These are extraordinarily difficult times for managing the economy.
Gone are the halcyon days when a lowering of taxes here or a raising of interest rates there would suffice, when a little more unemployment could be traded off for a little less inflation, and when government revenues could be depended upon to grow at a geometric pace that would cover all or most of the costs of new spending programs. Today, a finance minister is confronted with contracting revenues, simultaneously rising unemployment and inflation, and historically high deficits and interest rates. Over the whole desolate scene hovers the dollar, like a raven in search of carrion on the Arctic tundra.
Into that tundra strode Finance Minister Jean Chrétien last week with a budget, his third such foray in little more than a year. Chrétien was walking along an extremely narrow path. On one side, with the United States slipping into a near-recession, he faced demands
to stimulate the economy; on the other, with the government’s deficit already high and the dollar poised to drop again if it went much higher, he encountered cries for restraint. Putting aside the temptation to do nothing at all, he gambled—and injected some stimulus into the country’s economic arteries, though not as much as many critics had advised. As a result of the budget, this year’s deficit will rise to $12.1 billion from $11.8 billion and next year’s to $10.75 billion from $9.7 billion. Said Chrétien: “Of course, some would have wanted more, but I have offered the maximum I could under present circumstances.”
Chrétien was gambling that the nameless, faceless men who control the world’s currency markets would not react to the increased deficits by selling off Canadian funds and driving the value of the dollar even further down.
On the evidence of the first day following the budget, he won that gamble as the dollar did not merely hold its own, but actually edged up a bit, back above 85 cents. (Speculators had driven its value below 85 cents on the eve of the budget in anticipation that Chrétien would go farther than he did to stimulate the economy.)
Chrétien was also gambling that the economy would keep on expanding in spite of the difficulties in the U.S.— Canada’s biggest market—and that it.
required only modest stimulus to reach the finance department’s target of 4.5per cent growth in real output next year. On that score, the evidence will remain inconclusive for some time. It is a fact, however, that even if the department’s target is achieved, unemployment will remain unacceptably high.
But it is inflation, not unemployment, that is now preoccupying Chrétien and his department. They believe the lower value of the dollar has provided the basis for a strong economic revival in Canada, as long as prices and wages can be held in check. On the price side, the most effective fiscal instrument is a cut
in provincial sales taxes. But Chrétien tried that in his April budget and encountered strong political opposition. So last week Chrétien cut the federal sales tax, which is levied on the manufacturers, not the ultimate consumers, to nine per cent from 12 per cent, costing the federal treasury $1 billion in the next year.
Having dealt with prices through a sales-tax cut, Chrétien felt he still had some money left over to cut personal income taxes and, he hoped, relieve some pressure from wage demands as controls are phased out. Thus, the standard tax deduction of up to $250
offered to all wageand salary-earners was doubled to $500 and unemployment insurance premiums were cut by 15 cents for every $100 of weekly insurable earnings. These two measures, combined with the automatic tax cut resulting from the inflation indexing of personal income taxes, will mean an overall saving of more than $2 billion for taxpayers next year.
But Chrétien did not just cut taxes in his budget. He also took the opportunity to plug two flagrant loopholes in the tax system. One has allowed banks and other lenders to escape taxation on income from investments in term preferred shares and income debentures, even though they are essentially loans, the income from which is taxable. By using that loophole, the banks managed to whittle their effective tax rate down below 35 per cent from 45 in the past two years and the federal and provincial treasuries lost an estimated $500
million this year as a result.*
The other loophole closed by the budget has allowed professionals such as athletes, entertainers, doctors, lawyers and journalists (see box) to pay income tax at the unusually low rate of 15 per cent on part of their incomes by setting themselves up as corporations. The low rate was intended to help bona fide small businesses. “It was never intended to be a tax-shelter device for employment, professional and investment income,” says the finance department in a background paper.
There were other stingers in the budget for some groups of taxpayers, including an increase in the tax paid on all airline tickets to a maximum of $15 from $8 and removal of the sales-tax exemption for storm windows. But these were more than offset by other tax cuts, including removal of the excise taxes on motorcycles, marine engines and private aircraft; increases in tax credits for research and development and other investments by businesses; and provision for the deduction of the
*Petro-Canada, the government-owned petroleum, company, got in just under the wire with its purchase of Pacific Petroleums Ltd., announced six days before the budget. The purchase will be financed by preferred shares sold to banks and, as the budget is not retroactive, will be allowed to go ahead. There were suggestions that details of the budget had been leaked to Petro-Canada, prompting the company to move before the loophole was closed. But Chrétien and his officials strongly denied such allegations.
carrying costs for developers’ land.
The political impact of the budget is difficult to assess. It was generally applauded by business, as have been most of Chrétien’s measures since he took over the finance portfolio (see column on page 46), and condemned by labor. But the average taxpayer is likely to be more perplexed than persuaded by its contents and will not notice any significant impact on the wages he earns or the prices he pays. Its over-all political effect may be neutral, which would actually be a step forward for the government since its last economic initiative—the series of announcements in August—had a negative impact.
The budget did blunt the opposition somewhat by adopting its proposal for a sales-tax cut. But Chrétien decided to hang tough rather than give in to oppo-
sition demands for sweeping cuts in personal income taxes, for deductibility of mortgage interest payments (the Conservatives), and for massive spending on housing and transportation (the New Democrats). He also avoided any vote-grabbing gimmickry, which surprised some critics and led to speculation that there would be yet another budget before the spring election. “If they called an election on this one, I’d be very happy,” remarked Dennis McDermott, president of the proNDP Canadian Labor Congress. “But I know Chrétien is not that dumb.” Whether he is dumb or a shrewder judge than is McDermott of the public mood, Chrétien does not intend bringing in another budget before the election. “It’s always possible,” he says, but he would prefer to stand or fall on this latest foray.
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