CANADA

Wilson’s budget battle

PAUL GESSELL March 3 1986
CANADA

Wilson’s budget battle

PAUL GESSELL March 3 1986

Wilson’s budget battle

CANADA

For months Federal Finance Minister Michael Wilson looked despondent. Sitting in the Commons, frequently frowning, he answered opposition questions with a mixture of boredom and disdain. But in January, when the dollar began falling, interest rates started rising and the business community began complaining, the 48-year-old former Toronto stockbroker rallied. As the government launched an aggressive assault to defend the dollar and announced new cost-cutting measures, Wilson suddenly began promising to introduce “a tough budget.” Word quickly spread that Wilson was more upbeat because he had finally convinced cabinet colleagues that decisive action must be taken to tame the $34-billion monster known as the deficit. Said Conservative Senator Lowell Murray, chairman of the Senate banking committee: “The

falling dollar has deflated the argument that we can go along with a big deficit.”

The hundreds of pages of statistics, charts and political rhetoric that Wilson prepared for this week’s budget will prove whether the government was truly committed to tackling the deficit or merely putting on a prebudget show to mollify the business community. But some business leaders appeared convinced in advance that Wilson had won the support he needed to introduce measures that would lop at least $4 billion—possibly more—from the deficit. Thomas d’Aquino, president of the influential Business Council on National Issues, said the dollar’s fall dramatized the business community’s lack of confidence in the government and “helped Mr. Wilson win the battles in cabinet that otherwise would have been very difficult to win.”

Wilson’s budget wars, according to some government sources, were primarily with Health and Welfare Minister Jake Epp and Employment and Immigration Minister Flora MacDonald—the ministers responsible for the bulk of the government’s costly social programs. Even Mulroney has appeared worried about drastic belttightening measures. In December the Prime Minister said, “You can’t just come in here with an axe and start chopping away indiscriminately at ser-

vices to people.” But as budget day approached, Mulroney’s tone changed. He declared, “Our opposition to the deficit, our determination to reduce it or eradicate it is, and will be, implacable, unyielding and successful.”

Although Wilson faced conflicting pressures from competing interest groups, there was wide consensus on many points. There were repeated calls to reduce the federal deficit by trimming corporate tax breaks and the costs of running government programs, rather than by raising taxes and chopping social programs for the

poor. As well, many lobbyists demanded an overhaul of a bewildering tax system that often gives with one hand and takes away with the other. Donald Johnston, the Liberals’ senior finance critic, said he would not want to bring in “a budget with the present tax system” because of all the loopholes and contradictions.

The majority of the public appears to agree. A Gallup poll commissioned by the New Democratic Party in January showed that, among 857 decided respondents, 89.4 per cent believed the current tax system is unfair. The NDP’s

major prebudget statements requested disclosure of how much each loophole—Finance calls them tax expenditures—costs the Treasury. Among the tax breaks the NDP wanted eliminated: a $500,000 lifetime capital gains tax exemption introduced in last May’s budget and anticipated to cost Ottawa more than $550 million this year. Said Nelson Riis, NDP finance critic: “Canadians are angry about the chaotic

hodgepodge of schemes and scams that passes for a tax system.”

As Wilson faced the onerous task of plotting the country’s economic future, his work was complicated by a series of factors, including the falling price of oil (page 24). As well, the minister had to take account of an unsteady dollar, a growing gap between the rich and poor, persistent unemployment, regional disparities, a credibility problem with the business community— and a shaky government lead in public opinion polls. And at week’s end, Statistics Canada reported that the rate of inflation in January was 4.4 per cent, the highest in 18 months.

Some of those problems were highlighted in a report last week from the Conference Board of Canada. The Ottawa-based private study group predicted that, while the economy grew by a respectable 4.4 per cent last year, it is expected to slow to two per cent in 1987. Ontario led the country last year with a growth in real domestic product of 5.2 per cent, while British Columbia, Saskatchewan and the Atlantic provinces lagged far behind the national average.

Confronted with uneven growth patterns, some businessmen have modified their aggressive lobbying for corporate handouts. Said d’Aquino: “Business, the beneficiary of about 12 per cent of federal program spending, must bear its share of the burden.” In Regina, Dale Botting, a spokesman for the Canadian Federation of Independent Business, proposed cuts in the unemployment insurance program and trimming $2 billion from the business incentives offered by the department of regional industrial expansion. Said Botting: “We are entering into a new era of tough choices, a time of serious trade-offs.”

Parliament’s auditor general, Kenneth Dye, has estimated that the various loopholes available to business and high-income taxpayers cost the federal treasury between $30 billion and $50 billion in taxes each year. There was widespread speculation that Wilson planned to recapture more than $1 billion of those funds by changing two tax provisions: one allowing individuals a tax exemption on the first $1,000 of annual interest earned on savings and investments, the other allowing companies to write off three per cent of their inventories against taxes.

