CANADA

The Tories’ taxing sweep

Roy MacGregor June 3 1985
CANADA

The Tories’ taxing sweep

Roy MacGregor June 3 1985

The Tories’ taxing sweep

CANADA

Roy MacGregor

Glen Baxter lives on a carefully budgeted $35,000 a year as a New Brunswick Telephone Company engineering associate in a mortgaged white-frame house which he built outside Saint John. Now he expects that he, his wife and three teenage daughters will have to reduce their spending because of Finance Minister Michael Wilson’s federal budget. Still, Baxter said that Wilson took “a step in the right direction” and his wife, Judi, agreed. “We don’t believe in personal debt,” she said, “and that goes for government debt too.” At the same time, in Winnipeg, Kathy Franklin, a 30-year-old single parent with an eight-year-old daughter and an annual income of just over $20,000 a year from Transport Canada, where she works as a clerk, said that she was “disgusted.” Franklin added that she may eventually lose her job because of Wilson’s economies, and she said that she is also convinced the budget will “hit me very hard” in terms of spending power.

Across the country last week Canadians from every walk of life jotted down the budget numbers and came up with widely diverging verdicts on the intricate and wide-ranging economic plan that Wilson called “a budget of opportunity.” His catalogue of tax changes and social benefit curtailments encouraged the business sector and the wealthy, and it showered a bewildering, although less than punitive array of new taxes onto middle-class Canadians. For the 1,437,000 unemployed there was nothing of immediate practical value. Indeed, Wilson vowed to eliminate 15,000 of the current 258,000 federal government jobs in six years and he trimmed $78 million from the $2.1 billion set aside earlier for job creation and retraining programs this year. His aim, he declared, is to provide a budget that “challenges Canadians by rewarding success, not subsidizing effort.” But 39-year-old Wayne Corbett of Vancouver, for one, who works as a job placement officer in British Columbia’s forest industry, said that Wilson’s budget could “result in some people going on welfare when their unemployment insurance runs out—instead of helping them to get new jobs.” During last summer’s federal election campaign Prime Minister Brian Mulroney pledged that a Conservative gov-

ernment would create “jobs, jobs, jobs.” But Wilson declared in his Commons budget speech that growth and job creation cannot take place until Ottawa’s debt is under control and private enterprise is encouraged to expand. The minister will save $10.1 billion in spending restraints through the current budget year and the next. In the same period the budget will raise an additional $2.6

billion by increasing personal income taxes—including an 18-month surtax of either five or 10 per cent on annual incomes above $40,000 or $60,000 respectively—and from higher excise and sales taxes, including two cents a litre on gasoline beginning on Sept. 3.

To encourage enterprise Wilson reduced corporate taxes by a net $455 million—even though he placed a one-

year surtax of five per cent on big companies. He gave up another $900 million in revenue over the two fiscal years by awarding individual investors a tax holiday on lifetime capital gains of as much as $500,000, a program to be phased in over six years. “Despite these measures,” said a report prepared by the Toronto-based Clarkson Gordon accounting firm, “the federal deficit is expected to remain large through the next six years.”

Indeed, Wilson said that he expects to trim only $1.1 billion this fiscal year,

ending March 31, 1986, from the $34.9billion deficit that he predicted in a financial statement last November. The minister added that another $2.2-billion reduction will take place next year. At the same time, total budget spending will increase to $105 billion in the current year and to almost $110 billion in the following year from just under $100 billion in the budget year that ended on March 31.

Wilson’s own assumptions for the national economy’s development through the current year and next are modest. The annual rate of productive expansion will slow to 2.4 per cent by next year

—half the 1984 pace—his budget papers estimate. And the inflation factor in that calculation of gross national product will rise to an annual rate of 4.5 per cent from three per cent in the same period. Interest rates, he said, will remain above 10 per cent, and the number of unemployed will stay above 1.3 million through 1986. Still, the finance minister said that he is placing his faith in private enterprise and especially in small business—aided by new investment incentives—to act as the engine of economic progress and employment.

The budget weighed more heavily on old-age pensioners and middle-income families. Beginning next year the current adjustments to Old Age Security, family allowances and income tax exemptions to keep pace with inflation will not cover the first three per cent of the general price increase. At the same time, Wilson pledged to increase tax credits for low-income families with children for three years starting in 1987. But he will reduce the income means test and child tax exemptions at the same time. The net result of the tax and family allowance changes will save Ottawa $55 million in the next two years.

Government examples showed that the proposal will give an Ontario family of four with a single annual income of $20,000 an additional $38 in 1986, $60 the next year, $19 extra in 1988 and $22 more in 1989. The same family with a single income of $60,000 would get three dollars more next year and then lose a total of $287 over the following three years. Noted John Playfair, Clarkson Gordon’s national tax director: “The budget changes are good for winners—for people who are able to save and invest—and bad for everybody else.”

For his part, Opposition Liberal Leader John Turner stormed out of the Commons before Wilson finished his 82-minute presentation. Then Turner declared that the budget was “the most overdue in Canadian history—and it wasn’t worth the wait.” And New Democratic Party Leader Ed Broadbent noted that Mulroney had toured Alberta and Manitoba raising the prospect that the budget would be “tough but fair.” But, added the NDP leader, it will be “tough only on ordinary Canadians.” Broadbent declared that when Mulroney’s ministers try to enact its fiscal measures after the six-day budget debate beginning this week, “they are going to have the fight of their lives.”

