OUTLOOK 1995

THE YEAR OF THE CRUNCH

TEN KEY QUESTIONS CANADIANS WILL HAVE TO FACE IN 1995

ANDREW PHILLIPS January 9 1995
OUTLOOK 1995

THE YEAR OF THE CRUNCH

TEN KEY QUESTIONS CANADIANS WILL HAVE TO FACE IN 1995

ANDREW PHILLIPS January 9 1995

THE YEAR OF THE CRUNCH

OUTLOOK 1995

TEN KEY QUESTIONS CANADIANS WILL HAVE TO FACE IN 1995

ANDREW PHILLIPS

BY ANDREW PHILLIPS

I’ve seen the future, brother. It is murder.

Well, maybe not murder, as Leonard Cohen sang in his apocalyptic meditation The Future. But 1995 threatens more than its share of strife and turmoil. On both the political and financial fronts, Canadians will find themselves in the uncomfortable position of being forced to make important decisions—and of having the consequences of other people’s decisions thrust upon them. In Quebec, unless Premier Jacques Parizeau contrives somehow to wriggle off the hook of his oft-repeated commitment to hold a referendum by the end of the year, voters will have to make a fundamental choice about their future, with grave effects on all other parts of the country. And in Ottawa, Finance Minister Paul Martin is set to start the process of cutting the federal establishment down to size, with equally grave consequences for Canadians accustomed to the warm embrace of Big Government. Of course, no one should underestimate the capacity of Canadians for delaying decisions and postponing apparent disaster—but it will be a lot harder to do that in 1995. Call it the Crunch Year.

In many ways, 1994 was a curiously desultory year in Canada. The usual measure of doom and gloom was predicted, but not much of substance changed. The Parti Québécois, as predicted, won power in Quebec and, again as predicted, immediately set the province on the road to its second referendum on sovereignty in 15 years. Elsewhere, governments were talking more and more about doing less and less. A few provinces, notably Ralph Klein’s Alberta, embarked on bold new initiatives and radical ways of attacking old problems. But in Ottawa, real change is still to come— starting in late February when Martin is to deliver the budget that he has vowed will finally set the country on the way towards getting its finances back under control.

Despite the lack of real change—or perhaps because of it—the political mood was surprisingly „ upbeat. After the public rancor of the early 1990s, I Jean Chrétien’s what-me-worry approach calmed ! national nerves. Like some northern Forrest § Gump delivering himself of simple but effective £ nostrums, the Prime Minister succeeded possibly i beyond even his own expectations and ended the f year with an astonishing 75-per-cent approval from i voters. The Liberals issued their policy-papers-ofÎ many-colors (white for defence, red for immigrait tion, green for social policy)—and thus managed I to put off the hard choices until 1995. The one sure prediction, of course, is that the coming year ^ will present totally unforeseen problems and chalo lenges. But here are 10 key questions for 1995: a o road map for a year that promises more than its £ share of bumps:

WHEN WILL THE REFERENDUM BE?

At this point, not even Jacques Parizeau knows for sure.

But canny observers have already circled Monday, June 26, on their political calendars. The logic is compelling: it comes just two days after Quebec’s Fête Nationale, when nationalist passions spill into the streets with parades of Fleur-de-lys flags and teary odes by aging chansonniers. It is also the first Monday after school ends, so families will not yet have fled for the cottage. And it would be seven months after Bloc Québécois Leader Lucien Bouchard’s brush with death—meaning he will probably be fit enough to play at least some public role in the campaign if he chooses to do so. Late spring, early summer would also let Parizeau’s government use its first budget in March or April to dangle such goodies as a mortgage deductibility program in front of voters.

Quebecers would be voting only four months after a bad-news federal budget that Péquistes hope will make them draw their own conclusions about the drawbacks of federalism. The campaign machinery that Parizeau put in motion in December also suggests a late spring date. Fifteen regional commissions will be appointed in January, then tour their regions in February and March building support for sovereignty; a single unified commission will report to the National Assembly by midMarch; then, a law proclaiming Quebec sovereignty will be debated in the assembly in April or May—the prelude to launching the official campaign. Any delay, and Parizeau risks losing momentum.

At least two factors put a big question mark over that scenario. The Halifax G-7 economic summit is scheduled for June 16 to 18—and Parizeau’s advisers may not want that kind of reminder of Canada’s

sovereignty remains stalled below 45 per cent, voices in the sovereigntist camp urging caution (including Bouchard’s) will grow louder. That would imply an autumn vote—or even no vote at all in 1995, despite Parizeau’s repeated promises to stick to his timetable.

