Total $405 millions
Needless to say, Donald Fleming may not do all this exactly—he may put more into one item, less into another, drop some or add others. But the Conservative promises make it certain that he will have to do something pretty close to these things, at a cost pretty close to the same total. And according to the budget Walter Harris tabled last March, he'll have only $40 millions, or less than ten per cent of what he needs, to do it with.
Tn fact, though, his plight is not as bad as all that. He can find the extra money if he wants to—the Liberals could have done the same if they hadn’t de-
cided it was bad fiscal policy.
First of all, the surplus looks as if it will be higher than the $150 millions estimated in March—it may run over $200 millions. If it does, Fleming will have about $100 millions left after giving the civil service its extra pay.
Secondly, two $50-million items were paid into reserve funds—prudent financing, but not absolutely necessary. That could provide $100 millions more.
Finally, the national income is still expanding. If it goes on growing at the normal rate, existing tax rates would bring in $200 millions more next year than they will this year.
So it won’t be impossible to find enough money for 1958-59 and still avoid showing a deficit. As for the interim budget of next November, Fleming can use a whole year’s surplus to make tax cuts and new outlays in the final quarter of the year only. He shouldn’t have too much trouble making them balance.
But that is only one, and not the biggest, of the problems facing the new Minister of Finance. A much trickier one is monetary policy—the so-called “tight money” situation.
The quiet and stubborn Coyne
The very phrase “tight money policy” must have been w'orth many thousands of votes to the Conservatives in June. It has such a mean, nasty sound. I met a taxi driver in Ottawa, toward the end of May, who assured me it was the fault of this policy that his customers had become so tight with their money—tips were meagre, and the government was to blame. If many people had the same notion, no wonder the Grits were beaten.
Actually, of course, “tight money” is not so much a policy as a condition. When the demand for capital exceeds the supply, as it has in Canada during the last two years, the cost of capital goes up, just like the price of eggs when eggs are scarce. The cost of capital is the interest rate, so interest rates have risen.
The so-called “tight money policy” did not create or impose this natural process on the Canadian people. But policy did come in as a negative thing — a decision not to interfere with the law of supply and demand. The Bank of Canada could have held interest rates down by buying government bonds from the chartered banks at par, and thus giving the banks
the extra cash they needed without letting the price of government bonds go down and the interest rate accordingly go up. This the Bank decided not to do, and the rise in interest rates followed.
In opposition, the Conservatives attacked this decision and held the Liberal government responsible for it. In fact, as they are now learning, it was not a government decision at all.
Under the law enacted by the last Conservative government in 1935, power over monetary policy rests with the governor and directors of the Bank of Canada. They are of course responsible to parliament, for parliament is sovereign. But the government of the day is not. It is bound by the law, which only parliament can amend.
The present governor of the Bank of Canada is a youngish, slender, handsome man named James B. Coyne. He is a very quiet fellow, but he is also very stubborn. Unbeknownst to their Conservative foes, the Liberals too had a try at getting him to relax the “tight money policy,” but they didn’t succeed.
Walter Harris, as Minister of Finance, was not happy about it.
“There’s something wrong in the system,” he once said to an official of his department, “when these fellows across the street (pointing to the Bank of Canada) can defy an elected government.”
But the fact seems to be that they can. The issue has not yet been fully joined between the Bank of Canada and the new Conservative government, but Ottawa’s railbirds can see an interesting range of alternatives.
First, the Bank of Canada may give way to the mandate of the new regime, and act to bring interest rates down. People who know Jim Coyne think this unlikely.
Second, the governor of the Bank of Canada may stand absolutely firm on the letter of the law, and defy the government. Only an act of parliament could remove him. However, this might give the Conservatives just the issue they are seeking for a new and sudden election, so it too is regarded as improbable.
Third, the governor of the Bank of Canada might resign, and state his reasons for so doing. The government could then name another man whose opinions on monetary policy would be more to their liking. This would be a major challenge to the Conservatives on the whole issue of inflation, and they will
certainly evade it if they can.
