Canadian News

From bad to worst

Ian Urquhart September 25 1978
Canadian News

From bad to worst

Ian Urquhart September 25 1978

From bad to worst

When Jean Chrétien was appointed finance minister a year ago—the first-ever francophone to hold the job— he sailed in on waves of goodwill. He seemed to possess a zest for the job that his predecessor, Donald Macdonald, had lacked, and the general feeling was that at least things couldn’t get any worse. They did. On Sept. 16, 1977, the day Chrétien took office, the Canadian dollar was worth 93.07 U.S. cents; it closed Sept. 15 at 85.91. The unemployment rate was 8.3 per cent; it is now 8.5. The inflation rate was 8.4 per cent; it is now 9.4. All that occurred despite frantic efforts by Chrétien and his officials, who produced one budget and two minibudgets in the year, to turn the economy around. Concedes a battered Chrétien: “The job is tougher than I expected.”

For Chrétien there may be worse to come. The government, which grappled desperately with its overall deficit during the summer months, still expects to be a record $11.8 billion in the red this fiscal year. That is up from the $11.5billion forecast by Chrétien in April, and even the new figure may be under-

stated. Insiders say a figure of $14 billion is not out of the question. Such a deficit would put renewed pressure on the dollar, which in turn would exacerbate inflation. New inflationary pressures would push up wage rates, which have been lagging behind prices under controls, and lead to more showdowns between governments and public-sector unions. The past month has seen strikes by Air Canada and Toronto Transit Commission employees; the Post Office is the next likely bearpit. Such strikes in essential services drag down the economy, which is already performing well below Chrétien’s target of five-percent growth for the year—the bare minimum necessary to keep unemployment from rising even further.

Nobody, of course, blames Chrétien alone for the state of the economy. Since the OPEC nations quadrupled the price of oil, the whole Western world has suffered major economic upheavals and Canada, as a major trading nation, is more vulnerable than most. The new

economic order has baffled economists and managers everywhere as they try, without success, to apply old Keynesian solutions to bring down inflation and unemployment. In Canada, Chrétien faces the added problem that he has little room to manoeuvre with the federal deficit already so high and provincial and municipal governments taking up so much of the taxation pie. To stimulate the economy, Chrétien urged the provinces to cut their taxes, but met with little success. Then he offered subsidies to the provinces if they cut their sales taxes, a policy that turned into political disaster when the Quebec government accused Ottawa of intruding on its territory.

While the provincial governments and the muddled world economy must shoulder some of the blame, Chrétien can scarcely avoid responsibility. Strongest criticism of his performance comes, not surprisingly, from the opposition parties. Says Tory finance critic Sinclair Stevens: “I’ve had three finance ministers to deal with—Turner, Macdonald and Chrétien. Of the three, Chrétien is by far the weakest. I think he’s completely miscast.”

But the most telling criticism of Chrétien to date has come from a series of newsletters co-written by John Turner, who left the finance portfolio in 1975 to strike it rich on Bay Street. In one of the newsletters, obtained by the Conservatives and leaked to the press, Turner refers to Chrétien’s habit of looking on the bright side of the economy and glimpsing light at the end of the tunnel. Wrote Turner: “The minister’s optimism ... is leaving him with a growing credibility gap.” In the same newsletter, Turner also suggests Chrétien wants out of finance and into the cushy external affairs portfolio. Responds a miffed Chrétien: “Turner knows damn well my personal ambition is not to be minister of external affairs ... I want to stay here. I have no intention of quitting at all.”

But Chrétien’s friends say he did consider quitting during the sales-tax controversy. Chrétien himself denies he ever gave it serious consideration, but admits he was “depressed” at the time. Known as a straight dealer in the shifty game of politics, Chrétien felt doublecrossed by Quebec Finance Minister Jacques Parizeau, who did not object to the sales-tax scheme in private discussions before it was announced, then dumped all over it. Chrétien was also hurt by the failure of some of his colleagues in cabinet and in the Liberal caucus to support him while the salestax debate raged. “When they saw the flak, some got nervous,” he says. “But I was convinced that the only way out was to hang in there. It took much longer than I expected. It was much

more controversy than I expected.” But now that the issue has subsided he feels vindicated and the bounce has returned to his step.

