CANADA/COVER

A big budget for business

Carol Goar May 2 1983
CANADA/COVER

A big budget for business

Carol Goar May 2 1983

A big budget for business

CANADA/COVER

Carol Goar

The remarkable transformation of Marc Lalonde is now complete. Last week’s budget was the final stage of the finance minister’s sevenmonth metamorphosis. The scourge of the nation’s boardrooms has turned into the toast of Bay Street.

Ever since he became finance minister last September, Lalonde has struggled to earn the respect of Canada’s skeptical business community. But the intense, 53-year-old Montreal intellectual could not stamp out the lingering fear that deep down he was still the radical interventionist who gave Canada the National Energy Program, still the social reformer who in the mid1970s proposed that all Canadians have a guaranteed annual income.

Last week Lalonde finally made true

believers of many denizens of high places. Ordinary citizens collectively face personal tax increases of $3.5 billion in the next four years. For high rollers, however, the budget was heavy in rhetoric about the importance of profits and private initiative. It also was packed with investment incentives—continuing a well-established pattern in the Canadian tax system that Lalonde was reluctant to alter (page 19). In short, the business community, and individual investors, received ample proof that the most powerful minister in the Trudeau cabinet had come over to their side. “Until last night there was still some concern about him,” said Peat Marwick Ltd. accountant Spencer Lanthier at a postbudget breakfast in Ottawa. “But the budget changed his reputation.”

Although the stock market responded to Lalonde’s maiden budget with a

joyous leap, other groups were considerably cooler in their reception. The Consumers’ Association of Canada termed the budget “a care package for industry to be paid for by consumers.” Dennis McDermott, president of the two-million-member Canadian Labour Congress, dismissed the document as timid, ultraconservative and virtually useless to the nation’s 1.6 million unemployed. “It’s an absolute tragedy,” added Robert White, director of the United Auto Workers. For the poor, the budget provided only crumbs, said Patrick Johnston, executive director of the National Anti-Poverty Organization. Lalonde himself acknowledged that the country’s huge middle class—he defines it to include family income between $25,000 and $45,000—came away virtually empty-handed. But he offered no apologies. “I did not develop the budget on the concept that you have to give a

tax break to everyone,” he told reporters at a postbudget lunch. “A budget is not a whole bunch of lollipops so everybody can have his own.”

It was a budget without sweet surprises or sticky risks. During a fourmonth marathon of consultation, Lalonde was advised by some experts to bring in a “neutral” budget—to allow only a small increase in the deficit, to introduce new measures to relieve the nation’s worrisome level of youth unemployment and to offer tax breaks to businesses to spur expansion. That was just what the finance minister did. His $31.3-billion deficit was almost exactly what the money markets expected. The $1.2-billion job creation package ($4.8 billion over four years) was precisely the kind of modest stimulus most middle-of-the-road economists advocated. In fact, when the figures leaked out a day early, the reaction in informed circles was little more than an approving nod, even though there were convulsions in the House of Commons (following story).

None of the Trudeau government’s last three budgets has been quite so innocuous. Former finance minister Allan MacEachen took a chance—a wise one, as it turned out—last summer when he asked Canadians to join a national restraint crusade. His June bud-

get came to be known as the “Six-andFive” budget. In his November, 1981, budget—a major package of tax reforms denounced by business—he gambled on a belief that the country would accept a major shakeup of the tax system to make it more equitable, and lost. In October, 1980, MacEachen used his first budget to bootleg the introduction of Lalonde’s National Energy Program, one of the most vividly nationalistic policies in Canadian history.

Lalonde’s budget may not have shown the same mighty purpose as those of his predecessor, but he insisted it did have a theme—jobs. “The government,” Lalonde declared, “is determined to ensure that Canadians are provided with the jobs they need—good jobs, permanent jobs, satisfying jobs and well-paid jobs.” But the finance minister also offered the gloomy forecast that unemployment this year will average 12.4 per cent (it now stands at 12.6 per cent) and that it will decline only to 11.4 per cent in 1984.