Meanwhile, a list of sales and excise tax increases that read like nickel-anddime irritants will be cumulatively more substantial than new income taxes—and potentially inflationary when multiplied in price markups through transport and marketing systems. On Canada Day, July 1, the basic 10-per-cent federal sales tax levied at the manufacturing level will be extended to such previously exempt items as candy, pet food, surgical instruments and wood-burning stoves. Then, on the day after Labor Day—sparing the summer tourist—the two-cents-a-litre increase in the excise tax on vehicle fuels will affect not only private motorists but truckers, bus lines, railways, airlines and municipal transit systems.

On New Year’s Day the general sales tax rate will increase by one percentage point, the second increase since a point was added last Oct. 1. Wilson, who is addicted to Jujubes, proved that he can bite the bullet. Mulroney, who gave up smoking last year and stopped drinking in 1981, approved a 25-cent increase on a large package of cigarettes and a twoper-cent increase in the excise tax on alcoholic drinks. All the sales, excise and income tax increases together will, the Liberal opposition calculated, cost the average family of four about $350 a year. The NDP put the figure at $500.

One immediate concern was that Wilson’s tax measures could, by depriving Canadians of disposable income, slow the consumer-led recovery from the aftershocks of the 1981-82 recession. “We

feel extremely let down,” said Sally Hall, president of the Consumers’ Association of Canada. “The government has overlooked the fact that business can produce, but if there is no one there to buy they will soon go out of business.” Economics professor Ruben Bellan of the University of Manitoba’s St. John’s College said that “the reduction in buying power will hurt every business in Canada,” but Leo de Bever, the director of Toronto’s Chase Econometrics, declared that “the reduction in purchasing power isn’t all that significant.”

Labor and business leaders expressed radically different reactions. Dennis McDermott, the president of the Canadian Labour Congress, castigated the budget for not taking steps to fulfil Mulroney’s commitment to job creation. “I think it totally violates that promise,” declared McDermott. But John Bulloch, president of the Canadian Federation of Independent Business, praised the budget as “a small-business blockbuster.”

Indeed, the new capital gains exemption will make more capital available for investment. And Wilson said that a series of budget programs are specifically designed to help more than 700,000 Canadian companies that qualify as small businesses. Those include exemptions from corporate surtax, extension of lowinterest borrowing for indebted firms and permission for pension funds to make tax-exempt investments in small companies. As well, small businesses will benefit from increased refundable tax credits for research and development, changes in tax-free registered retirement savings plans to allow investors to build their security more quickly and from a freeze on unemployment insurance premiums paid by employers and employees through 1986. The budget, declared Bulloch, “is very powerful for the creation of new companies.”

Some middle-income Canadians surveyed by Maclean's expressed anger at budget measures that will reduce already strained family budgets, but others accepted the new programs without complaint. Among those who are not upset are Dick and Joan Flewwelling of Musquodoboit Harbour, N.S. They have a joint income of about $50,000 from the pharmacy he owns and the bed-and-breakfast tourist business that she operates in their rambling 19th-century house. Both of them are concerned the gasoline price increase may reduce the number of travellers in the province, But Dick Flewwelling said that he is not alarmed by the surtax on incomes. “I’ve already had a couple of ideas on how I can dodge it,” he said.

Wilson, foreshadowing future measures to reduce the deficit, proposed that starting next year, wealthy Canadians who often use legal loopholes to

avoid most income taxes will begin paying an unspecified minimum tax. As well, he said that Ottawa would seek to slow the growth of money transfers to the provinces for health care and higher education in order to yield annual savings of $2 billion by the end of the decade—a prospect that could lead to the Mulroney government’s first jarring conflicts with the provinces. The finance minister also said that Ottawa would begin selling off Crown corporations that are not fulfilling “a public policy purpose.” He singled out such firms as the federal communications company, Teleglobe Canada; Canadian Arsenals Ltd., which makes small arms; and the federal interest in the holding company, Canada Development Corp.

Federal companies with no commercial policy will be dissolved, Wilson said

—and the first victims were about 700 employees at two heavy-water plants operated by Atomic Energy of Canada Ltd. in the Cape Breton communities of Glace Bay and Port Hawkesbury. That action was designed to cut annual losses of more than $100 million, the result of a severe downturn in the market for heavy water used in nuclear power stations. On the day after Wilson’s budget, Regional Industrial Expansion Minister Sinclair Stevens flew to Glace Bay to announce severance pay for the laid-off workers and to outline a 10-year tax holiday for eligible companies in Cape Breton that would, in Stevens’s words, make the island “the most desirable place to open up a new business.” Stevens’s trip was part of a publicity blitz, including seven slick booklets and 10 weightier documents, designed to sell the budget. And economists said that the psychological effect of Wilson’s proposals could eventually prove even more important than its immediate economic impact. Mulroney is in the vanguard of the marketing campaign. His message: the first Conservative budget was tough, but life under the Tories will be far better than it was under Pierre Trudeau’s Liberals. According to Carl Beigie, chief economist for the the investment firm Dominion Securities Pitfield Ltd., Wilson’s budget succeeded because the government “had to generate a total mood change, and it does that. It is a masterpiece of craftmanship.” Still, that mood and the economic growth it is intended to generate will have to translate into jobs in order to sustain economic growth. And unless that happens, the counting of dollars and cents in the homes and markets of the nation may assume a far more threatening nature.

Ken MacQueen