WHAT HAPPENS IF QUEBEC VOTES YES?

comparative influence in the world just a week before they ask Much depends on the margin of a separatist victory. A decisive win—

Quebecers to set off on their own. That might nudge the Péquistes anything over about 55 per cent—would embolden Parizeau’s gov-

into going earlier—perhaps in mid-May. More likely, if support for emment to move ahead with its timetable of declaring independence

L I one year after the day of the referai fi eiidum. Quebec’s search for inter-

■ !ƒ I national recognition would be on, H with its officials lobbying heavily WÉÉ I in Paris on the assumption that France would likely be the first major nation to recognize the new state. But any parting would undoubtedly be messy and protracted: Chrétien and his ministers are already questioning the legitimacy of the referendum question and the legality of separation itself, no matter how Quebecers vote. And a sovereigntist win would raise a host of questions that English Canada has scarcely begun to think through. Who would, or could, negotiate with Quebec? Ottawa has no mandate to discuss dismembering the country, and several English-speaking premiers have served notice that they would want a voice at any bargaining table.

a unilateral declaration of independence—with all the potential for confrontation that would come with that.

WHAT HAPPENS IF

QUEBEC VOTES NO?

Again, much depends on the size of a federalist win. If sovereigntists fail to get as much as 45 per cent of the vote, federalists will taunt both Parizeau and Bouchard to resign. Parizeau almost certainly would not; Bouchard, on the other hand, might well quit politics, given his health problems. That would leave the Bloc Québécois marooned in Ottawa with no apparent mission—but many of its 54 MPs might suddenly discover an urgent need for a force to defend Quebec in Parliament, and not coincidentally, to keep their seats and perks. The aging elite of the Parti Québécois—old separatist soldiers like Camille Laurin and

Would Ottawa respond with a referendum of Bernard Landry—would be thoroughly

its own, or a snap election? And the most incendiary question of all: how would Quebec’s increasingly militant native community, and its 11-per-cent anglophone population, respond?

A narrow separatist victory—between 50.1 and 55 per cent—would be even more problematic. It might, indeed, be the worst possible scenario. Parizeau’s mandate to separate would be even more questionable, leading Ottawa and the other provinces to take an even harder line on negotiations. That would prolong uncertainty, with all the long-feared consequences of a falling dollar and international loss of confidence in the country. And it could push Quebec towards issuing

discredited, having led the separatist cause to defeat twice in 15 years with no chance to try again before they fade from the scene.

The outlook is murkier if the sovereigntists lose by a narrower margin—between 45 and 49.9 per cent of the vote. That would allow them to argue that they had at least increased support over the 1980 referendum (when René Lévesque’s government won 40.44 per cent for talks on sovereignty), and vow to do better in an eventual third referendum. And given the tendency of Quebec voters to throw their support from one side of the debate to the other, a federalist victory would by no means guarantee a PQ defeat in the

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next provincial election. After all, Lévesque won re-election a year after he lost the first referendum; Parizeau or a new, younger PQ leader could well keep Liberal Daniel Johnson out of power.

and the Reform party that the cuts are not deep enough, fast enough. The first signs of how the pain will be shared will likely come after a cabinet retreat on the budget set for Jan. 17.

HOW FAR WILL PAUL MARTIN GO?

The finance minister has sworn up and down that, “come hell or high water,” he will meet his goal of cutting the deficit to three per cent of national output by 1996-1997. To keep on target, he will have to find $3.1 billion in spending cuts or new taxes in his February budget—enough to cut the annual deficit from its current level of $35.8 billion to $32.7 next year. Some of the areas almost certain to be hit: a further tightening of unemployment insurance, likely including a reduction by a point or so of the maximum allowable percentage of previous income that can be claimed; major cuts in the public works and transport departments; more base closures for the military; and huge cuts in the budgets of regional economic development agencies. Ottawa’s rumor mill is talking of 25,000 to 40,000 layoffs among federal civil servants (10 to 16 per cent of the total) over the next three years.

Rising interest rates are forcing the government to pay more than it had planned to service the national debt, so the pressure is on for at least some new taxes. The most obvious is taxing lottery winnings (though, as with so many things, that will involve cutting a deal with the provinces); Martin may also be tempted to start taxing employer-paid health benefits. At the same time, there is no indication that the federal government has the political will to go further than its announced goals, despite cries from Bay Street

WILL RISING INTEREST

RATES COOL THE RECOVERY?

