It is a rare moment when Canada’s business leaders find something in common to cheer about—and rarer still when the object of their praise is the federal government. Still, in corporate boardrooms across the country last week the reaction to Finance Minister Michael Wilson’s first economic statement was almost universally favorable —albeit with reservations. Said Raymond Smith, president of forestry giant MacMillan Bloedel Ltd. of Vancouver: “We have been saying for a long time that Ottawa has to start cutting the deficit. Certainly the new government appears to be making the right moves.” Many economists also shared Wilson’s professed desire to cut federal spending next year, although some cautioned that —at least in the short term—Ottawa’s moves are likely to dampen economic growth, boding ill for the country’s 1.4 million unemployed.
The goal of Wilson’s exercise is simple: to reduce the competition between the government and private borrowers for available funds, a rivalry that some economists and businessmen say has helped to push up interest rates. Even so, business spokesmen said that last week’s announced cuts were modest by Ottawa standards and that much more fat will have to be trimmed. In all, the finance minister said that, beginning next April, about $3.5 billion will be withheld from the total federal spending in the 1985-86 fiscal year, and the government will collect some $700 mil-
lion more in revenue. At the same time, Wilson acknowledged, the deficit will actually increase to almost $35 billion from $ 34.5 billion this year. Said J.Peter Gordon, chairman of steelmaker Stelco Inc. of Toronto: “So far, Mr. Wilson has only dropped the first shoe. The real magnitude of the reductions probably will not be known until the budget next spring.” Added Hudson’s Bay Co. vicepresident William Evans: “The process of economic renewal is under way, but there is a great deal more yet to be done.”
Almost no one in business circles expects a surge in corporate investment. Throughout the summer election campaign Progressive Conservative Leader Brian Mulroney predicted confidently that a Tory victory would release a tide of domestic and foreign investment, creating tens of thousands of new jobs. That theme was also echoed in Wilson’s announcement last week.
But the reality, said Laurent Thibault, senior executive vice-president of the Canadian Manufacturers’ Association, is that business leaders are still reluctant to spend money on new plants and machinery and will remain so until consumer demand starts to pick up.
Said Thibault: “It could be a while before we see any significant change.”
More pessimistic analysts argue that in the process of trying to rebuild the economy, the Tories may actually nudge it closer to a recession. According to Michael McCracken of the Ottawabased economic forecasting firm Informetrica Ltd., the planned reductions in federal outlays will add between 40,000 and 50,000 people to the unemployment rolls. Said McCracken: “I am not terribly happy about all of these moves, but at least it puts Wilson in a good bargaining position. He can now say to business that he has done his part and that it is up to them to start spending like they said they would.”
For his part, Allan Maslove, director of the School of Public Administration at Carleton University, said the finance minister’s claim that a lower federal deficit will spur growth “is more a statement of faith than a conclusion based on economic analysis.” For one thing, Maslove said, the amount of federal borrowing has only a marginal impact on interest rates, which are determined mainly by borrowing costs in the United States. He added, “What is driving the deficit upward is not excessive government spending but reduced revenues caused mainly by high unemployment and a wide range of personal and corporate tax expenditures like Registered Retirement Savings Plans.” Indeed, even the conservative-minded C.D. Howe Institute, a Toronto-based economic think tank, estimated last week that only onethird of the federal deficit is structural. The rest would disappear if the country’s resources were fully employed and inflation eliminated, the institute said.
Wilson’s plan to raise Canadian oil and gas prices to world levels also contains potential perils. Analysts pointed out that the current glut on world markets means that the move is unlikely to spur much new exploration. At the same time, higher energy prices will reduce the amount of money in Canadians’ pockets and exacerbate economic sluggishness.
In the end, it seems likely that Canada’s economic future will be influenced less by Wilson’s announcements than by the landslide re-election of U.S. President Ronald Reagan. Explained Richard Plain, an economist at the University of Alberta in Edmonton: “If Reagan agrees to reduce £ his own deficit, then in2 terest rates will fall and
0 we will all come out of this smelling like roses.
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