COVER

Budget ’81: The gathering storm

John Hay November 23 1981
COVER

Budget ’81: The gathering storm

John Hay November 23 1981

Budget ’81: The gathering storm

COVER

John Hay

For many Canadians there was a certain undeniable appeal to Allan MacEachen’s budget last week. It was the joy of seeing the rich lose some of their tax loopholes, coupled with a measure of relief for most taxpayers. But throughout the budget documents ran the ominous warning that the economy will worsen before it improves.

Growth will flatten, unemployment will rise and inflation will remain in double digits for at least another two years. Having tapped his barometer,

MacEachen battened down the hatches. The government deficit will be constricted and the oncegrand notions about an industrial strategy have been shelved. Only the windfall revenues from the oil and gas taxes ($15.1 billion by 1985-’86) made room for the income tax reductions. To many, it was an all too discouraging prospect.

Conditions are already depressing enough, with consumer prices running 12.7 per cent higher than a year ago, and the officially recorded unemployment rate last month at 8.3 per cent of the labor force. Although the economy as a whole continued to grow through the first half of 1981, there were signs of slowdown by summer. More than 100,000 people have been laid off so far this year, and in October there were 40 per cent fewer housing starts than a year ago. Even more troubling to government economists is their dour outlook for the United States economy, now in the throes of a recession that is almost certain to spread north. High and erratic U.S. interest rates in the next couple of years, and the inflationary potential of large U.S. deficits, leave Ottawa more pessimistic than Washington about the economic future of the United States—and therefore about Canada.

While the Reagan administration argues within itself about such questions

(page 46), there was no more interested eavesdropper than Allan MacEachen. He, like Ronald Reagan, has fixed on a course of spending restraint combined with tax cuts. But unlike Reagan, MacEachen took care to give his tax cuts the appearance of justice (see following story). Where Reagan’s favored the very

rich, MacEachen’s are aimed further down the scale. The department of finance calculates that 12 million taxpayers will enjoy cuts next year ranging from $115 (in the under $15,000 bracket) to $5,625. Closing loopholes hits the rich, though most of the 795,000 taxpayers who will pay more next year are in the middle brackets. Indexing the tax brackets again next year will also help: a typical family of four could bring in about $15,000 without paying any federal income taxes next year.

For all the tinkering with the income tax, MacEachen emerges as a fiscal minimalist with his second full budget. Deluged with oil and gas billions flowing from Ottawa’s agreements with the producing provinces, he can manage to bring tax revenues closer to expenditures. And the budgetary deficit is intended to narrow from $13.3 billion this year to $9.6 billion in 1983-’84. At the same time, government spending is predicted to grow more slowly than the economy itself. Lower personal taxes and breaks for small business are more than offset by, among other things, closing loopholes and extending the corporate surtax. In addition, the treasury will take in $1.4 billion more next year than would have been the case without the new budget. Increasingly, MacEachenomics can be run by remote control. Taxes on gasoline, liquor and tobacco—once politically provocative in any budget—now move automatically, untouched by the finance minister’s hands.

With MacEachen bent on fighting inflation by limiting government spending, the budget provided no great boon to the victims of interest rates. Of the estimated 920,000 homeowners renewing 5 mortgages in the last half 5 of 1981 and in 1982, only a s few thousand will be eligible for government subsidies, or guarantees covering their mortgage interest deferrals. Small-business development bonds—providing low-interest bank loans to firms with serious debt problems—are extended for another year, and they will apply to farmers as well. The government is also subsidizing loans through the Farm Credit Corp. Those limited offerings are all of a piece with MacEachen’s restraint theme. So too was the government’s withdrawal from a nationalist-oriented industrial strategy bravely promised in the last election campaign (page 37). The only thing left that looked strategic was the retreat. MacEachen had already complained publicly that buying up foreign-

owned firms with foreign currency was pressing down the Canadian dollar; and the National Energy Program had raised corporate and government hackles in the United States. In the end, out went the interventionist ambitions of the Liberal campaigners.

Provincial leaders found reason to gripe against another of MacEachen’s penny-pinching ideas: a cut of about $5.7 billion from federal transfer payments to provinces for the years 1982 to ’87. Ottawa argues that the provinces will only be out of pocket by $1.9 billion, because they will reap their own extra revenues from an income tax base enriched for them by the plugging of loopholes. What MacEachen would not admit officially was that the provinces stand to lose even more if they agree to

other federal changes in the equalization scheme. Started 25 years ago, this system moves funds from federal coffers to the governments of have-not provinces (now all but Ontario, Saskatchewan, Alberta and B.C.). It is meant to provide provinces with enough money to offer comparable public services, and is computed on a hypothetical average province’s tax base. The program’s main problem, however, is that the average has been soaring since western oil prices took off. Were it not for a special exemption, even Ontario would qualify as have-not because it has almost no oil. The federal proposal: instead of the oil-inflated national-average tax base, Ottawa would use Ontario as the standard for equalization. For negotiating purposes, Ottawa slyly calls this a generous offer, because when the current five-year program dies next March the federal government is not required to maintain any equali-

zation at all. Privately, federal officials admit that their proposed formula would supply smaller handouts in coming years than the present plan. Bargaining on all those transfer payments will become fast and doubtless furious as the March 31 deadline approaches.

To provincial squeals of hardship, Ottawa can always reply with the invitation to provincial ministers to go home and increase their own taxes. That is especially true in the argument over federal transfers for health and education, which go to rich as well as poor provinces. To other Canadians, though, MacEachen proffered “the challenge of restraint, so that inflation is reduced, interest rates are brought down and growth resumed as soon as possible.” He repeatedly urged against demanding

increased wages to offset inflation, but ruled out both exchange controls and price-income controls—the first as ineffective, and the second as arguably unfair.

Finance department projections show how vulnerable the MacEachen budget leaves working families. After averaging 7.2 per cent this year, unemployment is put at 7.8 per cent next year and a high 8.3 per cent in 1983 and 1984, slowly edging down to 7.3 per cent by 1987. For those with work, the real average wage (wages minus inflation) is projected to fall by 2.4 per cent this year and one-tenth of a per cent in 1982, rising 1.4 per cent in 1983 but then shrinking again. Inflation isn’t expected to break below 10 per cent until 1984. Finance hedged these assumptions with a better and a worse scenario. But they were demoralizing enough to be picked up as ammunition and hurled from the opposition benches in

denunciations of the budget as inadequate and unjust.

To Conservative finance critic Michael Wilson, the budget turned out to be “a shell game” that “leaves Canadians with a sense of helplessness and frustration.” But in a curiously awkward Commons performance, Wilson never ventured any better way out of the nation’s fix. New Democrat Bob Rae called the budget “a blueprint for recession” in which the Liberals were admitting, “There is nothing we can do.” Indeed, there was something to that charge; the question is whether there is anything anyone could do. The cabinet has already shied back from one affirmative answer—a thorough-going industrial strategy that might have given some direction to the force of foreign

and domestic events. MacEachen also set himself firmly against pleas to ease his anti-inflation policy. “There are siren qualities to these entreaties that could well lead us onto the rocks,” he declared.

But the course he has taken carries its own risks, as the minister acknowledged. For one thing, he said, “we live in an uncertain world,” exposed as much as any country to economic troubles in the United States and elsewhere. For another, “we could do worse . . . because the self-defeating battle for higher incomes becomes more intense.” For now, MacEachen has taken his turn in the woods where the roads diverge. When he emerges on the other side, Canadians can only hope, with poet Robert Frost, that the route “has made all the difference.”

With files from Carol Bruman and Julie Van Dusen.