Interest rates jumped sharply in 1994—the bank rate went from a 30year low of 3.87 per cent in February to eight per cent at year’s end—and several pressure points may push them even higher in 1995. The U.S. Federal Reserve Board

0 has clearly signalled its concern

1 about the fast pace of growth in the § United States, and its intention to

raise rates to avert inflation. For Canada, the impact comes in two ways. First, slower growth south of the border could dampen our export-led recovery. And second, the Bank of Canada will eventually have to hike Canadian rates in step with U.S. increases to keep attracting foreign capital to Canada.

That international capital—and its skittishness about Canada’s debt and Quebec’s future—will also push rates up in 1995. Closer to the date of the Quebec referendum, edginess in global money markets will likely force Canadian rates to spike sharply upward. And any backpedalling by Ottawa on its commitment to reduce the deficit, or any sign of failure about meeting its deficitreduction targets, could also cause jolts in Canadian rates. Even if those spikes are temporary, however, the general trend to higher rates may cool, if not quench, the domestic economy. That means growth could be knocked back from more than four per cent in 1994 to about three per cent in 1995.

WHICH SECTORS OF THE ECONOMY WILL

BE HOTTEST IN 1995?

The fate of the American economy will, as always, have a lot to do with which sectors of Canadian business thrive most If higher interest rates slow U.S. growth, the demand for exports from Canada—especially for auto parts and resource commodities such as minerals—could suffer. However, the weakness of the Canadian dollar should continue to make Canadian exports more competitive abroad. Canadian-made auto parts, for example, have become increasingly attractive in Japan.

Other hot sectors will include forest products, energy and financial services. The trend to rationalization is already apparent in the forest industry, where larger companies are bidding to take over smaller firms. In the oilpatch, after a rush of capital into junior oil companies in 1993, the shakeout and consolidation of that industry has also started to gain momentum. The restructuring of Canada’s financial services industry will likely continue in 1995—at least among insurance and trust companies. Unless the major chartered banks embark on aggressive new lending initiatives or other costly ventures, they should perform strongly again in the coming year as well. However, given the recent volatility in equity markets and the prospect of higher interest rates (which make equities less attractive investments), their brokerage divisions won’t be as profitable in 1995 as they were in 1994.

WILL RALPH’S REVOLUTION CONTINUE?

This could be the year that Alberta’s slash-the-deficit revolution hits its toughest obstacle. It is not, as Premier Klein’s detractors suggest, that Albertans will rebel when they finally feel the negative effects of his budget cuts. They have felt tiiose cuts—kindergarten funding has been slashed nearly in half, hospitals have already closed beds, seniors are already paying more for medicine and their housing. Yet Klein retains a remarkable 57-per-cent support in opinion polls.

But the premier does face a potentially irksome obstacle created by windfall resource and agricultural revenues. The latest government estimate of Alberta’s budget deficit was recently slashed from $1.55 billion to $655 million. And some observers in the oilpatch now say that the record $1.01 billion in land sales—paid by drill-happy oil companies to the province for Crown land—could wipe out the deficit altogether. For Klein, there is danger that Albertans may be less willing to swallow his tough medicine once the deficit disease goes into remission. “It creates expectations that we’re going to back off,” he concedes. But even if the 1995 budget balances out, government officials point out that there are certain to be deficits in the next two years. And there is no doubt that Klein will proceed with plans to eliminate them. In fact, the premier has already announced plans to introduce a debt-elimination law in February to ensure that fiscal conservatism outlasts Alberta’s immediate budget problems.

Ironically, given all the sound and fury surrounding the deficit-elimination campaign in Alberta, Klein’s Prairie neighbors could yet beat him to the balanced-budget punch. In Manitoba, fellow Tory Premier Gary Filmon is expected to reap extra revenues from gambling and federal payments this year. It will probably be enough to push him into the black in time for his budget, expected soon after the federal budget comes down in late February. And in Saskatchewan, New Democrat Roy Romanow has methodically closed rural hospitals, reduced transfers to local governments and hiked income, fuel and sales taxes during his three years in office. He is very close to balancing the books—and may well slip in a balanced budget in early February. It might be galling for his Tory neighbors, but an NDP premier may well win the great Canadian deficit-elimination race.

WHO WILL REPLACE BOB RAE IN ONTARIO?

Of course, the Ontario premier might just hang on to power after the election he is expected to call in April or May. But almost no one outside NDP ranks thinks that is a realistic possibility. The

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numbers are dismal for Rae: the most recent provincewide poll gives his New Democrats just 15-per-cent support among decided voters, compared with 30 per cent for the provincial Conservatives and a commanding 52 per cent for the Liberals. If opinion does not change drastically before voting day, Liberal Lyn McLeod will become premier, with Tory Mike Harris taking over as Opposition leader and Rae’s NDP relegated to third-party status. More pessimistic New Democrats are already glumly predicting that they may be reduced to a rump of 10 or so seats in the 130seat legislature.

