SPECIAL REPORT

Seeing red through the black

The budget increases federal-provincial tensions

MARY JANIGAN March 9 1998
SPECIAL REPORT

Seeing red through the black

The budget increases federal-provincial tensions

MARY JANIGAN March 9 1998

Seeing red through the black

SPECIAL REPORT

The budget increases federal-provincial tensions

MARY JANIGAN

Although friends had sent congratulatory bottles of champagne to his office, there were no toasts—and decidedly no frills—after Finance Minister Paul Martin produced the nation’s first balanced budget in 29 years. At 6 p.m., mere minutes after his historic announcement in the House of Commons, Martin grabbed a coffee in the Speaker’s rooms off the government lobby before heading into a four-hour, virtually nonstop round of interviews. At 9 p.m., briefly between calls, he wolfed down a ham sandwich and a slice of cheese. An hour later, he curled up on the floor of his office, propping his head against a cabinet and cradling a mug of beer, as he and his staff anxiously watched the televised news coverage. “He was exhausted—and all he wanted to know was how we thought he was doing on the news,” says a senior staffer. “Celebration? The sad truth is that all anyone could think about was getting a few minutes rest.” That determinedly low-key gathering was perfectly in keeping with the restrained tone of Martin’s rhetoric—and his highly conservative numbers. The minister guardedly reported that the 19971998 budget is balanced—as are the budgets for the next two years. Then he offered moderately good news by 2000-2001 for just about everyone: the $583-billion debt will diminish by at least $9 billion; there will be at least $7 billion in tax cuts, largely for lowand middleincome earners; and there will be $11 billion in new spending, including a $5.5-billion package to foster education and job training. But although most economists predict that Martin will generate substantial surpluses over the next few years, the finance minister would only forecast balanced budgets.

His caution is understandable. If the expected 1998-1999 surplus develops, he can spend this year figuring out how to apportion it, retroactively, in next year’s budget. And that is an attempt to buy time—in the face of insistent demands across Canada for more spending, debt reduction and tax cuts. “It has been almost two generations since any finance minister had the luxury of announcing consecutive

balanced budgets,” notes Bank of Montreal chief economist Tim O’Neill. “In such circumstances, prudence is probably called for.”

Prudence could barely temper the mounting pressure across the land to do just about everything. Bob White, president of the Canadian Labour Congress, criticized Ottawa for its failure to introduce major employment programs. In contrast, Tim Reid, president of the Canadian Chamber of Congress, noted that the focus remained on spending—“as opposed to getting the debt under control.” Meanwhile, the Canadian Federation of Independent Business is stepping up its long-standing campaign for lower Employment Insurance premiums—in the wake of Martin’s indication that he will maintain the current level of $2.70 per $100 of eligible employee income into 1999. President Catherine Swift noted that the fund will have a surplus of $19 billion at the end of this year. “Paul Martin has got to be the Chicken Little of finance ministers,” she says. “But El premiums are a tax on jobs. We will be cranking up the pressure for a decent reduction in 1999.”

Worse, Martin’s prudence could not defer a serious confrontation with the provinces. They argue, in a rare show of unity, that Ottawa should boost transfer payments before concocting glitzy new programs, such as its $2.5-billion Canada Millennium Scholarship Foundation, in areas of provincial responsibility. From British Columbia to Newfoundland, premiers lauded Martin’s deficit-cutting achievement—and then denounced one of his principle methods: since the early 1990s, Ottawa has sliced almost $7 billion from its annual cash transfers to the provinces for health, postsecondary education and welfare. And they argue that Ottawa has ignored their

attempts to forge a renewed federal-provincial partnership to tackle pressing needs such as health care and university funding. As Saskatchewan Finance Minister Eric Cline told Maclean’s: ‘This budget is a failure. Ottawa obviously feels that if it gives more money in transfer payments, the provinces will get the credit.”

In Quebec, Finance Minister Bernard Landry denounced the scholarship fund—which will provide 100,000 annual scholarships averaging $3,000, beginning in the year 2000—as an example of “abusive and predatory federalism.” Quebec demanded the right to opt out—with full compensation—so that it could supplement its own education-grants program. Ottawa refused, and the uproar has become so intense that many Quebec observers suggest the federal government is giving ammunition to the Parti Québécois for an upcoming election—which could be held as early as May. Asserts Montreal broadcaster and former Bloc Québécois MP Jean Lapierre: “Ottawa is in the midst of giving them, on a silver platter, the pretexts to call an election.” Ontario Premier Mike Harris, in turn, warned that the federal government’s unilateral approach imperils national unity and threatens medicare: “He [Chrétien] has washed his hands of a very serious health-care situation in every emergency room.”

