COVER/SPECIAL REPORT

IN SEARCH OF SOLUTIONS

MARY NEMETH September 27 1993
COVER/SPECIAL REPORT

IN SEARCH OF SOLUTIONS

MARY NEMETH September 27 1993

IN SEARCH OF SOLUTIONS

A group of Canadians wrestles with the daunting realities of deficit reduction

The bus carrying the participants from Toronto’s Pearson International Airport arrived at The Briars late on a humid Friday afternoon. The group was greeted at a reception held in an elegant Victorian-style pagoda, complete with white columns and gingerbread trim—an oddly serene country setting for the sobering topic the group had been gathered to address. Dispensing quickly with introductions, the participants sat in the pagoda, drinks and canapés in hand, brimming with energy and answers as they launched into their personal philosophies on budgets and debt. If they could all manage their household accounts, they demanded, why could the government not manage its own? As they talked, they hardly seemed to notice that the afternoon humidity was giving way to an evening chill. The sky had turned a steel grey and and a cool wind had begun blowing off choppy Lake Simcoe. The blustery weather was a fitting portent of the stormy sessions yet to come, of the obstacles and frustrations that faced the participants as they prepared to grapple with the nation’s finances.

Edmonton car dealer Ken Haywood brought along a household budget book from the 1930s to illustrate his mother’s determination to raise budget-conscious children. “I wanted an accordion, apparently,” he said, referring to a childhood purchase recorded in the book. “She paid for it, and I paid her back. So I come from a budgeting background.”

Ruth Williams, president of the All Nations Trust Co. and a member of the Aboriginal Economic Advisory Board in Kamloops, B.C., related that when she recently applied for a loan to buy a camper, she was told that her debts should not exceed 40 per cent of her income. “It would be nice,” she said to applause, “if the government operated in the same fashion.”

The dozen Canadians came from all parts of the country with a range of views. They were not economists and they had difficulty grappling with complex theories on monetary policy or the merits of an independent Bank of Canada. What they brought to The Briars was a common-sense approach, bom of their own struggles to balance household and small-business budgets.

What they encountered as discussion of the federal deficit got under way was frustration. When they proposed to cut unemployment insurance, expert economists advised the group that the move would not make sense, that UI is a self-funding program that usually takes in as much money as it doles out.

Equalization to the have-not provinces? They need not bother cutting those either, because they are enshrined in the Constitution.

Overbilling in health care, perks for politicians and other examples of government waste? Sure, the economists said, but even if they shut down the entire government they could still not eliminate the $32.6-billion federal deficit.

And when some participants proposed deep cuts in such meaty expenditures as education and native programs, there were others who strongly objected on the grounds that the social and economic costs were too high.

In the end, the group did reach a consensus, prescribing about $9.5 billion in cuts to federal expenditures each year for three years—measures more drastic than what any government has ever imposed. Some of their proposals detailed reductions that the group considered essential—others were more symbolic, intended to express their exasperation with government inaction. But along the way, over a pressure-cooker weekend marked by flareups and compromise, the participants came to recognize the monumental obstacles politicians themselves face as they address the deficit issue.

During dinner on Friday, former deputy federal finance minister Fred Gorbet outlined the current budgetary crisis and presented his analysis of how the country acquired the federal deficit (this page). Most of the participants were still talking about his remarks, and nibbling at the last of their mud pie desserts, when Williams, a Shuswap Indian, and Carol Meredith, the owner of a small computer training company in Knowlton, Que., settled in a small lounge. Williams began to talk about Canada’s natives, about their 85-percent unemployment and 47-per-cent illiteracy rates. She wanted to make sure that deficit reduction took into consideration the special needs of her community. It was about that time when the others began drifting in.

“I have a friend,” Manitoba grain and livestock farmer Bill Barker interjected. “His daughter is married to a guy who is oneeighth Indian and their sons go to university free of charge. Can we go on for ever and ever with aboriginals having special rights?”

“You’re living in this country,” Williams replied, “with agreements made with the original inhabitants.”

“How long can this go on?” Barker asked.

“The agreement is for as long as the sun shines,” Williams replied firmly.

