NOVEMBER 1, 1979
Economic Outlook and Fiscal Planning
AN ADDRESS BY The Honourable John C. Crosbie, MINISTER OF FINANCE
CHAIRMAN The President, John A. MacNaughton
Ladies and gentlemen of The Empire Club of Canada: Almost two thousand years ago St. Luke, in Chapter Two, verse one, wrote the following, "And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed." From that day until the present mankind has been vexed by its tax bills and a debate about all aspects of taxation has raged on relentlessly.
The Canadian who is currently at the centre of the debate on taxation, on all aspects of fiscal and monetary management, is our guest of honour, the Honourable John C. Crosbie, Minister of Finance in the Government of Canada.
Mr. Crosbie has held the key finance post in two different levels of government. In 1972 he was appointed Minister of Finance, President of the Treasury Board and Minister of Economic Development in the Province of Newfoundland, a province noted for testing its cabinet ministers regularly and rigorously. The approval of electors in the province for his stewardship of their financial affairs, along with that of several other portfolios he held during a ten-year career in provincial politics, has been given in six consecutive successful election campaigns, four provincial and two federal.
It is understandable that the people of his native province were bursting with pride when on June 4th of this year, John Crosbie became the first Newfoundlander since Confederation to be appointed Canada's Minister of Finance. Their pride was compounded by the fact that at the same time James McGrath, another Newfoundland Member of Parliament, was also appointed to the cabinet, in his case as Minister of Fisheries. The result was that the Clark government became the first in Canadian history to have two Newfoundland cabinet ministers. In keeping with the sense of humour of our compatriots down east, the Fisheries Minister and the Finance Minister are affectionately referred to in the taverns of St. John's as Mr. Fish and Mr. Chips.
There are thousands of people in Canada who are prepared to give Mr. Crosbie advice on how to run the financial affairs of this country, but there are few, if any, who covet his job. With interest rates, the trade deficit, oil prices and the rate of inflation going up and the rate of real GNP growth and the dollar going down, Mr. Crosbie has what surely must be the most difficult job in Canada.
A man with the pressures and problems that he faces on an almost hourly basis could be expected to understand and sympathize with the lament of Woody Allen who once said, "Most of the time I don't have much fun. The rest of the time I don't have any fun at all."
In charting a course through the difficult period that virtually all forecasters anticipate for North American economies during the next year or two, Canada is fortunate to have a man with Mr. Crosbie's experience, his determination and his values at the helm of the Department of Finance.
For any who weren't already certain of what his philosophy as Finance Minister would be, it was made clear earlier this week at a meeting of the House of Commons Finance Committee where he said, "The setting of economic policies based on long-term economic reality, not short-term political popularity, is the challenge we face."
Comments in Canada's two leading financial weeklies at the time of his swearing in were succinct and in agreement on the qualities Mr. Crosbie brought to the Finance Ministry. Said The Financial Post, "Publicly Crosbie is folksy and funny, given to excruciating puns. Privately, he's known as shrewd, strong-willed and incisive." In The Financial Times, George Radwanski, after interviewing Mr. Crosbie wrote, "the impression that came across was of a confident, very tough man who, having accepted the economic hot seat, is determined not to be pushed around in policy matters by anyone, including the new Prime Minister."
Mr. Crosbie himself commented at a press conference in early September that, as Finance Minister, he wanted to be known as Mr. Tough Guy rather than as Mr. Nice Guy.
I am sure, ladies and gentlemen, that after listening to him today you will agree that in all likelihood the legacy of John Crosbie will be that he was both. It is my privilege on your behalf to welcome to our podium the Honourable John C. Crosbie, Minister of Finance in the Government of Canada.
THE HONOURABLE JOHN C. CROSBIE: Within the next few weeks I will be presenting the first budget of the new Conservative Government. The economic situation in Canada gives me little room in which to manoeuvre in drafting that budget; the requirements of budget secrecy give me little freedom in discussing with you this afternoon the policies I will propose in that budget. For advance knowledge on those policies you will have to rely, as I do, on The Globe and Mail.
Because of those restraints, I therefore intend to deal with the general economic stance that will be taken in the coming months by the government and, in particular, about our position on interest rates.
