Canada and the World

UNCERTAIN TIMES

The economy was always Paul Martin’s ally. Now it has become the enemy.

JOHN GEDDES,JULIAN BELTRAME December 24 2001
Canada and the World

UNCERTAIN TIMES

The economy was always Paul Martin’s ally. Now it has become the enemy.

JOHN GEDDES,JULIAN BELTRAME December 24 2001

UNCERTAIN TIMES

The economy was always Paul Martin’s ally. Now it has become the enemy.

Canada and the World

BY JOHN GEDDES and JULIAN BELTRAME in Ottawa

Certainty has been the hallmark of Paul Martins remarkable run as finance minister. When Martin set a target for cutting the deficit, Canadians learned, year after year, that he was sure to hit it—and then some. When he predicted the economy’s performance, his assumptions were so cautious that any surprises were bound to be good ones. So when he tabled his 2001 budget last week with the slogan “securing progress in an uncertain world” right there on the cover, the tentative tone—more hopeful than truly confident—signalled that much has changed.

The economy had always been Martin’s ally. In the prosperous years after Jean Chrétiens Liberals took power in 1993, taxes poured in fast enough to ensure that, with reasonable restraint, spending could be matched to revenues. The result was a string of four fat surpluses starting in fiscal 1998. But this fall, the wounded economy has turned into Martin’s enemy. He is still aiming to keep the books balanced, but only if a United States recovery begins by the middle of2002, as many forecasts predict, pulling Canada’s export-based economy up along with it. “If, on the other hand, U.S. consumer and business confidence erodes further,” Martin warned in his budget speech, “that would have economic and fiscal consequences for us all.” Hardly a rousing bit of rhetoric, but still the speech’s key line. Everything now hinges on a U.S. upturn. And that inescapable reality made Martin’s budget seem oddly beside the point. After all, if the key to bringing Canada’s slump to a quick end is a U.S. resurgence, how important could Ottawa’s fiscal plan be? The answer: not very, if the budget is viewed mainly as a policy reaction to the recession. “This is not a stimulative budget,” said Bank of Montreal chief economist Tim O’Neill. “It’s certainly not a stimulus package like the one the U.S. is considering.”

Republicans and Democrats in Washington were in hard bargaining last week over a bill that would put close to $ 100 billion (U.S.) in Americans’ wallets, mainly by raising unemployment and health benefits and cutting business and personal taxes.

The prospect of a stockingful of stimulus from Washington in time for Christmas had economists shrugging off Martin’s more modest gift list. Not that he was exactly stingy. The big-ticket item was a $7.7-billion, five-year security package to keep the Canada-U.S. border running smoothly, impose tougher screening of refugees, immigrants and visitors, and boost police, intelligence and military budgets.

Almost nobody was arguing with the need for all that as a response to the Sept. 11 terrorist attacks. More controversial in the package was Martin’s surprise move to impose a $ 12 each-way levy on air travel, starting April 1, 2002, to rake in $2.2 billion

over five years for beefing up airline and airport security. The new “air travellers security charge” is a tax by another name. Martin did not offer any new cuts to offset it. Instead, he claimed credit for sticking, despite the recession, to the five-year, $ 100-billion tax-easing plan he announced last year. For most individual taxpayers, though, the main relief from that plan already took effect on Jan. 1,2001, when personal tax rates were lowered at all income levels.

Beyond security, Martin found money to decorate his pre-holiday budget with a little tinsel. Not surprisingly, the Prime Minister’s favourite cause got funding—$185 million over two years for aboriginal children’s programs, including efforts to reduce the blight of fetal alcohol syndrome. And Martin’s own longstanding interests in technology and skills development weren’t shortchanged, with $1.1 billion directed to learning and R and D. He also announced

Canada and the World

that at least $2 billion from the expected surplus in the 2001-2002 fiscal year, which ends next March 31, will be directed towards a foundation to help pay for infrastructure like highways and sewage plants. At least $500 million more will be pumped from the surplus into a new fund for African development.

Leadership politics seemed to be in play when it came to picking which pet projects got the nod. Industry Minister Brian Tobin, Martins rival in the undeclared race to succeed Chrétien, looked like the biggest loser. His vision of a nation in which every community, no matter how small, would be hooked into high-speed broadband Internet service—a major Liberal election promise—had the wiring pulled out. Martin earmarked a mere $105 million to the ambitious project— and it won’t start flowing until 2004. Tobin was left assuring reporters that he had actually won, but had trouble keeping up a brave face. “It isn’t a billion dollars,” he told Macleans. “But with huge requirements in military spending and an economy in a downturn, to get any money at all is not a bad deal.”

Even with discretionary items like Tobins crossed off the list, federal spending is set to rise at a surprising rate. Not including interest payments on the debt, Ottawa’s outlays are slated to climb 17-5 per cent to $140.2 billion in three years, from last year’s $119.3 billion. Yet much more spending, much faster, would have been needed to satisfy those calling for a short-term stimulus. CIBC World Markets chief economist Jeff Rubin, a highprofile advocate of a more aggressive antirecession stance, urged Martin to boost spending by $10 billion this year—far more than the $2.7 billion in new spending set out in the budget.

But other experts argued that Martin was right not to open the federal spending faucet—and plunge Ottawa back into deep deficits. Sherry Cooper, chief economist for BMO Nesbitt Burns, said dramatic reductions this year in interest rates in both Canada and the U.S., combined with the expected Washington stimulus package, should be enough to make this downturn less punishing than the 19901991 recession. “We’ve got an enormous amount of monetary stimulus in the pipeline, and we will get the benefit of an enormous amount of fiscal stimulus in

the United States—without having to pay for it,” Cooper said.

The overwhelming importance of the U.S. economy is nothing new, of course. Fully one-third of Canada’s gross domestic product comes from selling into the U.S. market. But the combination punch of the Sept. 11 attacks and the recession has served as a sharp reminder of Canada’s heavy reliance on southbound exports and good relations with its mighty neighbour. While keeping border crossings as open as possible to trade was a top budget priority, Foreign Affairs Minister John Manley finalized a far-reaching deal with U.S. Homeland Security Director Tom Ridge to create a shared system for keeping track of everybody who enters and leaves both countries.

The central place of the United States in the global economy is not just an issue for Canada. “If the U.S. goes into recession, most of the rest of the world will too,” said Cooper. “And if the U.S. is booming, most of the rest of the world will follow.” (One measure of American clout: BMO Nesbitt Burns estimates U.S. stock exchanges account for 58 per cent of all the wealth invested in world markets, compared with 18 per cent for continental Europe, 10 per cent for Britain, eight per cent for Japan and just two per cent for Canada.) Assuming the U.S. recovery arrives about midway through 2002, the question is whether Canada will keep pace. Skeptics like Rubin argue that without a madein-Ottawa boost, Canada risks falling behind. “At some point, if we see a U.S. recovery take root, Canada could clutch along on its coattails,” he said. “But we’re going to find that, like in 1990-1991, the recovery here will lag behind.”

But Martin argued that Canada is better positioned this time than it was coming out of the recession a decade ago. Inflation is no longer an issue. Interest rates are at a 41-year low. Federal finances are dramatically improved. “What we have accomplished as a people,” he declared, “puts us in a position to take full advantage of the economic recovery when it comes.” Confident words from a politician whose track record gives him credibility. But, then again, never has he tabled a budget in such an uncertain world. ES]

Should the budget have done more to stimulate the economy and boost job growth?

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