“But,” Barker insisted, “won’t that create a special class of people that will be a perpetual source of tension?”

Williams had had enough. “A lot of money,” she said pointedly, “goes to people in agriculture.” With that, she turned away.

Barker, meanwhile, told Meredith that he is not a fan of agricultural support programs. “But is it any more of a subsidy,” he asked, “than paying a civil servant $30,000 or $40,000 more than he’s worth? In my home town, the civil servants make that much more than someone in private enterprise.”

From native programs to agricultural subsidies to civil service salaries—the jostling for a slice of the budgetary pie had begun.

After the Friday night confrontation between Williams and Barker, the participants trod carefully around the $3.6 billion the federal government spends on native programs— at least during the formal sessions. In the hallways and over lunch, those programs were still the subject of heated informal debate. “I don’t know where we’re going to get the money to pay the Indians,” car dealer Haywood told his lunch companions on Saturday. “They do get a lot of money,” another participant added. “But don’t let Ruth hear us,” cautioned a third, glancing nervously over his shoulder.

That reticence to offend would influence the end result. In their final agreement, the participants agreed to cut the costs associated with the federal government’s administration of native programs, but did not touch the programs themselves. For the most determined deficit slashers, it was both a setback and a lesson in the delicate politics of federal financing.

If the participants sometimes pulled their punches on native issues, they let loose on other government expenditures. Professional conciliators Ben Hoffman, Helen Ryane and Harriett Moquette assembled the group in a ground-floor conference room early Saturday morning and asked each of the participants to speak about the deficit-related issues closest to their hearts. Nursing professor Margaret Black of Willowdale, Ont., maintained that Canada’s “cradle-to-grave security” network has failed. “It’s going to be a big shock” when it’s gone, Black said, “but earlier generations didn’t have that kind of thing and they’ve managed to do quite well.” Ed Lim, a computer specialist with the City of North Vancouver, said that “the concept of universality has to be abolished. Free medical care, free money, easy access to UI, all these grants and welfare—those have to end.” And Frank Oliver, a retired CN Rail worker and former union representative from Brampton, Ont., said that he was tired of “politicians who come to me and try to buy me with my own money.”

Added Oliver: “Politicians today are too busy getting re-elected. There’s nobody minding the store.”

The conciliators sifted through the morning’s statements to identify topics for discussion. They divided the participants into three groups to discuss spending cuts, wealth creation and government process. The small groups began their deliberations after lunch outdoors on the resort’s lush green lawn.

The members of the group charged with identifying spending cuts—Lim,

Black, Williams and Oliver—began arguing almost at once. Lim, the most determined deficit-cutter of the four, pushed for immediate five-per-cent across-the-board spending cuts. Williams disagreed. ‘There’s an intricate balance here, and arbitrary cuts could adversely affect those who still have jobs,” she argued. And although Oliver conceded that no program should be exempt from the axe—“nothing is sacred,” he said—he clearly had reservations. “We still have to protect those who really need it.”

Oliver and Williams joined forces in favor of a proposal to formally review spending before making any cuts. But Lim seemed worried that such a review could drag on for years, turning into what he called a “royal commission” approach. “Once you launch a review, special-interest groups get involved and start lobbying,” he argued. “Then, things get political.” The matter was still up in the air when the group broke for coffee. During the lull, Lim expressed frustration. His group’s approach was too cautious, he said, “too Canadian.”

After the break, the spending-cuts group began to focus on individual programs. Health care received the most attention, largely because each participant had some anecdote about “waste.” Black said that a social worker once told her about a man who needed a prosthetic device. The social worker told him “to spend the money in his bank account so he would qualify for a government handout,” recounted Black, indignantly.

Others talked about doctors prescribing sunscreen or prescribing bottled water for use as a laxative.

In its report, the cuts group bemoaned “duplication” and the “layers of bureaucracy” in health care. They also proposed that Canadians be informed about the costs of the health services they use; that doctors order fewer lab tests; that the production of cheaper generic drugs be encouraged. The group also called for user fees on emergency services. Still, by the time they broke for dinner, they had made few significant cost-cutting proposals.

