Whittling at the deficit

TOM FENNELL March 2 1987

Whittling at the deficit

TOM FENNELL March 2 1987

Whittling at the deficit


Finance Minister Michael Wilson described it as a “breathing-space” budget. His critics called it an attack on families and the unemployed, while some economists said that the federal government’s annual tally of expenditures and revenues was simply boring. But for what it lacked in excitement, the federal plan for the fiscal year beginning April 1 compensated in clarity of purpose. The government, said some analysts, clearly intends to keep whittling away at the federal deficit by raising a swath of taxes on gasoline and tobacco, applying a new tax on snack foods and by refusing to expand government programs. That determination was welcomed in the business community. Said Roger Hamel, president of the Canadian Chamber of Commerce: “We have had deficit reduction for the third year in a row, and that is good. But we are disappointed that he did not go further down that path.” Wilson’s budget amounted to a gen-

eral summation on the economic state of the country and left such contentious issues as unemployment, tax reform, transfer payments and regional growth to a future forum. But in one shift the finance minister did use the budget as a vehicle to erase a series of retaliatory and beneficial duties that had been implemented by the present Conservative administration and the previous Liberal government. The lack of major new initiatives in the budget did not, however, prevent wide criticism of Wilson’s proposals. Opposition politicians and other critics accused the minister of slashing the deficit at the expense of the middle class, while doing nothing to ease unemployment in the recession-hit Maritimes and Western Canada. Said Richard McAlary, president of the Association of Professional Economists of British Columbia: “There is not even a nod about unemployment. That is saddening.”

Still, McAlary predicted that even with its lack of response to unemploy-

ment, Wilson’s budget would be effective in international money markets by provoking a favorable response to the Conservative government’s budgetary restraint. If the minister can hold spending in the new financial year to his projected $122.6 billion and collect his forecast $93.2 billion in revenue, the deficit will fall to $29.3 billion, down from $32 billion in 19861987 and $34.4 billion in 1985-1986. Two years ago the deficit accounted for 7.4 per cent of the country’s gross domestic product, far higher than the comparable U.S. figure of 4.6 per cent. Wilson is predicting that the Canadian figure will fall to 4.4 per cent of the country’s gross domestic product in the coming fiscal year.

Still, many businessmen had wanted far deeper cuts in the deficit. Hamel said that the deficit could have been reduced further if the government had chopped away at some social programs. Instead, Wilson stayed with his course of reducing the deficit by increasing taxes and other reve-

nues. Indeed, by the end of the new fiscal year, the amount of personal income tax collected by the federal government will have climbed to $43.3 billion, compared with $29.2 billion in 1984-1985.

As well, employers are being asked to bear the brunt of a new revenueraising measure announced in the budget, said Eric Owen, manager of taxation and financial policy with the Canadian Manufacturers’ Association. In a tax-collecting change that will bring the federal government an extra $1.2 billion in the coming fiscal year, companies will be required to speed up remissions to the federal treasury of the income tax, unemployment insurance premiums and Canada Pension Plan contributions that they deduct from their employees. The federal government will now collect the funds twice a month instead of monthly. But Owen HO said that the action will not only load employers with extra paper work, but will deprive companies of a vital source of short-term cash.

Wilson also increased consumer taxes as part of his deficit-fighting program, adding one cent a litre to the tax on gasoline and diesel fuel, more than three cents on a large pack of cigarettes and $4 more on airline tickets. While tax increases in those areas have become a staple of government financing, Wilson also announced that beginning on July 1 the 12per-cent federal sales tax —imposed on the manufacturer’s selling price—will be extended to such snack foods as potato chips, nuts, Popsicles and ice cream bars. Predicted Irene Gibb, president of the Confectionery Manufacturers Association of Canada: “The tax will have a devastating effect on the confectionery industry.”

The New Democratic Party calculated that the combined tax increases would add on average between $65 and $100 annually to the tax burden on Canadian families. Said NDP Leader Ed Broadbent: “They are even taxing Granola bars for kids.” The NDP estimates that altogether the average Canadian family will pay 52 per cent or $1,300 more in taxes in 1987-1988 than it did before Wilson took charge of

federal finances in September, 1984.

Critics in both Eastern and Western Canada, who have been demanding federal measures to assist slumping regional economies, also attacked the budget. Greg Kerr, finance minister in Nova Scotia’s Conservative government, said that Wilson’s fiscal plan seems to reflect the wealth and continued growth of Ontario, but does virtually nothing to address the economic problems of the depressed areas of Canada. Said Kerr: “The initiatives the feds have been talking about are working in Central Canada, but we are in limbo.” And in Vancouver,

economist McAlary, for one, noted that “the unemployment rate in Vancouver is 20 per cent, the highest of any city in North America. But there is not even an acknowledgement of it.”

Despite continued recession in parts of Canada, NDP calculations concluded that the federal government will spend $3 billion less on regional development in 1987 than it did in 1984—the year that Prime Minister Brian Mulroney’s Conservative government was elected. At the same time, Broadbent said, 80 per cent of economic growth in Canada over the past year has taken place in Ontario, while the economy of almost every other part of Canada declined.

Said Broadbent: “It’s a lack of economic leadership and fairness precisely at a time when Canadians were looking for it.”

Wilson countered that major initiatives in regional development could still emerge later this year. He told reporters following his budget speech that across Canada there is a mistaken expectation that regional and group interests must be linked to annual federal budgets. “You have got to do this for this sector and this for that region and put it all in a budget statement.” Instead, he said, the government is free to launch job-creation programs in the regions at any time.

But in last week’s budget, Wilson did respond to pressure from special and regional interest groups in removing some tariffs on imports that had been imposed last year in retaliation for punitive U.S. duties on Canadian wood products. The finance minister revoked a 10-per-cent duty on books, a 30-per-cent tariff on Christmas trees and other duties on tea bags and some computer parts imported into Canada from the United States. The surcharges were levied last May when the Reagan administration imposed a 35-per-cent penalty on Canadian cedar shakes-and-shingles imports. The Canadian tariffs were attacked by affected groups, including book retailers, publishers and Christmas-tree growers in Eastern Canada who expressed concern about U.S. retaliation against their annual exports of trees to the American market. The 35-per-cent levy remains, but Wilson said in his budget speech that he would reinstate the “duty-free entry for books, computer parts and Christmas trees.”

Wilson also provided relief to the Canadian steel industry by revoking a 121/2-year-old agreement that permitted reduced-tariff imports of special steel and carbon steel mill products from developing countries. Now the full tariffs applied to these will be restored.

Overall, the Canadian dollar may be the big beneficiary of Wilson’s budget, said Leo de Bever, chief economist of Toronto-based Crown Life Insurance Co. The U.S. administration, he noted, had tried but failed to slash its deficit. But, said de Bever, “Michael Wilson promised to cut Canada’s deficit—and he delivered.” As a result, the Canadian dollar could hold firm or climb in value on foreign money markets, allowing the Bank of Canada to hold down or lower its critical trend-setting interest rates. As a result, Wilson’s boring budget may yet earn some praise.

— TOM FENNELL with correspondents’ reports