BUSINESS

DECODING THE BUDGET

BUZZWORDS SOMETIMES OBSCURE REALITY

BRENDA DALGLISH March 9 1992
BUSINESS

DECODING THE BUDGET

BUZZWORDS SOMETIMES OBSCURE REALITY

BRENDA DALGLISH March 9 1992

DECODING THE BUDGET

BUSINESS

BUZZWORDS SOMETIMES OBSCURE REALITY

It was a difficult assignment: federal Finance Minister Donald Mazankowski, 56, had to deliver his first budget to a nation caught in the grip of an economic slump that seemed to defy every prediction of recovery. Beyond that, he had to give Conservatives at least a glimmer of hope that they can climb out of the sub-basement they occupy in the polls before the next election, expected in 1993. The result was an artful balance of minor tax breaks and mostly symbolic spending cuts that the minister assembled after weeks of consultation with special-interest groups. In round numbers, the budget contemplates $159.6 billion in federal spending, $132.1 billion in revenues—and a deficit that, at $27.5 billion, will be $2.5 billion higher than the one that Mazankowski's predecessor, Michael Wilson, predicted for 1992-1993. Maclean’s analysis of what lies behind the numbers—and the minister’s rhetoric:

1 wanted a budget that would deliver a strong bottom line: one that supports the well-being of Canadians and their families; one that promotes the success of our business people in expanding and creating jobs; one that contributes to a strong and more united Canada.’

Mazankowski did not mention that one of his most important goals is to win re-election for his government—the least popular one in the history of Canadian public-opinion polling. With that in mind, his budget gave a little something to every Canadian voter in the form of income tax cuts. For those who had demanded economic stimulation, there was a plan to help home buyers—and that also served to appease some of the testy provincial premiers. The budget’s tone, meanwhile, was resiliently upbeat: the theme to which Mazankowski re-

THE TORY SHIFT

How the Conservatives have shifted the federal tax burden—and the bulk of government spending—from companies to individuals since taking over from the Liberals. Selected budgetary revenues and expenditures, as a percentage of the total, in the last year of Liberal government—and as forecast by last week’s budget.

turned again and again in his hour-long speech was one of confidence and optimism.

Taking account of the public’s sullenly antiOttawa mood, Mazankowski at least symbolically included himself and his fellow Conservative ministers in his budget cuts. But in fact, the five-per-cent cut that he announced in salaries for cabinet ministers applies to only part of their income; the real effect amounts to barely a one-per-cent reduction on overall salaries. Similarly, while members of Parliament, senators and senior public servants will no longer be allowed to travel first-class at taxpayers’ expense, they may continue to travel in almost as much comfort in business class. In fact, on

flights within Canada first-class cabins are rare.

Still, the changes took direct aim at critics on the Conservatives’ right who have complained loudly about government waste. Said Michael Walker, executive director of the right-wing Fraser Institute of Vancouver: “It’s a budget that could have been crafted in the back rooms of the Reform party.”

While Mazankowski nodded to the political right, he ignored those on the left who had demanded jobs for the country’s 1.5 million unemployed. His reasoning: the nearly 90 per cent of working Canadians who do have jobs would not tolerate the higher taxes that federal spending on job creation would entail.

'Canadians want to cut the deficit. They do not believe that government can borrow us out of the trouble that governments borrowed us into.’

Mazankowski’s tough message echoed similar declarations that Wilson made repeatedly over the course of seven previous Tory budgets, setting targets that were not met. And Ottawa’s failure to meet the current year’s deficit targets was brushed aside amid renewed commitments to future reductions. In fact, although Mazankowski’s budget calls for the deficit to edge down over the next 12 months, it also acknowledges that the government will overshoot its 1991-1992 borrowing target of $30.5 billion by $1 billion.

Still, the Tories can claim some success in reducing the deficit as a proportion of the country’s overall economy. By that measure, the deficit will shrink to less than one per cent of Canada’s gross domestic product in the coming fiscal year—compared with almost nine per cent in 1984-1985, when the Liberals were last in power.

Mazankowski’s efforts to restrain the deficit could be undone, however, if the provinces ignore Ottawa’s signals and raise their own deficits in the weeks or months ahead. There is strong pressure on them to do just that: the recession and cutbacks in federal transfer payments have increased welfare caseloads, sent thousands of Canadians back to school in search of employable skills and led to demands for jobcreating investment in such public works as roads and sewers—all provincial responsibilities. If the provinces respond by borrowing more, their demand for debt could push interest rates higher—and wipe out most of the economic gains that Mazankowski hopes for.

That risk may not deter some provinces. NDP Premier Bob Rae, for one, said that Ontario might raise both its deficit and taxes in its next budget. “What are we supposed to do?” Rae asked. “Stop paying social assistance to people who are starving or who are homeless? Or who haven’t got a job and have had their unemployment insurance cut off?”

‘We will bolster the recovery by providing a welcome break for Canadian taxpayers and home buyers. The equation is simple: we are reducing spending in order to cut taxes.’

