CANADA/COVER

THE TAX SQUEEZE

A BUDGET LEAK BRINGS THE GRIM ANNOUNCEMENT OF TAXES AND CUTS A DAY EARLY

ROSS LAVER May 8 1989
CANADA/COVER

THE TAX SQUEEZE

A BUDGET LEAK BRINGS THE GRIM ANNOUNCEMENT OF TAXES AND CUTS A DAY EARLY

ROSS LAVER May 8 1989

THE TAX SQUEEZE

CANADA/COVER

A BUDGET LEAK BRINGS THE GRIM ANNOUNCEMENT OF TAXES AND CUTS A DAY EARLY

It was a few minutes before 7 p.m. last Wednesday, less than 24 hours before Finance Minister Michael Wilson was due to lift the veil of secrecy from his long-awaited federal budget. In a boardroom in Ottawa’s Langevin Block, the fortress-like nerve centre of Prime Minister Brian Mulroney’s Conservative government, senior officials huddled to complete the arrangements for the next day’s proceedings—“just crossing the t’s and dotting the i’s,” as Wilson’s press secretary, Richard Rémillard, later recalled. Suddenly, a colleague bounded into the room with heart-stopping news: at that very moment, Global Television reporter Doug Small was broadcasting live from Ottawa, waving in his hand a booklet that outlined virtually every significant budgetary measure, from reductions in Via Rail subsidies to a special deficit-cutting surtax on individual taxpayers. Said Rémillard: “When we heard that, we knew right away it was going to be a hell of a night.”

For Rémillard’s boss, the news could hardly have been worse. As the man responsible for leading the government’s attack on the $28.9billion deficit, Wilson had spent months trying to prepare Canadians psychologically for what he and his officials knew would be one of the

most inflammatory budgets in the country’s history. His 15-page budget speech had been rewritten again and again to soften the impact of spending cuts and steep tax increases by emphasizing the extent to which Ottawa’s huge and growing public debt threatened Canada’s economic future. But last week’s unprecedented breach of budget secrecy threw the government’s carefully orchestrated publicity plans into disarray. Only three hours after Global’s disclosures, a grim and obviously tired Wilson read a shortened version of his speech at a hastily called news conference, then drove off into the night while aides distributed thick bundles of budget documents to a crowd of reporters and MPs.

Illegal: Wilson had expected to have to defend his budget but instead he spent much of the next day fighting to save his political career. Both the Liberals and the New Democrats demanded his resignation, claiming that —in theory, at least—the information obtained by Global could have been used by

unscrupulous investors to rack up illegal profits on the stock market. But Prime Minister Brian Mulroney summarily dismissed those demands, adding that even if Wilson had offered his resignation, “I would have turned it down.” Paradoxically, the opposition’s insistence that Wilson pay the price for an apparently criminal act may have worked in the government’s favor, generating public sympathy for a minister whose belt-tightening policies were sure to arouse widespread opposition. But the focus of attack quickly shifted to the substance of the budget. The combination of spending cuts and tax increases prescribed by the Tories was described by some critics as harsh and unfair, by others as too little, too late.

‘Disaster’: In fact, there was evidence to support both views. Wilson’s budget slashed $1.5 billion from planned federal spending during the next fiscal year, in part by reining in military purchases (page 19) but also by shelving such politically popular initiatives as a proposed national child care program (page 18). In addition, Ottawa will collect another $3.7 billion in revenues, including increases in corporate and personal income taxes and higher levies on gasoline, alcohol and tobacco. The measures came after months of statements from the government about the need to restrain the national debt. But, in spite of those measures, Wilson predicted that the federal deficit would actually rise this year, to $30.5 billion—on total spending of $142.9 billion— largely because higher interest rates have

increased the cost of servicing the $321-billion national debt.

That combination of reduced government spending, higher taxes and a higher deficit virtually guaranteed that Wilson’s proposals would meet with widespread disapproval. Ruth Robinson, president of the Consumers’ Association of Canada, labelled the budget “a disaster” and complained that individual taxpayers were being forced to pay “more than their fair share” to fight the deficit. Meanwhile, the government’s leading welfare advisory group, the National Council on Welfare, said that Wilson’s decision to tax back family allowance and old-age benefits from some high-income Canadians would spell “the beginning of a cycle of poverty for more and more families and pensioners.” And Lise Corbeil-Vincent, executive co-ordinator of the Canadian Day Care Advocacy Association, accused the Tories of reneging on a pre-election promise to increase the number of subsidized day care spaces. She added, “Families are left out in the cold by this budget.”

A fiscal conservative who dislikes red ink, Wilson was not expected to receive praise from interest groups that want increased government spending. But perhaps more significantly, his budget drew criticism from individuals and organizations that previously have been among his most dedicated supporters. On Bay Street, the consensus was that the finance minister

had missed his chance to make sweeping cuts in the size of government. Said George Saba, chief economist for Montreal Trust: “Despite all the prebudget hype, the annual deficit has gone up, not down, and we are still raising taxes when we should be cutting spending.” Laurent Thibault, president of the Canadian Manufacturers’ Association, also complained about Wilson’s failure to restrain spending further, saying, “It is like you had three sports cars and you decided you would cut back by not buying a fourth car. That is not really cutting back.”

Disturbing: At least initially, those concerns were overshadowed by the drama of last week’s budget leak. Indeed, as the story unfolded, it became apparent that there had been not one but several attempts to release budget information in advance of Wilson’s scheduled speech before Parliament at 5 p.m. on Thursday. The Toronto-based Globe and Mail reported that an unidentified person had telephoned one of its journalists on Wednesday and told him that the government was about to cancel plans to build a new $200-million headquarters for Transport Canada—information that was contained in the budget package. And The Ottawa Citizen quoted an anonymous source who claimed that details of the budget had been read to him over the phone on Tuesday by a friend who was a public servant. The friend is reported to have said that his

THE OPPOSITION’S ATTACKS MAY HAVE CREATED PUBLIC SYMPATHY

brother had been given the document by someone who worked at the plant where the budget had been printed (page 14).