The likeliest solution of all, of course, is the good old Canadian principle of compromise. The government will try to get Coyne to move a little way in their direction while they move a little way in his, and hope that circumstances meanwhile may narrow the gap between them.
At the moment, though, circumstances seem more likely to do the opposite. A new tax-cutting, free-spending federal budget, though it will give the individual taxpayer more money to spend than he had before, will make the market for investment capital tighter than ever.
Why? Because the government itself will become a competitor for capital, for the first time since the war.
The big surpluses of recent years have been “over-taxation” in one sense, perhaps, but they haven’t always meant that the government was taking in more than it was spending. Big capital projects like the St. Lawrence Seaway have been launched without, so far, any need for new borrowings by the federal treasury.
If the surplus is to be wiped out, Ottawa will have to raise some capital. The Seaway is using about $100 millions this year, the Northern Ontario pipeline $60 millions. Thus the demand for capital becomes greater than ever without, so far, any increase in the supply.
So if the Bank of Canada sticks to its guns, presumably the interest rate will go up more than ever. But if the Bank of Canada gives way and provides an increase in the supply of capital, what then?
Coyne and his men say the result will be inflation. That’s why they have fought so hard against all suggestions that they move in and give new cash for the banks to lend. In principle they say it’s exactly the same as printing new money, and will send prices up even faster than they’re going up anyway.
Indeed, according to the economic doctrine on which Liberal governments operated since 1942, the whole Conservative program, which will add about half a billion dollars to the buying power of Canada without any creation of new goods, is practically a definition of inflation.
Conservatives have never accepted this definition. They say the people are quite capable of doing their own saving. They say the main cause of inflation is not so much spending by individuals as wasteful spending by the government itself.
Actually there is not much hope of massive savings in the civilian government departments. Their estimates are studied in Parliament item by item and the opposition has never suggested cutting a single dollar off them. If large sums are to be cut out of government expenditures they must come out of the defence program, which has run between a billion and a half and two billion a year for the past six years.
Conservative financial critics like Donald Fleming and J. M. MacDonnell have always believed this possible and still do. It is not so certain that General George Pearkes, late defence critic and now Defence Minister, holds the same view.
At a press conference in London after a quick visit to NATO headquarters Pearkes said he was now learning a great deal that he couldn't know when he w'as in opposition. “I can see,” he admitted frankly, “that some of my criticisms were not valid.”
But in fact his criticisms had been fairly mild. Of all the present cabinet, Pearkes would probably be least embarrassed by having his old speeches read back to him. He always thought Brooke Claxton did an admirable job of building
up Canada’s armed forces after the Korean War began, and even from his seat in opposition he always said so. Pearkes has no intention of making any fundamental changes in Canadian defence policy. He was asked at the same press conference whether Canada would follow the British example and reduce manpower to concentrate on guided missiles. His answer was no. As for Canada’s commitment to NATO overseas, an air division and an Army brigade, Pearkes has often said he considers this a necessary contribution that must be carried on.
The watchword is carry on
Where then will the massive savings be made in Canada’s defence program? The answer to that will be settled, no doubt, in the cabinet chamber, where Fleming and Pearkes will lock horns like all ministers of Finance and Defence. Pearkes is a genial soul but a doughty fighter. It would be rash to count on many heavy slashes in a budget that he is defending.
Defence is not the only field where no major change of policy is expected. Prime Minister Diefenbaker has made it clear that there won’t be any shift in foreign policy either. Canada will continue to support NATO, contribute to the Colombo plan, keep a contingent in the United Nations Emergency Force in the Middle East, refuse to recognize Communist China. The new Labor Minister, Michael Starr of Oshawa, says he found his department in excellent shape and has no plans for radical changes. The same goes for Howard Green in Public Works and Douglas Harkness in Northern Affairs. Broadly speaking their watchword will be “carry on.”
In those cases nobody ever expected or demanded anything else. It is not so with all the things the new government inherited.