The other groups were struggling, as well. The government-process group—made up of Barker, Meredith, Haywood and Toronto litigation

lawyer Craig Lewis—made perhaps the most substantive proposal of the afternoon, agreeing to hasten the abolition of interprovincial trade barriers. Although those barriers are generally used to protect jobs in each province, they tend to drive up prices. “Bringing that money back into the economy outweighs the positive factors of saving jobs,” the group said in a statement. They agreed as well that the Senate was ineffective, although they were split over what to do about it. They finally drafted a proposal to either reform or abolish the Senate.

The government-process group also floated some ideas that eventually sank. Haywood proposed lumping the Maritime provinces together to eliminate the duplication of services. “Do you think that would be a good idea?” Meredith asked. “I think the Maritimes would have a fit.” And farmer Barker complained that the Bank of Canada in the past set high interest rates to cool the overheated Ontario economy, with devastating effects in economically sluggish Western Canada. Barker asked whether it would be feasible to have separate interest rates in different parts of the country. Economist Ted Carmichael outlined the pitfalls of that idea. “Unless we have a Prairie dollar and a Quebec peso,” he said, “we’re going to have a common monetary policy. And if we don’t have a common currency, we don’t have much of a country.”

The wealth-creation group was made up of Chantal Biron, an unemployed computer technologist from Montreal; Kit Krasemann, a technical communications specialist from Nova Scotia; Sheila Simpson, a shop owner from St. Andrews, N.B.; and Evelyn Goodings, a retired ad ministrative assistant from Welland, Ont. As the group broached a se ries of wealth-creation proposals, Krasemann argued that Canadians are poor salespeople and that federal training programs should in clude a sales element "You can produce all the product in the world," he said, "but ii you can't sell it, you come to a dead end." The group also discussed ways in which the country could attract more investors In Niagara Falls

N.Y., they attracted factories by offering no taxes for a year,” Goodings offered.

Countered Krasemann: ‘That costs money.” He suggested searching for ways to generate more exports. “One resourcea Canada has plenty of is fresh water,” said Krasemann. “The Americans in California are prepared to buy.” Biron objected. “Very often, we offer them our environment,” she said.

“I’m against that.”

Throughout Saturday’s discussions, there was a recurrent theme—government waste. The cuts group had

concentrated on abuse in the -health-care system. At the same time, in the wealth-creation group, Goodings ridiculed an Ontario government proposal to spend $50 million to put identification pictures on provincial health-insurance cards—intended as an effort to reduce fraud in the system.

Haywood, meanwhile, complained about the National Gallery’s acquisition earlier this year of a $1.8-million abstract painting.

Dinner that evening was a sombre affair. The participants talked about how frustrated they were, and about how little they had achieved. Only Anderson, the economist, seemed invigorated, letting her dinner grow cold as she shuffled through budget documents, trying to calculate the net effect of the day’s deliberations. When the group drifted back to the conference room, Willowdale’s Black declared: ‘We got a little taste of what it was like to be politicians this afternoon and try and figure out answers to thorny problems.”

Then, a nervous silence fell over the room as the participants waited for Anderson to deliver her judgment. Well,” she said, smiling, “the good news is I don’t think that we’ve increased the deficit.” That provoked laughter. But Anderson went on to explain that “even something as radical as abolishing the Senate only saves us $55 million.” And while she applauded the long-term potential of some of the wealth-creation proposals, “in the short run, what most of those suggestions will have done for us is cost us money.” Responding to proposals for eliminating waste, she cautioned that “there’s not as much fat left in the system as people think.” And after tallying all the groups’ recommendations, she estimated that they would cut $4 billion, at most, from the budget. Given a federal deficit of $32.6 billion,

Anderson concluded, “we still have a big gap left.”

