COLUMN

How to make Marc Lalonde a hero

Dian Cohen February 21 1983
COLUMN

How to make Marc Lalonde a hero

Dian Cohen February 21 1983

How to make Marc Lalonde a hero

COLUMN

Dian Cohen

That Canada’s economy is in an appalling state is one thing that most of us would agree about. Finance Minister Marc Lalonde has an opportunity to right many of the economic wrongs created by the previous two budgets of his predecessor, Allan MacEachen. To this end, he has been travelling throughout the country, inviting input for the new budget he is expected to bring down in mid-March. Although my opinion has not been solicited, my budget suggestions have three qualities to commend them. First, they are steps that Lalonde can easily and painlessly take. Second, if enacted, my proposals will not worsen the current economic situation. And they have a 70 to 30 chance of conferring glory upon the federal government, a sacrifice I will gladly make for the good of the country.

What we all have to understand is that what Lalonde does or does not do next month will not make even the slightest bit of difference to world economic recovery. That is in the hands of the people who run the United States. Basically, what Lalonde must do is gamble on U.S. ingenuity. In this he has little choice. The only real option he has is to avoid policies that will directly prevent Canada from sharing in the U.S. recovery.

Lalonde’s first order of budget business is to lift the burdens imposed by MacEachen’s budgetary debacles of June 28, 1982, and Nov. 12, 1981. There remain about a dozen items from those two failed budgets. The most economically debilitating of them deal with taxes paid by big and small businesses. For instance, the MacEachen budgets decimated an investment incentive called the Capital Cost Allowance, which allowed businesses accelerated writeoffs on the costs of a variety of equipment purchases. Thus money was freed to be invested again. In addition, MacEachen imposed a further 12.5-percent tax on small business. If Lalonde will bring in legislation to offset MacEachen’s budgets, then the business community will likely be willing to compromise to help Lalonde save face.

Since budget-making is the art of the possible, Lalonde could score some winning points. After having his speech writers draft a short paragraph paying lavish tribute to his predecessor, he would then be free to soften the impact of MacEachen’s damaging legacy. His

priority should be small business, which still forms the backbone of the economy and is responsible for most of the job creation—more than half of the new jobs in the private sector since 1969 have come from businesses with fewer than 25 employees. Since the darkest hours of a small business are in its first five years, investment losses are of paramount concern. After making an investment of $50,000 or $100,000, businessmen then sit and wait—and, as often as not, they go out of business. Lalonde could allow small businesses to write off their losses against earned income (the scheme is called a flowthrough) back three or even five years and forward as well. He could also permit them to incorporate so that liability is limited and outside investors would be more willing to extend financing. Had such measures been in place last year, a good number of the estimated 80,000 shutdowns of small businesses

‘Lalonde’s only real option is to avoid policies that will prevent Canada from sharing in the U.S. recovery ’

would not have happened. Their owners would have balanced their 1981 and 1982 losses against their 1979-1980 profits. With a general economic recovery forecast for 1983 or 1984, they would have been able to keep their profits and would be in a stronger position than ever to stay in business and create jobs.

The finance minister need not stop at that. There are a few more things that he can do that will look good, cost relatively little and that will go far in convincing a skeptical business community that Ottawa is, at least, listening. He could, for example, prod his deputy, Mickey Cohen, to introduce Montreal Stock Exchange President Pierre Lortie’s idea of a Registered Shareholder Investment plan. That is a scheme by which shareholders’ capital gains would be partially protected from inflation. If a person makes a 10-per-cent capital gain and the yearly inflation rate is 10 per cent, then there would be no taxable capital gain. Lalonde might also consider altering the research and development incentive—why not offer a straight 25-per-cent tax credit? This inexpensive measure would pay rich

dividends to Ottawa’s dwindling stock of goodwill.

Looking ahead, Lalonde must be able to head off New Democratic Party Leader Edward Broadbent, who will, inevitably, on the morning after the tabling of the budget, claim that there is nothing in the document for labor. It has been rumored that the finance minister’s blue-ribbon panel of economic consultants is recommending a dramatic stimulative infusion of money into the economy. They are apparently convinced that the economy is so depressed that raising the budget deficit to $35 billion, or even $40 billion, would have no impact on the capital markets. But they are wrong. Even if all the economists in the world agreed that putting $6 billion to $10 billion into the economy would not harm it, we must realize that the world is not run by economists who have an understanding of full employment budgets and tax expenditure adjustments. It is run by politicians and bankers and other such people around the world who would take one look at the deficit and immediately sell the Canadian dollar short. In order to prevent the collapse of the dollar, Bank of Canada Gov. Gerald Bouey, once again, would have to push up Canadian interest rates, and the Canadian economy would self-destruct. Even now, it is said that the International Monetary Fund has started a Canadian dollar collection, waiting for the moment when Ottawa has to borrow.

Decidedly, a $6-billion injection of cash would be a grave error. But no one, really, would object to an infusion of $1 billion or even $1.5 billion into some job creating program. The cash could also be divided between job creation and housing. Since we all know perfectly well that few people are going to be completely satisfied the morning after the budget no matter what Lalonde does, let us at least hope that he leaves us no worse off than we are.

Essentially, the implementation of my proposals would cost relatively little; they contain something for both business and labor; and they do not alarmingly increase Canada’s present record deficit of $23.9 billion. Who knows? With a bit of flourishing rhetoric from the finance department writers, Marc Lalonde may be able not only to quiet his critics but actually to do something positive for his country.

Dian Cohen is a Montreal-based economics writer.