The budget contained two distinct job creation thrusts. The first, which will cost taxpayers $725 million in the coming year and $2.4 billion over the next four years, is a traditional make-work program. From the government that gave birth to “double tracking,” there now will be “fast tracking,” for 100 pub-

lic works projects—bridges and ships, buildings and runways—that were postponed for the latter part of the decade. Said Lalonde: “Earth will be moved, steel will be rigged, and concrete will be poured in the coming months.”

It took Lalonde only eight paragraphs to describe the government’s own accelerated building program. It took him five pages to outline the programs the government will launch to encourage activity in the private sector. Said a delighted Roy Phillips, executive director of the Canadian Manufacturers’ Association: “I think the entire Canadian population should look on this with some confidence.” The package includes:

•Relaxed rules for investment tax credits that will allow companies greater flexibility in reducing their income taxes by investing in new facilities. The credit will range from seven per cent to 50 per cent, depending on where the firm is located. The cost to taxpayers: $195 million this year and $1.3 billion over the next four years.

•A temporary tax-credit scheme for endangered companies that have no income to tax, until April 30, 1986. Cost: $400 million.

•A temporary tax-credit scheme designed to encourage investors to buy shares in Canadian companies between

June 30, 1983, and Dec. 31, 1986. People purchasing the stocks will be eligible for a tax credit of as much as 25 per cent of the value of the shares. In Quebec a similar plan has been in effect since 1979, when Finance Minister Jacques Parizeau added stock incentives. According to Montreal investment consultant Alan Case, the average Quebec investor has saved about $2,000 a year in taxes due to the plan. Said Case: “I will consider taking advantage of the federal writeoff myself and I will be recommending it to my clients as well.”

•A $300-million infusion for some 100 industrial incentive programs offered by Industry, Trade and Commerce to encourage investors to bring new projects on stream. A department official, however, said it was still unclear how many of the programs would be enriched.

•An extra $180 million over the next four years for the Export Development Corp., a Crown agency that assists Canadian companies in foreign markets.

The obvious question about the various funds, programs, incentives and tax credits is: who will pay for them? The answer: Canadian consumers—but not immediately. The bite will come on Oct. 1, 1984, when the federal government will introduce a three-pronged tax increase. The current nineper-cent sales tax on most items will go to 10 per cent; the levy on liquor and tobacco from 12 to 13 per cent; and the five-per-cent construction materials tax will move to six per cent. The new rates will remain in effect until Dec. 31, 1988, and will glean $3.5 billion. By the time the new tax rates go into effect 19 months from now, they will most likely be lost in a host of price changes resulting from inflation, the state of the economy and the caprice of the marketplace. Most Canadians will never know what hit them.

Lalonde called last week’s economic plan a “recovery budget.” In the spirit of the coming upturn, Lalonde upgraded his traditional postbudget press lunch from last fall’s serving of cold pizza and warm beer. Last week there were linen and china instead of paper napkins and

plates—and chicken breasts with vegetables. “As you see,” said Lalonde, referring to the meal, “recovery is on the way.”

But his gloomy economic projections are likely to dampen any celebrations Canadians might have planned. Although the government expects 600,000 more people in the work force by the end of 1984, compared to December, 1982, the spurt in employment may have little impact on the 1.6 million officially listed as out of work. Instead of taking on the unemployed when the economy improves, many businesses are likely to hire graduates fresh from school. Lalonde admitted that it was unpleasant to have to predict such a bleak job market. But he believed it would have been personally dishonest

and politically foolish to soothe Canadians with unrealistic projections.

Still, his budget did offer lower-income Canadians a few breaks. The biggest was a doubling in the amount a parent can deduct from income tax against child care expenses. The deduction for one child was raised to $2,000 from the current $1,000, and the total family deduction to $8,000 from $4,000.

For single working parents and families in which both parents work, this tax change will provide considerable relief.