But many of those allowances, known as tax expenditures because they amount to government payouts, encourage industrial expansion and employment. Steve Huza, founder of Montreal-based Circul-Aire Inc., which manufactures heating, ventilation and air-conditioning equipment, has seen his firm almost double in size in five years and partly credits government incentives and grants.“Budgets are our lifeline,” said Huza. “No one here is lying on Caribbean beaches. We put it right back into research and development.”

In recent weeks Wilson provided few

clues publicly about his budget, except that it would basically continue existing policies designed to stabilize the dollar, reduce interest rates and generate employment in the private sector. Maclean's has learned that Wilson asked his department to investigate, possibly for a future budget, the viability of implementing a tax credit aimed at freeing more low-income people from paying income tax. But there were no hints of improving federal social programs. Said one Tory official: “Epp and MacDonald have had to fight like hell to get anything and found it most discouraging.” Some Conservative MPs, admitting that they feared unpopular tax increases, say that last year would have been a better time to crack down. And former Liberal finance minister Marc Lalonde told Maclean's: “They missed a tremendous opportunity in the last budget, just after the election. I don’t know if they can catch up.”

The Conservatives tried to be tough in some areas last year, mainly by increasing sales taxes and reducing protections against inflation in old-age pensions and family allowances. But a public backlash against the pension proposal forced the government to retreat. The Conservatives lost doubly— first by appearing to penalize the elderly and later by succumbing to public pressure. Said Raymond Garneau, the Liberals’ associate finance critic: “I hope that he [Wilson] learned his lesson last year.”

But for Wilson, the major challenge is to reduce the deficit in measured steps without pitching the economy into a tailspin. Expected to total almost $34 billion in the fiscal year that ends on March 31, the deficit represents the amount that the government must borrow to cover the gap between revenue and the $105 billion it planned to spend. The accumulation of annual deficits I has saddled Canada z with a public debt of Q about $224 billion. Paying interest and handling charges on the debt was expected to cost the government about $26 billion this fiscal year. Still, Wilson’s public statements in the past few months about the need to tame the deficit had often been more aggressive than Mulroney’s. Those conflicting signals damaged the government’s credibility within the business community and among ordinary vot-

ers. Typically, Eric Novak, a farmer near Rowatt, Sask., said, “What bothers me is the way governments waste our money.”

Economists concluded that a lack of confidence in the government was a prime factor in the downward pressures on the dollar’s foreign-exchange value early this year. The result was a dramatic rise in interest rates as the government borrowed funds to counter the pressure. Until then the government’s economic report card had been largely positive. The unemployment rate dropped to 9.8 per cent in January from 10.5 per cent at the time of last May’s budget. Inflation was stable at four per cent annually, and the trendsetting Bank of Canada interest rate stood at a manageable 9.2 per cent in mid-December. The bank rate has since climbed three percentage points, with a resulting rise in mortgage and consumer borrowing rates. Robert Nixon, treasurer of Ontario’s Liberal gov-

ernment, cited a boom in the mortgage-dependent construction industry but said, “There is nothing like 13-percent interest rates to put a wet blanket on that.”

In an effort to demonstrate frugality, the government announced costcutting measures even before the budget. The cabinet temporarily froze all discretionary expenditures to prevent the annual spending binge in February and March by government departments using up surpluses in their yearly budgets. Two hundred jobs were to be eliminated from the fisheries department. Initiatives were announced to cut back the almost $3 billion spent annually in administering regulatory control of everything from the standards of baby cribs to the quality of the environment.

Meanwhile, the provinces, though supporting deficit control, made costly

proposals. The economically depressed Atlantic provinces pushed for an increase in the equalization payments given the poorest provinces and more tax incentives to attract businesses to their region. Most provinces also urged Ottawa to abandon plans to trim transfer payments for health care and postsecondary education by $2 billion at the end of the decade. Lamented Ontario’s Nixon: “I just don’t know where I will get the money to finance hospitals and education.”

Like the provinces, many of Canada’s 1.3 million unemployed were pessimistic about what the budget would bring. Derek Brown, who was laid off last December from a railcar fabricating plant in Trenton, N.S., felt the government should resurrect winter works programs to reduce the welfare rolls. Said Brown: “At least if you have a winter works program, they are getting community work done.” But there was no indication that the unemployed

would receive new direct benefits. Patrick Johnston, executive director of the National Anti-Poverty Organization, harbored few hopes for the long-term future of the poor. He cited data from Statistics Canada showing that the income of the richest 20 per cent of Canadian families increased marginally between 1981 and 1984, whereas the income of the poorest 20 per cent decreased 11.2 per cent during the same period. And Wilson’s last budget, which increased sales and gas taxes, only exaggerated the disparity. Said Johnston: “If they don’t try to compensate for that, it will make the gap between rich and poor even worse.” This week, with all of Canada watching Michael Wilson, the challenge was to set the measure of that gap.

HILARY MACKENZIE

PAUL GESSELL with HILARY MACKENZIE in Ottawa and correspondents’ reports