PEETER KOPVILLEM February 26 1996


PEETER KOPVILLEM February 26 1996

Previewing the budget

Federal Finance Minister Paul Martin vows that he will stay the course



The 10 provincial finance ministers were reciting their usual bitter complaints about Ottawa’s lavish spending habits when Finance Minister Paul Martin offered to trade places with them for an evening. On Feb. 8, over chicken dinner in the 22nd-floor boardroom of his departmental offices, Martin first presented an overview of federal expenditures. Then, he sat back solemnly as his provincial counterparts told him where to cut. They pointed out that there were 5,000 federal health employees even though the provinces administer health-care programs. They acidly noted that regional development and federal industry offices are often side-by-side on the same street, in the same town. They complained that Ottawa is constructing new buildings where there is a glut of empty office space. Martin countered that cutting off funds in each of those areas would mean less money and fewer jobs in their regions: there was no painless way to cut. “The provinces were saying ‘Cut in somebody else’s backyard,’ ” Martin told Maclean’s. “But the federal government’s backyard is their backyard. That’s the way Canada is: there is only one taxpayer.”

Such practical exchanges have bolstered Martin’s resolve to continue the cleanup of federal finances—whatever the political price. Despite provincial pleadings, despite the qualms of some of his own freer-spending caucus colleagues, Martin will keep cutting to meet the target that he announced last fall: the deficit must decline to two per cent of the gross domestic product in 19971998. Maclean’s has learned that the finance minister’s third budget, expected in early March, will slice as much as $2 billion from federal program spending in 1996-1997. It will likely freeze the upper limit on retirement plan contributions at its current level of $13,500. It will increase the income supplement for low-income working families. The budget will also announce further cuts in cash transfers to the provinces for social programs. Those cuts will not take effect until 1998-1999—but they are certain to provoke immediate provincial wrath. And the budget will reallocate spending to introduce a multimillion-dollar fund to develop hightech products and create jobs. As Industry Minister John Manley told Maclean’s: “We need to satisfy anxious Canadians that we have a plan to deal with the technological changes that are affecting us.” Martin’s budget will be equally interesting for what it will not do. Although it will tinker with corporate and personal exemptions, it will not raise tax rates, even on such traditional targets as cigarettes. It will not implement Liberal plans to tax back a greater proportion of federal old age pensions from wealthier Canadians. The cabinet remains fiercely divided about whether Ottawa should even mention that contentious issue before the next election—even though old

The minister says the deficit must decline to two per cent of GDP in two years

age pensions constitute the largest single element of Ottawa’s program spending. The budget also will not tackle reform of the despised Goods and Services Tax—a key Liberal campaign promise in 1993. In fact, Martin says the budget is not likely to surprise or shock Canadians. Asked what headlines he expected, Martin said: “We stayed the course, showed the light at the end of the tunnel and clearly indicated the government’s priorities—jobs and the preservation of our social programs.”

For financial markets, and for Martin himself, Ottawa will truly near the end of the tunnel when the national debt stops growing faster than the economy. Ten years ago, the debt was half of the size of the economy. Today, it is $579 billion— almost 74 per cent of the country’s GDP, the total value of all goods and services produced in a year. The debt is so high that it is crippling the government’s capacity to act: interest costs alone consume a staggering 36 cents of every tax dollar.

The key is to get the annual deficit under control to curb the growth of the debt—and to foster economic growth so that the size of the debt shrinks in comparison.

This year’s budget will outline how Martin intends to meet his deficit targets of $24.3 billion in 19961997 and $17 billion in 1997-1998. If the deficit does drop to $17 billion, and if growth continues as expected, Martin will have achieved a critical breakthrough: the debt will finally begin to decline as a proportion of the GDP.

In a series of interviews with senior government officials, Maclean’s has pieced together a summary of what the budget will— and will not—do:

• There will be no new spending. In fact, with spending cuts of as much as $2 billion, new programs such as the technology fund will be paid for with money redirected from the cancellation of old programs. In particular, despite the continuing threat of Quebec separatism, and the pleas of some Montreal federalists, there will be no massive programs to rebuild the dilapidated infrastructure of the city of Montreal. Said a senior Finance official: “There is no way that we are going to be spending in Quebec, when [Quebec Premier Lucien] Bouchard is cutting in Quebec. Montreal is his problem.”

• The CBC will remain without the stable, long-term funding that the Liberals promised in 1993. A proposed 7.5-per-cent levy on direct-to-home satellite, cable and long-distance telephone services to fund cultural agencies, especially the CBC, sparked such a flurry of complaints to MPs that the idea barely even made it to Martin’s door. It will not be implemented.

• The budget will gradually increase the working income supplement, which now provides up to $500 a year to low-income households to encourage workers to stay in the labor force. The goal is to provide more funds to families in order to tackle Canada’s most pressing social problem, child poverty.

• A group of Liberal MPs pressed Martin to lower the tax-free limit for registered retirement savings plan contributions from $13,500 in 1996 to $7,500. Those MPs argued that only wealthier taxpayers benefit from the current limit. But the finance minister is unwilling to lower the ceiling because RRSPs provide a desperately needed pool of domestic savings that Ottawa itself draws upon when it borrows money. Martin is likely, however, to freeze the ceiling at its current level, cancelling scheduled $l,000-a-year increases, which were due to begin in 1998.

