COVER

CALLS FOR A KICK-START

SPEND NOW AND PAY LATER

BRENDA DALGLISH,BARBARA WICKENS February 10 1992
COVER

CALLS FOR A KICK-START

SPEND NOW AND PAY LATER

BRENDA DALGLISH,BARBARA WICKENS February 10 1992

CALLS FOR A KICK-START

SPEND NOW AND PAY LATER

COVER

Acourier's job usually calls for only the most basic skills-picking

up and delivering packages.

In spite of that, executives at Federal Express Canada Ltd. say that they plan to spend $12 million in 1992 on training for the company’s 3,200 employees in areas such as remedial reading and using computers. David Bronczek, the Mississauga, Ont.-based company’s general manager, says that it is important to invest heavily in training for the company to remain profitable in the future. At the same time, Bronczek added,

Canada’s federal and provincial governments should spend more on programs to improve the quality and productivity of the country’s labor force. “If you cut back spending on training, on programs to improve quality, you can save a little bit of money in the short term,” he said. “But you have guaranteed yourself a disastrous future.” As the current economic recession drags on, support for more public spending is winning the approval of an increasing number of business executives and free-market economists—those who tradition-

ally oppose such measures because they can lead to higher deficits.

Specifically, they say that Ottawa and the provinces should act to stimulate economic growth either by spending money themselves or by cutting taxes, even at the risk of higher deficits. Says Douglas Peters, chief economist at the Toronto-Dominion Bank: “The first thing the government has to do is to say, ‘Look, this recession is deeper and worse than we expected,’ and then start to do something about it.”

Surprised: The debate about the government’s role in kick-starting the economy became sharply focused late last month when Matthew Barrett, chairman of the Bank of Montreal, surprised many colleagues in the business community by calling on the federal government to do more to help the unemployed. Declared Barrett: “Helping Canadians

without work makes good business sense.”

Speaking to the company’s shareholders in Montreal, the bank chairman recommended that Ottawa create a $3-billion, multi-year program to spur job creation and launch a “significant training and retraining program” for the unemployed. He added that some of the money for the program could be raised by reducing social benefits for those who do not need them. For the remainder, he said, Ottawa should use the savings it will realize in the 19921993 fiscal year because lower interest rates have reduced the cost of servicing the $420-billion national debt. By contrast, government officials say that any money saved from lower interest rates should be used to reduce next year's deficit, currently projected to reach $24 billion.

Miller Ayre, president of St. John’s, Nfld.-based Ayre’s Ltd., is another businessman whose views

about the importance of deficit fighting shifted as the recession drove his company to the brink of bankruptcy. In December, Ayre announced that he planned to close most of his company’s 60 womenswear stores, which operated under the J. Michaels, Kristy Allan and Berries names, and lay off as many as 750 employees. Ayre, who is also the current chairman of the Canadian Chamber of Commerce, told Maclean ’s that he used to be a firm supporter of the federal government’s approach to controlling the deficit by reining in spending. Although he emphasized that he was expressing only his personal views, he said that the recession’s severity has convinced him that Ottawa’s eight-year-old campaign to restrain spending and fight inflation has gone too far. Declared Ayre: “The government has to face the fact that there are short-term economic problems that have to be dealt with. They cannot continually look to the long term for solutions.”

At the same time, Ayre rejects suggestions that

the rising toll of unemployment and business bankruptcies is evidence that the economy is undergoing a necessary, and ultimately beneficial, restructuring.

Said the businessman:

“Right now, there is a perverse logic that the sicker we are, the healthier we must be getting.”

Deepened: Other business leaders, leaning towards an even more liberal approach, say that Ottawa’s single-minded war against the deficit has actually deepened the economic downturn. Clearly, they argue, government revenues must fall during recessions because the unemployed, bankrupt and less profitable pay less in taxes. Simultaneously, government expenditures will increase as the demand for social services, including welfare and unemployment insurance, soars. The result: a bal-

looning deficit. Tim O’Neill, president of the Atlantic Provinces Economic Council in Halifax, says that during recessions, governments should temporarily allow deficits to expand to preserve jobs and keep the economy functioning as smoothly as possible. Said O’Neill: “Rather than tilting against the natural flows, governments should accommodate them. Otherwise, they risk exacerbating the problem and damaging the economy even more by adding to the cause of the recession in the first place.”

One traditionally popular method of stimulating demand and creating jobs is the acceleration of government spending on new roads, hospitals, schools and other publicly owned facilities. Said William Dimma, deputy chairman of Royal LePage Ltd., a diversified residential and commercial real estate company based in Toronto: “In the short term, I still lean a little more to controlling the deficit, but I do think that there is room for some spending on public works projects.”

For his part, Donald Savoie, an economist at New Brunswick’s University of Moncton who has advised the Mulroney government on economic and constitutional issues, says that he is reluctantly adopting the position that the economy is “sick” and that public funds would be better spent now on infrastructure projects than on cutting government deficits. Added Savoie: “Public works projects are productive—they get money to the people who are the most vulnerable. And they make good economic sense, particularly at a time when interest rates are low.” Savoie and O’Neill both cited a proposed fourlane expansion of the Trans-Canada Highway in the Atlantic provinces as the kind of project that governments should launch immediately.

Cutting taxes—a tactic intended to leave consumers with more money to spend—is another favored method of stimulating the economy. John Bulloch, president of the 85,000-member Canadian Federation of Independent Business and a longtime critic of

government deficits, now says that provincial sales taxes and Ottawa’s sevenper-cent GST should be cut by one percentage point each. He acknowledges that tax cuts might result in higher deficits, but adds that they could also stimulate the economy enough to offset the temporary loss in revenue. More importantly, declared Bulloch, “It would result in a boost in consumer confidence.” It would also, he said, improve the bitter mood of the public towards government and “drain some of the poison out of the system.”

Other business leaders favor cutting income taxes on the grounds that such cuts are more equitable than sales-tax reductions. Says Claude Beland, president of the Caisse centrale Desjardins du Québec, the province’s largest financial institution: “The govern-

ment should give money back to individuals by raising the level of the individual tax credit. It can be good for the government, too, because if people spend more, the government will collect more sales tax.”

In the absence of any such measures, there is a clear danger that Canadian consumers will remain pessimistic about the economy’s prospects, minimizing the chances for recovery. Many, with good reason, are now fearful of losing their jobs or of being forced to accept pay reductions; others are already unemployed and see little prospect of rejoining the workforce in the near future. Confronted with that bleak reality, growing numbers of business leaders are now prepared to shelve—temporarily—ideological concerns to clear the way for measures that could breathe life into a feeble economy.

BRENDA DALGLISH

and

BARBARA WICKENS