You may have heard rumours of my appearance on Tuesday of this week before the Standing Committee of the House of Commons on Finance, Trade and Economic Affairs to discuss interest rate policy. If, by chance, you are one of those Canadians who follows the procedures of Parliament and are already familiar with what was said in that committee hearing, I make no apology for returning to the subject this afternoon.
The course that has been adopted by the Bank of Canada, and it is one the government supports, is one that will have impacts on many sections of the Canadian economy in the next few months. I think it is important that Canadians understand clearly and in detail the reasoning that lies behind that situation and the implications.
Many of our decisions in the economic area have been unavoidable. We had and have no reasonable alternative, and that is a second subject I would like to deal with--the other reasonable options that were open to us.
The economic difficulties that face Canada today are not new. They did not arise overnight. They will not disappear overnight. I cannot solve with one budget the deep-seated inflationary pressure that has been taking an increasingly deep hold on the Canadian economy over the past ten years. I cannot solve quickly an eleven billion dollar budgetary deficit or a current account deficit on international payments of over seven billion dollars. Those three factors--inflation, the budgetary deficit and the international current account deficit are among the most severe of the legacies we are left with as a new government.
But if it is true that we cannot solve these difficulties overnight, and that they are the result of actions that occurred before this government came to power, it is equally true that we cannot deal with them by blaming them on someone else.
We have the opportunity as a new government to make fundamental corrections in economic policy that will benefit Canada for the long term. I believe in long-term solutions based on economic reality; not short-term cosmetic tinkering based on political popularity.
Those long-term solutions start with a realistic assessment of our present situation--the realities of our trading patterns, economic productivity, debt and deficit positions, and so on.
It would be possible for us to continue with the monetary policy that has been recommended and put in place by the Bank of Canada and counter it, on the other side, with increases in government spending and with new programs to protect Canadians who will feel the impact of higher interest rates. We could take with one hand and give with the other.
But surely that policy has been tried before. Surely that policy was followed for most of this decade by the previous government and surely it is clear that on May 22 of this year, Canadians decided they wanted a change.
What form will that change take?
As Minister of Finance since June 5, I have not been besieged by people volunteering to take a cut in their standard of living, and thus stand in the vanguard of the fight against inflation, presenting their ox to be gored first. But neither have I found Canadians so unrealistic, so naive as to expect and believe that we can achieve our economic goals without real sacrifice. My message to you today, simply expressed, is that if those sacrifices are made now, then we can put ourselves in a position to reap increasing real benefits in the years ahead.
In all the history of Canadian politics I don't suppose that there has ever been a federal politician who did not talk about his belief in Canada's potential. The catch is that Canada's potential is not achievable unless we solve the problems of inflation, of the budgetary deficit, of the imbalance of international trade, of energy supply and distribution.
I would like to deal in some detail with the reasons for the high level of interest rates, and alternatives we could have chosen.
As I noted earlier, the most important reason is our inflation rate. Prices have risen much faster in recent years than at any time since the Korean war. These increases have been so persistent that there is now a widespread expectation that inflation will remain high in the years ahead. As a result, when people lend money they feel it will be worth less when it is repaid. They demand a rate of interest which will compensate them for at least some of that loss.
Borrowers, on their part, are prepared to pay the higher rates of interest because they expect they will pay less now for the goods they buy than they will have to pay if they wait, and they will be able to repay the loans in devalued dollars.
That vicious circle has to be stopped and interest rates high enough to slow borrowing are part of stopping it.
Are there other devices that could have been used to accomplish this end which do not involve higher interest rates? Yes: a comprehensive system of controls.
Such a system would require detailed decisions as to which classes of borrowers should be able to obtain funds from which financial institutions and for what purposes and in what amounts. Measures would also have to be taken to ensure compliance. Moreover, steps would have to be taken to make sure that savers and investors did not divert funds to foreign markets to earn a better return and this would involve a comprehensive system of foreign exchange controls.