The monumental nature of the task was finally hitting home. Over drinks at a Saturday evening party, and over breakfast the next morning, participants pored over copies of the federal budget. “A deficit will not do,” Biron insisted. “We must bring it down to zero. If I leave here this weekend without doing that, I will be extremely disappointed.” A new consensus began to emerge. Stimulating the economy to generate more tax revenue or reforming government programs to make them more efficient would clearly have positive long-term effects. But those effects were difficult to calculate. If the participants were going to make a quantifiable impact on the deficit in the one day left, they would have to make drastic spending cuts.

ft was in that spirit that the participants reconvened early Sunday morning. The debate started deliberately enough. But with the clock ticking against a departure deadline of 5 p.m., the group decided to make even more sweeping cuts. And when they could not reach complete consensus, they voted with a show of hands, passing some proposals by majority rule. By noon, the group had imposed a 20-minute deadline for debate on each item. As a result, some of the cuts were waved through with scarcely an objection. Other items provoked heated debate. A brief sampling of the key arguments and dilemmas that marked the way to the accord:

DEFENCE

Barker was first off the mark, proposing deep cuts in military salaries and benefits, which total $5.2 billion, or nearly half of the departmental budget. But Goodings protested vehemently. “I have a son in the air force,” she said. “He may be $5,000 above the poverty level, but he has a wife and two children to support. I support cuts, but if you’re going to cut people that are $5,000 above the poverty level, I disagree.”

Goodings’s objection was a classic example of how a personal stake in federal spending could cool the deficit-cutters’ ardor. But it was only a temporary setback. The group quickly turned its attention to the defence department’s capital expenditures, of which the EH-101 helicopters are a part. Helicopters and other such purchases were planned, Krasemann argued, “when there was a Soviet Union—when we had, if you like, a survival threat. We don’t any more.” The group agreed to cut the military’s annual $2.7-billion capital expenditure budget by 30 per cent over three years.

OLD AGE SECURITY

The economists pointed out that anyone whose individual net income exceeds $83,000 now has their OAS payments—which start at age 65—entirely clawed back in taxes. The group voted on whether that threshold should be reduced to $53,000. All 12 hands went up. Should the threshold fall to $40,000? That time 11 hands went up. What about $30,000? “How many people would be willing to go all the way down here?” asked economist Carmichael. “You’re really talking about going after people with very moderate incomes at this point.” Only two hands went up: those of two of the younger participants, Biron and Lim. ’Hie group settled at the $40,000 income level, a decision that would cut $3.2 billion from total OAS expenditures of $20 billion. But later, the senior members of the group wondered at the younger members’ willingness to slash away at OAS. “Maybe they haven’t experienced the ups and downs in life yet,” Goodings suggested. “They may think they’ll never get old.”

THE CANADIAN BROADCASTING CORPORATION

The group debated the CBC’s high level of Canadian programming, its service to isolated communities and its efforts to limit the amount of time it devotes to advertising. “I don’t want to see happen to the CBC what’s happened to the Via [railway service],” said computertraining company owner Meredith. But in the spirit of budgetary restraint, she recommended a 50-per-cent cut to the annual $ 1.1-billion subsidy, while urging the CBC to increase its efficiency and international marketing. Eight of the participants eventually agreed to cut the subsidy by 30 per cent, or $330 million in total, over three years. (The federal government already has plans to cut the subsidy by $250 million beginning in 1995.) But four refused to sign that part of the deal. “This is one of the times that I won’t go with the majority,” Oliver declared. “I’ll say it just once, I feel the CBC has a service to perform for the country.”

HEALTH CARE

The group picked up on a Saturday proposal for user fees. Once again, it was pensioner Oliver who objected. He described the National Health Act, which discourages user fees by cutting federal medicare transfer payments to provinces that apply them, as “the police force over our national health scheme.” Without the act, he warned, “you can just rest assured in a few years you will be like the United States.” But Meredith argued that user fees could save the system. “Canadian medicare is a very fine system, and we’re dam fortunate to have it,” she said. “The idea is to allow them to charge user fees in order to preserve it.” The group voted unanimously to allow user fees.

At the same time, the group agreed to cut the health-care component of the $26.4 billion in federal cash transfer payments to the provinces. “We either have to decide we’re going to maintain the deficit,” argued Black, the nursing professor, “or we’re going to have to decrease services.” A 30-per-cent cut would be feasible, she added, “if we’ve agreed to reduce the level of services—which may mean you have to give up your heart transplant.” Evidently, the group did agree: they voted to support a 30-per-cent cut over three years. But later, Oliver urged a cautious interpretation of that vote. “If I had my druthers, I’d leave medicare alone,” he said. “But the signal I think we’re sending is that you have to cut out the abuse and the inefficiency. We can’t afford it the way it’s operating today.”