Both those cases, however, came to light only after Wilson had released his budget. So did another disturbing incident: at about 2:45 p.m. on Wednesday, a man telephoned CJOHTV, the local CTV network affiliate in Ottawa, and told acting assignment editor Michael O’Byrne that he had a copy of the budget and was willing to sell it. O’Byrne put the caller on hold and consulted with his boss, news director Max Keeping, who told O’Byrne that the station had a “hard and fast” policy that forbade reporters from paying for information. Informed of Keeping’s decision, the caller politely said goodbye and hung up.

Scare: Less than an hour later, Global TV business reporter Paul French received a telephone call from a man who also claimed to have advance information about the budget. French, who works in the network’s Toronto newsroom, said that the man had called Global on a toll-free line from Ottawa and that he stayed on the line for about 30 minutes. “He asked me right off the top whether we paid for stories, and I told him we didn’t,” French recalled. “But he did not seem to mind. He started reading from some document he had while I took notes. I never asked him his name or telephone number because I did not want to scare him off.”

Later that afternoon, Small, Global’s Ottawa bureau chief, telephoned Rémillard to ask whether the budget details received by the network were accurate. Rémillard knew that they were, but tried to discourage Small from using the information by saying that there were many unsubstantiated rumors about the budget circulating in the capital. Still, Rémillard was sufficiently worried to call Wilson, who in turn alerted Mulroney and Deputy Prime Minister Donald Mazankowski. At 5:50 p.m., just 10 minutes before the House of Commons was due to adjourn for the evening, government House Leader Douglas Lewis entered the chamber and asked for all-party agreement to extend the hours of debate. Lewis’s strategy was to try to keep the House sitting until the government could verify whether the leak was genuine, in which case Wilson would introduce his budget immediately. But opposition MPs turned down his request.

At the Langevin Block, Wilson’s aides tuned in to the Toronto-based Global network’s 6 p.m. newscast, broadcast to viewers in Ontario and Quebec. At first, they were relieved to discover that although Small was reporting the existence of a possible leak, he was not reporting any details, and they turned their attention to their planning meeting. Said Rémillard: “I thought, big deal—it looks like we don’t have anything to worry about.” But minutes after

Small went off the air, the source of the leak telephoned French again to ask why his information had not been used. He then offered to supply the network with a copy of Budget in Brief a 28-page booklet that summarized the budget’s contents. With that, Small arranged to meet the man at a west-end Ottawa gas station, where he collected the document and rushed back to the television studio in time to appear on the newscast again, shortly before it ended at 7 p.m.—this time with proof of the

leak in his hand. Small quoted from the document and predicted that it could “cost Finance Minister Michael Wilson his job.”

Breach: Mulroney, however, clearly had no intention of sacrificing his finance minister. By 8 p.m., the Prime Minister and his senior ministers and aides had decided to release the full budget that night to minimize the possibility of anyone gaining a financial advantage from its contents. Declared Lewis, announcing a full investigation of the leak by a special unit of the RCMP: “There has been a breach of security. Our responsibility once that happens is to get it out.” In fact, most constitutional experts agreed with the government’s approach. But both opposition parties argued that parliamentary tradition dictated that Wilson should step down and allow his successor to present a new budget. Said Liberal Leader John Turner:

“How many more of those documents have been floating around, and for how long? The integrity of the system demands that no one receives inside information from a budget.” The opposition kept up that line of attack throughout the remainder of the week, but Wilson showed no sign of losing his resolve. Indeed, many business leaders were quick to rush to his defence, suggesting that Wilson’s resignation would unsettle stock markets and weaken the value of the Canadian dollar. Nor did Wilson appear disturbed by criticism of the harsh measures contained in his budget, arguing in the Commons that the future economic health of the country depended “on the will of the government to continue making tough choices.” Added the minister: “If we do not act now, we will face a growing danger of higher inflation and even higher interest rates. This could lead to a severe recession.”

At week’s end, the government released its detailed spending estimates for the 1989-1990 fiscal year, which showed that total federal spending will rise to $142.9 billion. That figure is almost $10 billion more than Ottawa spent in the previous 12-month period. Even so, the Tories plan to cut the equivalent of 1,072 full-time jobs from the federal public service, shrinking the bureaucracy to the same level that existed in 1973. The government also announced cuts in its foreign aid budget and—in a move that provoked an immediate backlash from several premiers—a reduction in the rate of growth of its payments to the provinces.

Coincidence: As unpopular as some of those measures were, some observers wondered whether the government had actually gone far enough to restrain the growth of the deficit. But I Calgary Tory MP Lee Richardson, for I one, suggested that Wilson’s decision to lean more heavily on tax increases than spending cuts was firmly rooted in political expediency. Said Richardson: “Canadians have come to count on government programs. So raising taxes is not only the most palatable way of cutting the deficit, it is the easiest.” Moreover, even the limited cuts that Wilson has proposed are certain to arouse prolonged controversy. As Rémillard put it: “We have just closed or reduced 14 military bases. That means 14 ridings are going to scream. Don’t you think that causes political pain?” Coincidence or not, only three of the bases that will be shut are in ridings now held by the Conservatives. Besides, as Wilson well knows, the Tories can wait until 1993 at the latest before facing the voters in another general election. The government’s renewed mandate last November clearly gave it the confidence to act now— regardless of the short-term political consequences.

ROSS LAVER in Ottawa