Chrétien also denies a suggestion in another Turner newsletter that he and the finance department have lost some of their power and prestige to Trudeau’s own economic advisers as a result of the sales tax dispute.

There are always debates inside government over the best economic policies to follow, says Chrétien, but “we’ve done pretty well what we want.”

Tension between the finance department and the prime minister’s personal advisers is nothing new.

After the 1974 election, for example, Trudeau assembled his own panel of economists to provide a counterweight to the advice he was getting from finance. It was abandoned when Turner complained.

Later, when Macdonald was finance minister, the department and Trudeau’s advisers quarrelled regularly.

The finance department’s decline can be traced to last February’s federal-provincial conference on the economy. The department wanted to focus attention on medium-

term problems and objectives for the economy, but failed utterly as the politicians haggled over such short-term matters as hydro projects and a “Buy Canada” campaign. A finance department document setting out goals for the Canadian economy three-to-five years down the road was dismissed as unrealistic by the provinces, and was quietly dropped by Ottawa. Then, in April, the sales-tax dustup with Quebec dealt a severe blow to the credibility of finance in general and Chrétien in particular. When Trudeau went on national television Aug. 1 to announce a new set of economic priorities, he was acting on the advice of his own office. The finance department and Chrétien had been snubbed.

Most of what followed the TV address was orchestrated by Trudeau’s office and the package that unfolded included some items that the finance department had long fought against, such as the

proposal to slash the baby bonus and introduce a tax-credit scheme in its place. But other parts of the package, such as the spending cuts and the proposed freeze on oil prices, had been advocated by the finance department before. Over all, Chrétien and the department agree with what was done—but not with how it was done. In the hurried atmosphere, designed by Trudeau’s office to stir up election fever, ministers including Chrétien were sent out to press conferences unprepared and unable to answer key questions. They came away embarrassed, and cursing Trudeau’s office.

When the smoke cleared, it became apparent the over-all impact of the government’s August economic initiative was restrictive. The net result of the spending cuts and new programs was to lower the projected government deficit for this fiscal year from $12 billion to $11.8 billion and, for next year, from $10.2 billion to $9.7 billion. While those numbers are still high, it is clear the emphasis is on curbing inflation rather than on cutting unemployment.

Left unanswered is how the government plans to achieve its target of fiveper-cent growth for the economy with restrictive fiscal and monetary policies. The answer may come later this year in yet another budget from Chrétien, but there is a furious debate raging inside and outside government over what it should contain. Some of the alternatives suggested include: • Tax cuts. The Conservatives are pressing for a $2billion cut in personal income taxes plus other assorted tax breaks for investors and corporations. The argument against such cuts is that they would encourage imports as well as domestic production, worsen the federal deficit, increase inflationary pressures, and leave everyone worse off than before. The New Democrats are promoting a $1.5-billion cut in the federal sales tax, which is levied on the manufacturer, not the consumer. The § argument against such a cut is the same as that for % personal income taxes. In § addition, there is the posti sibility the cut would be Ej kept by the manufacturers § as windfall profit rather “ than passed on. g • Job creation. The New 8 Democrats are also recom-

mending a $1.7-billion capital-investment program. But such a program would worsen the federal deficit and run counter to the government’s pledge to hold down its spending.

• Exchange controls. Instead of continually raising interest rates to maintain the value of the dollar—a policy that has a dampening effect on the economy—the government could simply forbid people to move large sums of money out of the country. The government has repeatedly denied it is even considering such a move, but such denials are to be expected until controls are actually implemented. It would appear the denials are genuine in this case, however, because exchange controls would be highly unpopular and an election is looming. Controls could easily backfire, as well, by undercutting international confidence in the Canadian dollar.

• Tax-based incomes policy (TIP). In the U.S., TIP, a scheme whereby inflationary gains in income are taxed away, is receiving serious consideration. But it would entail considerable bureaucratic interference in the marketplace, and Ottawa, just emerging from wage-price controls, is unlikely to consider a quick return to a controls-like environment.

In the final analysis, the best approach for the government may be to do nothing. But Chrétien is not likely to have that option available. If the dollar continues to slide and the government deficit grows larger still, the international financial community will force him to restrict the economy even more. If not, the pressure of the looming election will force him to stimulate the economy in whatever way he can. If he can.

Ian Urquhart