In response, Chrétien repeatedly mocked those provinces for their continued deficits—and charged that they were frittering away taxpayers’ money. He noted that Quebec has chosen to continue funding for its foreign embassies—and that Ontario has provided major tax cuts instead of devoting additional funds to health care. “Mr. Harris. What did he do? Rather than balance his books, he decided to cut taxes,” the Prime Minister declared. “So he blames the federal government.”

Such disputes did focus largely unwelcome attention on the five provinces that have not yet managed to conquer their annual deficits. Newfoundland expects a $20-million deficit inl997-1998—and it will not balance its books until 1999-2000. Prince Edward Island is not likely to eliminate its deficit before 1999-2000. British Columbia expects a hefty 1997-1998 deficit of $185 million—and it is highly unlikely that it will balance its books in the coming year. ‘We had hoped for relief from the very small transfer payments that the federal government is giving us for health and education,” B.C. Finance Minister Joy

The new federal budget is the first to balance the nation’s books in 29years—and Edgar Benson’s modest $ 139-million surplus in 1969-1970 was itself only the third since a string of postwar balanced budgets ended in 19511952. The red-ink finance ministers and their budgets since 1970-1971:

A history of deficits

McPhail told Maclean’s. “Once again,

British Columbia will have to go it alone.” Quebec anticipates a 1998-1999 deficit of $1.2 billion—with a balanced budget in the following year. Harris pointedly noted that he is loath to go to the polls until Ontario’s deficit—about $5.2 billion in 1997-1998—has disappeared, although Ottawa’s refusal to raise transfers may make it impossible to meet that goal by 2000-2001, as he had hoped. “We are struggling with this federal government just to balance our books,” Harris said.

The battle between Ottawa and the provinces could also mark the start of several years of seriously escalating confrontations that can only hurt individual Canadians. Martin is well aware of the danger: partly to postpone any potential battle, he based hisl998-1999 budget on growth rates that were well below most economic predictions— and interest rates that were well above most forecasts. As a result, his budget is merely balanced—not $7.6 billion in the black (including the government’s $3-billion contingency fund), as Bank of Montreal economist O’Neill predicts. But the provinces are well aware of that sleight of hand, and equally aware that Ottawa is now talking about another flashy, highly expensive federal program to cover the costs of patient home care—which will again intrude into provincial jurisdiction. Unless Ottawa works closely with the provinces to ensure that home-care programs dovetail with provincial hospital closures, the result could be chaos. Queen’s University economist Tom Courchene points out that provinces could retaliate by “uploading” their problems: they could allow hard-pressed universities to raise tuition fees, for example, because Ottawa has ensured that needy students have funds through the millennium foundation. “The problem is that there is a common area of activity out there that both levels are trying to spend on and tax

from,” Courchene notes. “If we don’t tackle this together, there are going to be some important clashes.”

Ottawa did attempt to limit its intrusions when it cut taxes: it added $500 to the basic personal exemption of $6,456 for taxpayers who earn less than $20,000, thereby removing 400,000 people from the tax rolls. It also eliminated its three-per-cent general surtax for those with incomes under $50,000. But Ottawa was anxious not to offend the provinces. As a result, the changes are intricately designed to leave provincial revenues unaffected: there will be no change in the basic federal tax because, on their returns, taxpayers will calculate those reductions after figuring out their basic tax. And thus there will be no change in provincial tax, which is a percentage of basic federal tax. But that, in turn, may force Ottawa ° and the provinces to reform taxes— because the entire system is now impossibly complicated. Notes David Perry, research associate at the Canadian Tax Foundation: “When someone sits down at the dining room table next April, it will be terrible to figure out what you are paying—and why.”

Such varying and wide-ranging pressures mean that surpluses will be almost as hard for the federal government to handle over the coming years as its previous gruelling fight against the deficit. The evening after his landmark budget, Martin and an aide finally managed to straggle into a local Ottawa diner at 10:30 p.m. for a hamburger and fries. One by one, his fellow diners hesitantly approached his table to offer congratulations. Such honeyed words may mark a rare calm in a stream of mounting pleas—and threats.

JENNIFER HUNTER

BRENDA BRANSWELL