EDUCATION

When the group turned its attention to transfer payments for postsecondary education, Williams urged caution. “If we’re going to be addressing unemployment insurance, social assistance and becoming more competitive,” she said, “I think one of the keys is education.” But Black wanted to spread the pain. “There are inefficiencies in the educational field as well as in postsecondary [education],” she argued. Goodings insisted that education is key to wealth creation. “Fm not saying this shouldn’t be done,” Black replied. “Fm just saying that it could be done more economically.” In the end, for the sake of simplicity, the group decided to lump together all federal cash transfer payments to the provinces, with the exception of equalization, and to cut the entire $16.5-billion package by 30 per cent over three years.

OTHER PROGRAMS

The group did not have time to address every budget item. But with the bus that would take the participants back to Toronto ready and waiting in the parking lot, they rushed through a few final deals. Barker, the farmer, was taking some ribbing for having escaped the budget axe, and made a last-minute gesture. “Following through on what we said the other night, that we do it equally, across every segment of society,” he said,

“Fm willing to take the same cuts—a 30 per cent cut in agricultural subsidies.” That put the pressure on car dealer Haywood—the most vocal pro-business advocate— to make a concession on business subsidies. “No bloody way,” he joked. But in a more serious tone, he added: “Remember that business does generate jobs.”

The group finally agreed to cut agricultural subsidies, but proposed a six-month study to determine whether business subsidies are generating wealth—with the option to cut them by up to the same 30 per cent if they are not.

Along the way, the deficit slashing had begun to alarm the economists. “That is total insanity,” economic consultant Carl Beigie exclaimed at one point, after an early suggestion to eliminate the entire $32.6-billion deficit in a single stroke. “The assumption is you can have a balanced budget at 11.6-percent unemployment,” he added, shaking his head. And later, just after the group slashed health and education by 30 per cent, Anderson told the group that she was “getting a little bit nervous.” Said Anderson: “There are lots of social and economic costs which we’re not taking time to address here.” Even some participants seemed to have second thoughts in the final hours of negotiations.

Still, in the end, everyone signed the document. “The whole message from this,” said Haywood, “is that these 12 people agreed that we’re going to have to live on a lower standard, we’re going to have to look at people’s wages, we’re going to have to do with less. I think that’s the message—the figures themselves I don’t think are that important.”

In the days and weeks following The Briars weekend, the participants would have plenty of time to reflect on the deficit, to have regrets or to pat themselves on the back. But when they signed their final accord, they just seemed relieved that 272 days of arduous negotiations were over. The last-minute amendments had taken the group down to the wire. Immediately after the signing ceremony, the participants picked up their luggage and headed for the parking lot. Shaking hands with the conciliators, smiling at the cameras for the last time, they boarded the bus for home.

Two weeks later, Krasemann sent Maclean’s and CTV a letter: “I have had to

dump my rather simplistic views regarding this country’s deficit and its possible solutions,” he wrote. “Cutting of expenditures doesn’t necessarily provide a solution. It can merely exacerbate the problems of unemployment, regional disparity and the whole infrastructure that holds this country together. The accord ended up sounding rather like the usual communiqué issued at the conclusion of similar get-togethers of our political masters. Full of high ideals, wistful thinking and hopelessly turgid reading. And rather thin on numbers. We became that which we berated.”

It was, perhaps, a harsh assessment. Toronto’s Lewis, for one, put a more positive spin on the accord. “I feel that somebody reading this cannot help but absorb the message we’re trying to get across,” he said, late on Sunday afternoon. “The salad days are over. The government has to spend money more wisely.” Still, Krasemann’s letter underscored the difficulties he and his fellow participants faced as they grappled with the deficit. Canadians, and their “political masters,” would do well to keep those difficulties in mind in this electoral season of high hopes and lofty promises.

MARY NEMETH

with JOHN DALY in Toronto