But the benefit will be of no use to welfare mothers or parents who cannot afford day care.

The second main tax change affecting

low-income Canadians was Lalonde’s decision to increase the employment deduction on income tax returns to 20 per cent from the current three per cent. The measure will apply only to those earning less than $16,700 a year— roughly four million taxpayers.

The last program directed at the lower end of the income scale was a commitment to inject an additional $40 million into the government’s slum renewal program (known as the Residential Rehabilitation Assistance Program) and to build an additional 2,500 badly needed public housing units. Overall, however, those that do not have did not get much. Said Terrence Hunsley, executive director of the Canadian Council on Social Development: “The bottom line is that it doesn’t mean very much to a low-income Canadian.”

The middle class did not fare much better. Lalonde insisted that the public had outgrown the 1970s view that the finance minister should turn into Santa Claus at budget time. “There has been a significant cultural change in the 1980s,” said Lalonde. “I believe the middle class can be, and will be, brought back to our party strongly if they feel we are managing the whole economy well.” In spite of the broad overview, the finance minister offered average Canadians a handful of small benefits:

•For those planning home renovations, an extra $120 million has been k! added to the govern|§§ ment’s pool of grant ¡Hi money, with individual maximums as high as $3,000.

«For those hoping to buy

a house, an extra $30 million has been allocated for the “temporary” (it is about to expire) Canadian Home Ownership Stimulation Plan, which offers buyers of new homes a $3,000 grant. The new money should extend the program’s life-span until the end of May. •For those with a Registered Home Ownership Savings Plan (RHOSP), the government offers two new options. One is to shelter as much as $10,000 in one year in a tax-exempt account. Under the old rules, contributions were limited to $1,000 a year. The second alternative is a one-year rule change allowing RHOSP holders to withdraw unlimited tax-free funds in 1983 to buy

furniture and major appliances.

•For investors, or those toying with an entry into the stock market, there is a promise that by fall the government will implement a new, still-undefined security investment plan that would help protect earnings from inflation.

Lalonde sidestepped the contentious question of how fair the tax system is to the various income groups. His only comment was that now is the wrong time to tinker with a country that suffers fragile economic health. “What I wanted to avoid in this budget was shaking up the system,” said Lalonde. Tax reform, he added, “will have to be done gradually—I don’t see it happening this year or next.”

Lalonde admitted that it would take time for the private sector to start hiring and that there would be a delay until the government building program took hold. Accordingly, he injected an extra $440 million into Employment Minister Lloyd Axworthy’s make-work budget. Officials estimate that the money will create 40,000 to 50,000 shortterm jobs.

While the budget contained something for almost everyone, it was clear that business was the big winner. The government has long recognized that it is good politics to have the business community on its side. For one thing, business has the most vocal and wellfinanced lobby groups in the country: the Canadian Chamber of Commerce, which speaks for 140,000 businesses; the Canadian Manufacturers’ Association, with 4,000 corporate and 8,000 individual members; John Bulloch’s Canadian Federation of Independent Businesses, with 64,000 members; and the Business Council on National Issues, a select group of the nation’s most powerful 130 chief executives, which is run by a former Trudeau aide. As well, most public opinion polls show that Canadians are looking to the private sector for jobs. As Lalonde put it in his budget, “The private sector is the economy’s main engine of growth.”

Sam Hughes, president of the Canadian Chamber of Commerce, has watched seven finance ministers come and go since he took over the country’s largest business association in 1975. Lalonde was on the telephone to Hughes 10 minutes after he returned from being sworn in as finance minister. Since then Hughes’s feelings about the forbidding Montreal lawyer have changed from guarded to respectful to warm. Hughes recognized that Lalonde’s friendly overtures to the business community were good politics as well as clever economics. He kept asking himself, “Is it all for show?” Hughes has not yet decided to climb into Lalonde’s lair. “But,” he concludes, “the budget got us a long way home.” «£>