Canada

MONEY PROBLEMS

JOHN GEDDES December 10 2001
Canada

MONEY PROBLEMS

JOHN GEDDES December 10 2001

MONEY PROBLEMS

Canada

JOHN GEDDES

Paul Martin might have made things easier for himself. Following last year’s federal election, Martin could have told Jean Chrétien he was ready to end his long run as finance minister. After bowing out as the man who slayed the deficit, Martins next portfolio likely would have been foreign affairs, fiad he made that move, it would have been Martin, not John Manley, bounding around the troubled globe this fall, burnishing his world-statesman credentials as Canadas envoy against terrorism. Instead, the perennial prime-minister-in-waiting faces for the first time—after delivering seven full budgets and October 2000 s preelection mini-version—the thankless task of drafting one in the teeth of a recession.

If Martin is losing any sleep over missing his chance to get out of Finance while the getting was good, he will, of course, never admit it. But the job can’t be much fun these days, tie has never worked under such ominous political and economic clouds, even back in the early years of his fight against the deficit. That was in the mid1990s, when the economy was robust, Ottawa’s tax haul was swelling, and the Liberal cabinet had fallen into line on the need to clamp down on government overspending—as had most Canadians. Today, the economy is stagnant, tax revenues are withering, and the cabinet is unwilling to let Martin set a course for harder times without clamouring for whatever cash there is. How he handles those pressures in the budget he intends to table on Dec. 10 will put Martins enviable public image as a strong hand on the fiscal tiller to the test.

Three key themes are expected to run through his new blueprint. The first is

additional federal money flowing to the provinces over the same period. In fact, Martin puts more emphasis on safeguarding those old commitments than introducing new ones. “We’ve made it very clear,” he said last week, “that both the corporate and personal tax cuts, and the transfers to provinces for health care and education, are going to be protected.” He’s also relying heavily on interest rate cuts to spark some spending; the Bank of Canada dropped rates last week by half a percentage point to a 41-year low.

The budget’s third theme is the most politically loaded: Martin’s personal legacy of a deficit-free federal government. After the whopping $ 17-billion surplus for the fiscal year that ended on March 31, stumbling back into a deficit seemed inconceivable— until recently. Now, Martin stops short of vowing to stay in the black, suggesting the risk of red ink is real. “I believe it’s important that we do everything possible to avoid a deficit,” is as far as he will go. Whether the economy will spin off enough tax revenues to keep the federal books balanced hinges on the U.S.-led recovery most economists predict for later in 2002. “If the economy doesn’t turn around as the conventional wisdom sees it turning around, I can easily see us back in deficit next year,” said Douglas Porter, senior economist at Nesbitt Burns, the Bank of Montreal’s brokerage arm. “It’s a close call.”

How fast the U.S. economic engine can get back into high gear is the key question. Last week, the U.S. National Bureau of Economic Research said the United States officially went into recession, defined as at least two consecutive quarters in which the economy shrinks, in March. But a major package of tax cuts and new spending was being hammered together in

had surged well ahead, racking up a 20002001 surplus measuring 2.4 per cent of U.S. gross domestic product, the broadest measure of an economy’s output, well above Ottawa’s surplus of 1.6 per cent of the GDP. That leaves the U.S. government with more room to ramp up spending or slash taxes to combat the slump. The Canadian government might be packing the same sort of stimulative punch now had Martin not already loosened the purse strings during good times. After declining through most of the second half of the 1990s, federal spending began climbing again in 1999. By this year, program spending, which includes everything but interest payments on the federal debt, topped $119 billion—about the same as in 1994 when Martin tabled his first belt-tightening budget.

Other closely watched measures of economic health also show surprisingly little has changed since the Liberals came to power. When Martin tabled his first budget in 1994, federal taxes were soaking up 13.4 per cent of the GDP, a slice of the national wealth many economists thought was too thick. By 2000, the latest figures available from Statistics Canada, Ottawa’s tax haul had crept up to 15.4 per cent of the GDP. Back in 1994, the loonies value was a big worry, since it took about $ 1.37 in Canadian currency to buy $1 U.S. Now, it costs around $1.60 in Canadian funds to buy a single greenback. Canadian unemployment has fallen, to about 7.3 per cent this fall, from 10.3 per cent in 1994. But U.S. joblessness has also dropped—to 5.4 per cent this year from 6.1 per cent in 1994—so Canada’s persistently worse rate remains troubling.

No wonder Martin’s high standing rests so squarely on the singular achievement of

A troubled economy narrows Martin’s options-for the budget and himself

the post-Sept. 11 agenda, with the bulk of any new spending, perhaps as much as $4 billion, devoted to anti-terrorism items like defence and border security. The second is the economic downturn, although Martin is not expected to unveil any major new spending or tax cuts to fight off a recession. Instead, he is likely to tout the economic boost from the five-year $ 100billion tax cuts announced just before last fall’s election, along with $23 billion in

Washington, although the U.S. Congress was still debating the details. Dramatic U.S. government anti-recession measures could make Martin’s budget look anemic. But he simply doesn’t have the cash to match U.S. stimulative action in proportion to the Canadian economy.

As recently as 1997, Ottawa looked better off than Washington—balancing its books while the U.S. government was still in deficit. But by this year, Washington

eliminating the deficit. Should that accomplishment slip away, his ranking among the most successful finance ministers in Canadian history would no longer be unassailable. The all but uncatchable front-runner in the race to replace Jean Chrétien, revealed as fallible, might also begin to look vulnerable in the Liberal leadership sweepstakes—and the foreign affairs cabinet post that could have been his would look even better. E3