At one of the first cabinet meetings some routine matter came up involving the Trans-Canada Pipeline project. Prime Minister Diefenbaker fished in his pocket
and pulled out a sheaf of yellowing press clippings.
“Now about this pipeline,” he said. “Here’s something Howard Green had to say about it last year.” He read out a sizzling paragraph or two. He went on around the table, not forgetting to include “something John Diefenbaker had to say.” In all cases the general burden was that the project was damnable in root and branch and should be consigned to perdition.
He was of course merely pulling his colleagues’ legs and his own. They were against the pipeline with all sincerity. But they all know it has gone too far now to be unscrambled, and they never did go along with the CCF demand for unconditional nationalization.
Some other ghosts of the past will not be so easily laid. One such is the Retail Price Maintenance Act passed by the Liberals against tooth-and-nail opposition by the Conservatives a few years ago.
The act forbids manufacturers to impose a fixed retail price. Merchants must be allowed to set their own profit markup and must not be penalized for so doing by having their supplies cut off.
Retail merchants were violently opposed to this law and the Conservatives worked very closely with them at the time.
Already Justice Minister Davie Fulton has heard from some of these comradesin-arms. The burden of their message is always the same: “Now that you are in power when are you going to repeal the law?”
Though the Conservatives opposed it, now they’re not at all sure they want to repeal the law. It has been in force for several years and its effects are no longer a matter of speculation. Do the Canadian people really want it repealed, or would they rather keep it? The government would like to find out before taking any precipitate action.
But these problems are trivial compared to others the incoming government finds on its doorstep. Of these grave and
urgent matters one of the gravest is employment.
In the first six months of this year Canada received 175,000 new immigrants; more than in any postwar year except 1951. The total for the whole of 1957 will be 250,000—the biggest immigration wave since 1913.
Before the election, when the Liberals took it for granted that they’d still be the government, they were looking toward next winter with considerable alarm. With that flood of immigrants, plus a slight leveling-off in the economy, they expected at least half a million unemployed by next February. They hadn’t quite figured out what to do about it.
One thing they probably would have done, that the Conservatives will probably do too, is come to the aid of the housing industry.
Home building in Canada is far below the 1956 level. Unless energetic steps are taken fewer than 100,000 dwellings will be completed in 1957 compared to 125,000 last year. Only 50,000 houses are in progress right now and if nothing is done the figure for next January might be as low as 10,000.
One reason why the Liberals were slow in waking up to the housing situation is that home buyers haven’t felt the pinch yet. When Robert Winters was in charge of housing as Minister of Reconstruction in 1948 he used to get three hundred letters a week from angry house-seekers. This year, as Minister of Public Works and still responsible for housing, he got about one letter in an ordinary week and often none at all.
Five up and five to go
This led some people to infer that the demand for housing has slackened off. They note, for instance, that the number of completed but unsold houses is higher than last year. But most of these unsold homes arc in Toronto, priced at $25,000 and up. Central Mortgage and Housing Corporation, the government’s agency in the home building field, can find no evidence of any drop in the demand for houses at $16,000 and under.
Meanwhile the housing industry itself is in a condition approaching crisis. One Ottawa builder who put up fifty houses last year has put up five this year so far. With luck he may build another five but no more unless something is done.
His trouble is that he can’t get enough money from the banks to build more, and this is every builder’s trouble. At a time when capital is scarce and borrowers plenty, banks and insurance companies naturally prefer to lend their money in the safest, surest, easiest market. Interest rates have gone so high that a good Ontario Bond pays 5.17%. Big commercial builders are willing to pay as much as 6.75% on big lump-sum loans. Small wonder the banks are not anxious to dole out small mortgages at only six percent.
Obviously the housing crisis leads back to our old friend, the “tight money policy.” It is an effect of the scarcity of capital. To cure it the government will have to do something to make capital less scarce. No matter what the something is it is almost sure to be a step the economists would call inflationary.
Maybe this is the real issue of the last election and the next. The Liberals, by and large, have been taking this expert advice for the past twenty years. The Conservatives seem to be planning, by and large, to ignore it. The event will show who is right. ★