Ottawa is indeed cutting some spending— sending less money to the provinces, spending less on interest on the national debt and trim-

ming the operating budgets of federal departments by three per cent. It is also giving taxpayers a small break by reducing its surtax on federal income tax to four from five per cent, effective on July 1. A further one-percentage-point reduction takes effect next January—just months before the expected 1993 election.

But the total effect is less dramatic than Mazankowski’s budget makes it appear. The tax cut will create only small savings for most people—a one-earner family with two children and an income of $40,000 will save $27 in 1992. The impression of a modest stimulus to the economy from forgone federal taxes this year is also deceptive: in fact, the budget will actually result in Ottawa taking $8 million more out of the economy this year than it would have done without the changes. And despite the tax cuts, Ottawa predicts that if the economy revives, Canadian companies and individuals will actually pay $1.5 billion more in taxes in 1992-1993 than they did in the past 12 months.

‘It is impossible to overstate the importance of this dramatic turnaround in the cost of living and doing business in Canada. This will have an increasingly positive effect on all families and all enterprises.'

Inflation in the month before Mazankowski delivered his budget was at an annual rate of 1.6 per cent—the lowest figure in 21 years. That fact formed the foundation on which Mazankowski built almost everything else in his budget. If his assumption that inflation is going to remain low is correct, and if low interest rates follow, his budget will work. If he is wrong, both the federal government and the economy will be in deep trouble.

In part, Mazankowski was playing to his strength. The government’s greatest economic success has been its war on inflation. Assisted by John Crow, governor of the Bank of Canada, the Conservatives have even surpassed their own target, set a year ago, of 3.2per-cent inflation for 1992. Finance department officials now predict that the rate will average 2.2 per cent this year, putting Canada into the favored company of such low-inflation countries as Japan, Germany and Switzerland.

Mazankowski is counting on that low inflation rate to deliver enormous economic benefits. His hope is that a stable currency will encourage more investment, make Canadian exports more competitive and protect people living on fixed incomes. At the same time, he anticipates that lower inflation will also lead to short-term interest rates as low as 6.5 per cent by 1993, compared with seven per cent now. If rates do decline, that could lead to mortgage

savings for home buyers and more investment.

But low inflation and falling interest rates are far from certain. And by failing to lower the deficit, Mazankowski has left intact one of the principal engines of high interest rates, which attract the foreign capital that Ottawa requires to supply about one-third of its financing.

If Mazankowski’s assumptions are wrong, and the current low inflation is not followed by more interest-rate declines, the government could find itself in a worse situation than it is in now. Real interest rates—the rate after subtracting inflation—are still between five per cent and seven per cent. That is well above both historical levels and U.S. real rates, which range from less than one per cent to 4.5 per cent. If that gap does not close, Ottawa will not only face continuing payments on its large and growing $420billion debt, but also will have lost one of the few advantages of high inflation: the ability to devalue debt as dollars diminish in value.

‘We will simplify, streamline and substantially enrich our support for children and families.’

In another tactical omission from his budget speech, Mazankowski avoided acknowledging that “streamlining” federal support for children effectively ends Canada’s longest-running universal social program—the family allowance. His budget unveiled a plan to replace it, as well as the existing child tax credit and refundable child tax credit, with a new child tax benefit, starting in January, 1993—just in time for the anticipated election. If the proposal

becomes law, the new benefit will give the poorest parents $144 a month for each child.

Mazankowski’s case for the change: combining three cumbersome existing programs into one will save money in administration—which can instead be used to increase payments for those who qualify for the new benefit. It is an argument that appears to have seized the imagination of Health Minister Benoît Bouchard, as well. He used similar reasoning to suggest last week that Ottawa could achieve even larger savings by rolling all social benefits into one comprehensive program.

But universality may prove difficult to dislodge without a fight. New Democrat finance critic Steven Langdon, for one, said that universality gives every Canadian a stake in maintaining social programs. Without it, he said, Canadians will fall into two opposing camps: those who benefit from social programs—and those who pay for them. Mazankowski’s proposal, Langdon argues, “leads to the inevitable squeezing of the social safety net, since it will just be there for a disadvantaged minority.”

'We will restructure and streamline the operations of government to improve both efficiency and service to Canadians.’

Mazankowski announced the cancellation of 21 federal agencies, from the well-known Economic Council of Canada, which employs 120 people to give the government economic advice, to the almost extinct Veterans Land Administration, which has 64 workers providing real estate loans to war veterans. But the sweeping closures will produce savings of only $22 million—roughly one-quarter of the amount that Revenue Canada will spend answering tax inquiries from the public this year. As a result, the savings are less significant than the symbolism. The closures will give Mazankowski political ammunition for a counterattack on the Reform party, which has attracted thousands of disheartened Conservatives by ridiculing frivolous government spending.

For taxpayers, there might be more lasting benefits in Mazankowski’s long-range commitment to provide better government service. One of his undertakings would reduce the constellation of government offices in most Canadian cities to one-stop service centres, where people could pick up everything from an unemployment insurance application to a passport form.

For Canadians who find that appealing, however, there is a catch. First, they will have to re-elect Mazankowski and the Conservatives.

BRENDA DALGLISH