The strategy sweep

MARK NICHOLS March 17 1986

The strategy sweep

MARK NICHOLS March 17 1986

The strategy sweep

Stretched out on the bed in his Regina hotel room, John Barber, president of the Saskatchewan Conservative party, nursed a rye and water and began talking about Prime Minister Brian Mulroney. While two cowboy-booted cattlemen who had come to discuss livestock issues nodded in agreement, Barber suggested—jokingly—that the purpose of Mulroney’s trip to Western Canada last week was

to be with his wife, Mila. “He hasn’t seen her for a week,” said Barber. The Prime Minister, who arrived in Regina Thursday afternoon on a western sweep, saw Mila later in the day. She arrived at the Hotel Saskatchewan just as her husband was fielding questions from journalists, interrupted the proceedings with a cheery “Hi, dear,” then waited quietly for the press conference to finish.

In fact, Mulroney had important political undertakings to carry out during his quickly scheduled three-day trip to Saskatchewan and British Columbia. Making his second visit to both provinces since he took office 18 months ago, the Prime Minister’s trip was designed to build political support and show the Tory flag in the West. At the same time, the visit gave him an opportunity to promote Finance Minister Michael Wilson’s controversial Feb.

26 budget—away from the heated debate in the Commons. With the government’s financial projections and underlying assumptions under increasing attack, it was a challenging task. But as he faced questions at his Regina press conference about declining world oil prices and the faltering Canadian dollar, Mulroney said, “I expect continued growth and better times.”

In Ottawa opposition MPs charged

that by imposing an estimated $1.48 billion in new taxes on Canadians over the coming year, Wilson’s budget would widen the gap between rich and poor Canadians. Wilson’s tax proposals, declared Liberal Leader John Turner, “attack the average Canadian family in a brutal fashion.” For his part, New Democratic Party Leader Ed Broadbent said that instead of instituting sweeping reforms of the tax system, Wilson merely added to the existing burden on Canadians. Declared Broadbent: “I want to say to Mr. Wilson that he had an option. Neither the Liberals nor the devil made him do it.”

On his trip west, Mulroney confronted other Ottawa-generated issues as well. They included questions about a Jan. 6 letter signed by Youth Minister Andrée Champagne which said that the government should se-

cretly use federal funds to recruit young members for the Conservative party as a pre-election “priority.” After initially saying that she did not know if the letter was hers, Champagne acknowledged that she had signed it, then apologized to the Commons. But she refused to accept opposition demands that she resign. In Vancouver, Mulroney said only that Champagne had “apologized in the House for her error as she should have. That is appropriate conduct by a minister in the parliamentary system.”

Earlier in Regina, where a provincial election is expected later this year, Mulroney held a 25-minute meeting with Tory Premier Grant Devine. The main topic of discussion: federal funding for a $3.2-billion heavy oil upgrader at Lloydminster, on the AlbertaSaskatchewan border. The funds were initially pledged by the previous Liberal government in Ottawa. But the Prime Minister refused to commit Ottawa to a specific part in the project, saying his government would work to see “if we can make this project fly.”

In the meantime, 5 there was mounting f concern that the fi§ nancial assumptions “ on which Wilson’s budget was based may prove faulty. The authoritative Conference Board of Canada predicted that as a result the government probably will not be able to bring the federal deficit—currently $34.3 billion—below the $30 billion mark in the next fiscal year, which begins April 1. The independent agency took issue with two budget predictions: that world crude oil prices, which dipped to $11.50 (U.S.) a barrel last week, would average $22.50 a barrel over the year, and that interest rates—the prime rate closed the week at 13 per cent—would average 9.5 per cent. Some analysts noted that while declining oil prices could sharply reduce Ottawa’s tax revenues from the industry, each percentage point increase in interest rates above the targeted level during the year would cost the government $1.25 billion in interest payments on the federal debt. But the debate over future trends in the

economy had no clear outcome.

The Conference Board acknowledged that the budget could help enhance the prospects for stronger growth over the longer term. But after taking into account declining oil prices and predicting that interest rates would likely remain in the 10.5per-cent range over the year, the board concluded that the deficit may be $32.9 billion by the end of the fiscal year.

Even federal government statistics caused problems for Wilson. While he forecast that business capital investment in 1986 would rise by seven per cent, a Statistics Canada survey of 25,000 institutions released last week estimated that investment would grow by only 2.5 per cent.

At midweek Wilson appeared before a blue-chip audience at a joint meeting of Toronto’s Canadian and Empire clubs to defend his budget. Conceding that “some commentators” were questioning basic aspects of the budget,

Wilson declared, “I remain convinced that our overall plan is based on prudent assumptions.” The minister acknowledged criticism that he did not cut heavily enough into government spending, then said that further cuts would simply have “caused greater unemployment in the regions, leading to a higher deficit.” Wilson also argued that Canada would ultimately derive a net gain

from lower oil prices. The decreases, he said, would help to reduce inflation and bring down interest rates.

While Wilson and Mulroney defended the budget in Canada, senior finance ministry officials flew to major American cities last week to explain the document to U.S. audiences.

The missions—to New York, Chicago and Los Angeles—underlined the fact that one of the major objectives of the budget was to persuade speculators in international money markets that Ottawa is serious about reducing the deficit. In New York, Fred Gorbet, associate deputy finance minister, met with Japanese bankers and financial

experts and talked to American and Canadian businessmen. Brian Rose, a New York-based lawyer who works for the Canadian firm of Stikeman Elliott, noted that while Gorbet’s presentation was “superb” there was concern over Wilson’s tax increases “and the lack of further cuts in spending. People had expectations of a war being waged on expenditures.”

Indeed, the initial reaction among some U.S. financial analysts was that Wilson did not go nearly as far as he could have to cut the deficit—and that some of his assumptions would likely turn out to be wrong. Carol Mackoff, a trader with Manufacturers Hanover Futures Co. who works on the Chicago Mercantile Exchange, said that following Wilson’s release of the budget the Canadian dollar “just sort of hung there.” Then, she added, analysts began questioning Wilson’s assumption of interest rates averaging 9.5 per cent over the year and decided that “this just isn’t doable. And they sold. The market’s perception is that it was a weak speech. They expected more of Wilson.” Others said Ottawa had promised too much, hinting at a more draconian approach to deficit-cutting that could not be delivered.

Still, after dipping to a postbudget low point of 69.98 cents (U.S.) on Monday, the dollar closed the week at 71.25 cents—still below the prebudget 72-cent level, but well above the record low of 69.24 cents that it fell to on Feb. 4. The new level reflected, in part, heavy intervention by the Bank of Canada, which last month alone spent $1.3 billion buying dollars to increase demand and push up the currency’s value. Some financial experts said that the dollar would stabilize at an acceptable level when the budget was better understood. “The initial negative impact on the dollar is extremely short-term,” insisted James Pitblado, chairman of Toronto’s Dominion Securities Pitfield. “What gets lost is that we’re getting under control something that was out of control.”

But analysts at home and abroad were clearly far from convinced that the budget would succeed in that goal. When reporters in Vancouver asked Mulroney how he could sell the budget to the unemployed workers demonstrating outside of his hotel, the Prime Minister observed: “I suppose the only way you can sell any budgetary document is in a calm atmosphere with patience and objectivity. You can’t sell it in a shouting match.” Last week, the sale had clearly begun.