BUSINESS WATCH

A pessimistic and enraging budget

Peter C. Newman May 8 1989
BUSINESS WATCH

A pessimistic and enraging budget

Peter C. Newman May 8 1989

As usual, the madcap pilots of the Royal Canadian Air Farce got it right—and our political masters blew it. According to CBC’s resident radio wits, Finance Minister Michael Wilson should have combined the budget’s most controversial measures by forcing Via Rail to adopt nuclear-powered locomotives—and buying submarines that serve bad coffee.

That was about the only amusing comment last week’s budget deserved. It is as pessimistic and bleak a report on our national accounts as has ever been tabled—or attempted to be tabled—in the House of Commons. It also achieved the rare distinction of enraging critics right across the ideological spectrum, so that the enduring imprint of its authors was that of a clutch of meanspirited and politically maladroit operatives whose luck had run out.

The budget’s detailed contents were much less important than its overall message: all the bad news the Mulroney propaganda machine had been pumping out in the past few weeks—about how catastrophic a problem our deficit and national debt had become—turned out to be understatement. Despite the imposition of heavy new taxes that will touch nearly every Canadian wage earner and some fairly vicious expenditure cuts, the forecast 1989-1990 deficit at $30.5 billion will be $1.6 billion higher than last fiscal year’s $28.9 billion. That means we are actually moving backward, and not even in the finance minister’s most optimistic predictions does he contemplate reducing the national debt (as opposed to the deficit) by the end of the century.

Wilson was so far off the mark in his estimates because he grossly underestimated his 1988 interest rate in last year’s budget projections. That $6-billion blunder means the cost to the federal treasury of carrying our national debt in the coming year will be $39 billion instead of his $33 billion forecast. To compensate for that mistake, the finance minister is predicting a 12-per-cent prime rate over the next 24 months. Now it is our turn to pray that he will be wrong again.

Although the Tories boasted about reducing the deficit by $10 billion during their first term, the national debt nearly doubled from the record $160 billion it reached during Pierre Trudeau’s last year. The cost of paying interest on the existing debt load has become Ottawa’s largest—and most wasteful—expenditure. One authoritative source has predicted that Canada’s national debt could reach $1.13 trillion in the next 11 years; that would require monthly interest payments (at current rates) of $10 billion. In other words, Canada is not only bankrupt, we rank right up there with the world’s worst debtor countries—a sort of Zaïre with polar bears.

The new tax on capital will help snag some of the corporate welfare bums who so far have avoided contributing to the receiver general. Still, there was disappointingly little in the Wilson document about seriously boosting corporate taxes, which now account for just over 11 per cent of the total take. The changes in old-age pensions and family allowances will redirect funds to those who really need them, without destroying the universality ethic.

The national sales tax that comes into effect in January, 1991, at nine per cent, is suspiciously low, presumably because Wilson pledged it would be “revenue-neutral” during last fall’s election (although provincial sales taxes vary and sometimes make up the tax difference). That may be the initial bite, but nearly every other country that has a value-added tax runs closer to 20 per cent at point of sale.

The budget’s most baffling edict was the death warrant of the nuclear-powered submarines. Despite widespread protests, publicly and privately, cabinet ministers allowed the process of choosing the best boat to proceed, even while the budget was being drafted, assuring defence department officials there would be no retreat on that, the core recommendation of the government’s own white paper.

The submarines, which were—and are—the only craft available to give Canada the three-ocean navy it needs, were not scrapped for financial reasons, as was stated. The 27-year program required minimal expenditures during its initial years, moving up from an annual $20 million to a yearly maximum of about $400 million—which would have amounted to about three per cent of the defence budget. Wilson’s decision means that Perrin Beatty’s white paper is as dead as the Meech Lake accord. A statement by Defence Minister William McKnight that “defending Canada’s arctic waters will have to be left to the United States and Britain” represents a shocking abdication of Canadian sovereignty.

The business community’s predictable reaction to the Wilson cannonade has been to condemn its relatively mild treatment of the deficit. Bay Street was hoping for a $25-or $26-billion bottom line. “One of the main problems,” I was told in a prebudget interview with Marshall (Mickey) Cohen, the former deputy minister of finance, now president of The Molson Companies Ltd., “is that the finance department now enjoys so little discretion. Most of the money is spent before the budget is written. This is one of those tragic budgets where the government has slashed its wrists and bled all over the floor to make whatever cuts they can, but the business community will dismiss it as nothing much. The truth is that there’s very little government waste left to correct.

“We won’t solve our fiscal problem until Canadians perceive that we are in a real crisis,” he says, “and that won’t happen as long as the deficit issue remains a debate among the elite. Some political leader is going to have to stand up and say, ‘Look, the cupboard is bare, there is no more money for welfare payments, no more funds for most of the things governments do.’ ” Then Cohen turned seriously pessimistic: “This issue isn’t going to be resolved merely by cutting out universality. That is only the beginning; that is only the painless stuff. It simply won’t be enough to take money away from the people who don’t need it. You are going to have to get at the people who really need it as well. That is not so much a question of political courage as having the stomach to do it, because it is going to be very, very painful.”