Rae, however, insists that those numbers will not hold firm. His party may be trailing badly, but he is by far the best performer of the three party leaders: McLeod is scarcely recognized by the public, and Harris has made many voters nervous by proposing his radical “Common Sense Revolution,” a Reform-style program that would involve cuts of 20 per cent to most areas of government spending. The NDP’s hope for avoiding a wipeout lies largely in focusing its campaign as much as possible on Rae himself. And that will be helped by the fact that the Ontario campaign will probably come just as the Quebec referendum fight is nearing its climax. If Rae can position himself as the champion of Ontario against Ottawa, and a strong voice for Canada in the national unity wars (as he has hinted he will do), he has at least a hope of saving his government. But not a very big one.

The NHL, meanwhile, wanted to implement a punitive tax on higherthan-average payrolls. The players saw the tax as a thinly disguised salary cap, and resisted. If the season is cancelled, the players’ association will likely initiate a series of tournaments, and Wayne Gretzky will reconvene his travelling all-stars for a trip to Japan. If a deal is reached by about Jan. 10, however, an abridged season of 50 games could start by the owners’ new deadline of Jan. 16 and run through to a Stanley Cup final in late June. Although costly to people who make their living from hockey, the shortened schedule could be a blessing to fans who find the 84-game regular season far too long.

There is trouble, too, for the other two major professional sports. Basketball’s collective agreement expired last year, and the two sides agreed to play only after signing a no-strike, no-lockout agreement In football, the Canadian league wants to reduce its Canadian-player quota against the wishes of the players, and the tumultuous first year of the NFL’s salary cap has led some teams’ officials to suggest that it too, needs a major revision. By the end of 1995, fans could be looking back fondly at 1994.

With ANTHONY WILSON-SMITH in Ottawa, BARRY CAME in Montreal, MARY NEMETH in Calgary and DEIRDRE McMURDY and JAMES DEACON in Toronto

Is THERE A FUTURE FOR THE NDP?

A murky one, at best. If, as is likely, the NDP loses power in Ontario, it will lose its biggest network of paid loyalists, which every party relies on to keep going. In Ottawa, where it struggles along with just nine MPs, the party is almost irrelevant. Worse, none of the potential candidates to succeed Audrey McLaughlin as leader when she finally steps down at a national convention set for Oct. 12 to 15 in Ottawa has any more charisma than her. Only one—British Columbia’s Svend Robinson— has a sharp national profile. The more mainstream contenders, such as Saskatchewan MP Chris Axworthy and former MP Lome Nystrom, are unlikely to set voters on fire. One possible candidate, however, might attract some of the national curiosity that McLaughlin so conspicuously failed to win: Saskatchewan Finance Minister Janice MacKinnon has spearheaded her province’s austerity drive, and may well become the first provincial treasurer to bring in a balanced budget this spring.

MacKinnon’s success, however, underlines the NDP’s dilemma: the political spectrum has shifted so far to the right that it can stay in tune with voters only by following a small-c conservative agenda. B.C. Premier Mike Harcourt faces an election as early as next fall, and the betting is that he can cling to power in an uphill fight with Gordon Campbell’s Liberals only by turning to the right and following the path blazed by Roy Romanow in Saskatchewan. And Canada’s increasingly intricate involvement in such transnational arrangements as the North American Free Trade Agreement calls the NDP’s core beliefs further into question: withdrawal, as the party still advocates, would be economically disastrous and politically incredible. The NDP’s choices, then, appear almost equally unpalatable: continue to lose ground with voters, or accept its opponents’ basic political assumptions.

WILL 1995 BRING LABOR PEACE

IN PROFESSIONAL SPORT?

After a strike by major-league baseball players that killed the World Series, and a three-month National Hockey League lockout, fans might think that things could not get much worse. But they could. North America’s major professional team sports are all trying to rein in their skyrocketing payroll costs while keeping small-market teams competitive, and their method of choice has been capping salaries. In late December, the baseball owners decided to impose a cap and unilaterally rewrite the terms of their collective agreement with the players. The owners also plan to open training camps in late February, hoping to lure a few disgruntled big leaguers to bolster their rosters of replacement players—mostly minor leaguers. But the players union has a $210-million strike fund to keep its members loyal. And the owners’ ranks are somewhat divided: Ontario laws forbid the Toronto Blue Jays from using so-called scab labor, and Baltimore Orioles owner Peter Angelos, a labor lawyer himself, says he won’t use replacements.