• Martin has ignored a concerted lobby by employers and employees for lower employment insurance premiums. Although the fund is expected to generate a $6-billion surplus by the end of 1996, Martin argues that he wants even more money in the fund kitty to ensure plenty of cash in case of an economic downturn. That decision is certain to be controversial. Thomas d’Aquino, president of the Business Council on National Issues, says that further reductions in premiums are vital to encourage job creation. ‘These are payroll taxes—payroll taxes are taxes on jobs,” said d’Aquino. ‘The minister has said over and over that payroll taxes are job killers. If the surplus rises to $8 or $9 billion, that goes well beyond the real need of the fund.”

• Last October, as the Quebec referendum battle raged, Prime Minister Jean Chrétien temporarily scuttled Martin’s attempts to control the spiralling cost of pensions for the elderly with an impulsive vow: “I can guarantee you that you will get all the same benefits on Tuesday [the day after the vote] if it is a No.” The cost of those programs, $21.2 billion in 1995-1996, is slated to rise 60 per cent over the next 15 years. To stem that tide, Ottawa prepared a list of possible reforms to the old age security system, which included: paying benefits on the basis of family income instead of individual income so that a recipient would receive less money if the household income is high; and a further claw-back of benefits from wealthier recipients. Chretien’s comment made it impossible to implement any of those changes in the coming budget. Some advisers argue that it is now politically impossible to even discuss reforms before the next election. Yet, Martin told Maclean’s that he would still like to implement reforms this year—even if he does not introduce them in the budget. “Basically my view is that you shouldn’t put off the problem,” he said.

• On April 1, under a plan made public in the February, 1995, budget, the federal government will roll the money that it gives to the provinces for health, postsecondary education and welfare into a single block fund, the Canada Health and Social Transfer. The old funding formula, which will be extended until April 1, 1997, has been a source of considerable tension between the provinces because it provides less money per capita to wealthier provinces, such as Ontario and British Columbia, while rewarding have-not provinces, including Quebec. Maclean’s has learned that Ottawa plans to gradually reduce the differences in payments to the provinces, starting in April, 1997. But the government has decided that it will not eradicate those differences entirely, largely because that would provoke howls of outrage from Quebec. As well, although all provinces were hoping that Ottawa would promise to freeze cash transfers at the 1997-1998 level of $12.5 billion, the budget will announce that there will be a further reduction in 1998-1999—a move that is certain to provoke provincial fury.

• The budget will introduce a technology fund, which will provide loans to high-tech firms that are on the brink of developing new products. Industry Minister Manley told Maclean’s that Ottawa is no longer in the business of subsidizing business. In fact, if it is going to put money into high-risk ventures, such as biotechnology products, the federal government wants a guaranteed share of those products’ profits. Said Manley: “I would foresee sharing the risk, and also sharing some of the benefit.”

• Martin also expressed concern about the so-called jobless recovery, noting that it is difficult for workers to make the transition to the new highly skilled jobs. ‘You could once come off the farm and get a job on the assembly line,” he said. “But you can’t go off the

Martin would like to implement pension plan reforms this year

assembly line and instantly become a technician.” As a result, the budget will likely call for in-depth studies of the tax system to determine how Ottawa can better encourage onthe-job training, particularly among small businesses. Ultimately, that will likely mean a shift in emphasis away from direct sponsorship of expensive courses in training schools. In future, Ottawa wants business, not government, to decide what skills are needed and to train new employees with the help of tax breaks.

• The Commons finance committee urged last month that Ottawa add $1 to the price of each carton of cigarettes as soon as possible, providing it can do so without encouraging cross-border smuggling. That sin tax would have added $150 million annually to Ottawa’s coffers. Martin would have jumped at the chance. But according to a federal-provincial agreement, Ontario and Quebec must get the first crack at that lucrative tax base. Because Ontario Premier Michael Harris adamantly refuses to raise taxes, Ottawa is out of luck.

The 1996 budget is the third and final piece of a difficult three-year chess game with the nation’s finances. Next year, after all, is likely to bring a general election. And, although spending will not increase in 1997-1998, it is equally unlikely that there will be major additional cuts in a pre-election period. Instead, Martin has preprogrammed future spending cuts so that they will occur almost automatically through to 1998-1999. Former senior bureaucrat Arthur Kroeger, a longtime Ottawa policy adviser, points out that Martin changed the very structure of government spending patterns in his 1995 budget when he made major, multi-year cuts and introduced the new block fund for social programs. “The big breakthrough was the budget of 1995,” observed Kroeger. “That was a huge turnaround. For the federal government, it was a major, major change, and they are going to keep going because our debt is so high that we cannot backslide.” For Martin, it is no less than a per-

sonal crusade. “Just take a look at the way our

interest charges are rising,” he said. “It is just staggering. It drives me absolutely crazy that for two decades we didn’t do anything about it.” If the minister does stem the tide of debt, he will deserve his place of honor. □