Direct controls on consumer credit and exchange controls have been used on occasion in Canada, mainly during World War II, but experience with such controls has led Canadian governments to avoid them if possible and, for my part, I would be opposed to proposals to use them in current circumstances. I object to them on principle; I object to them unless and until circumstances become so catastrophic that they can no longer be avoided. So if we wish to slow the pace of borrowing--and credit has been expanding at an annual rate of twenty-six per cent, almost thirty per cent for industrial borrowers--our only reasonable choice was to raise interest rates.
High interest rates are also caused in part by the size of our government deficit. That deficit is financed by the sale of securities to the public, a process which absorbs a large amount of the savings in the economy. If government was able to borrow less there would be more money available for other borrowers. As with other commodities, reduced borrowing demand on available capital would tend to reduce interest rates.
Our deficit will be reduced over time, both as a percentage of government spending, and hopefully, in dollar terms. Government spending itself must begin taking less of the economic pie, and leaving more resources with the private sector.
We could reduce that deficit faster by making radical cuts in social programming, in provincial transfer payments, in old age pensions and other areas--but we will not do so. Such cuts would be socially unacceptable, economically unfair and politically disastrous. We cannot work miracles, but we can and will improve administration, implement efficiencies, and cut back automatic increases in spending.
A third reason for the present interest rate levels is the large and growing deficit in the current account of our balance of payments. It cannot be reduced quickly and as long as it continues it must be covered by an adequate flow of capital into Canada.
Our need to import capital has been intensified by the need to finance our large government deficit as well as private sector investment in new plant, equipment and housing. This year we will spend at least seven billion dollars more abroad than we earn. We could make up that shortfall by running down our foreign currency reserves or by selling gold. That would not stop future deficits from occurring and once sold, those reserves are gone.
Again the other option that could be used is strict and rigorous exchange controls. We could prevent Canadians who travel from taking more than twenty-five or fifty dollars out of the country with them. With controls we could prevent foreign lenders and investors who have put their money in Canada in good faith from repatriating any dividends or interest on their capital.
In addition to being an interventionist stance that I believe is neither justified nor desired, the imposition of controls would not grapple with the underlying problems of the Canadian economy. They would have an impact far more serious than that of current monetary policy. So the chosen path is to maintain interest rates at levels high enough to attract capital here by normal market pressures. Again--we have no reasonable alternative.
One frequent suggestion recently had been to keep rates at present levels, ignore the effect on exchange rates and let the dollar fall to ... whatever--in any event, a level considerably below present value. This choice, the argument runs, would increase the cost of imports and persuade Canadians to buy from domestic suppliers, stimulating our own economy without penalizing domestic borrowers.
The analysis is simplistic. To begin with, many of our imports simply cannot be replaced domestically--those of you who have searched the supermarket in vain for a Newfoundland orange will know what I mean. For those imports that can be replaced, there is an inevitable lag time, perhaps as long as two or three years while the necessary production capacity is built or expanded. In the meantime, all imports would increase in price. Many major export industries are already operating at or near capacity and could not immediately supply an increased demand. The international current account deficit would increase dramatically, and the inflation effect of a lower dollar would be felt throughout the economy--all to avoid the so-called "inflation impact" of higher interest rates.
I cannot accept such proposals as reasonable or workable and, once again--the only alternative was an increase in interest rates.
Finally, on a general point, while it is easy to suggest alternatives to present economic policy ("Let's try this new idea and see what happens,") those making the suggestions don't have to accept personal responsibility for the consequences.
I will not tinker with economic policy without having a good degree of assurance about the results. No responsible minister could, or would. As long as we have a need to attract foreign capital to balance our current account deficit on international flows; as long as we have a need to keep Canadian capital working here rather than invested outside our borders; as long as there is a substantial borrowing requirement to cover budgetary deficits and as long as the granting of credit to businesses and individuals far outstrips our real increases in productivity and growth; as long as all those conditions persist, we have no alternative to high interest rates.
They are not, of course, our only policy weapon. Fiscal policy forms a major part of the package, and initiatives directed at these same goals will be in the budget.
Reducing the deficit on both budget and current accounts means encouraging the private sector to produce more, compete more effectively here and internationally. It means stimulating on the supply side, particularly for export and import replacement industrial sectors. It means moving as fast as we can towards self-sufficiency in energy. This requires that we move the price of oil up toward world levels.
Canadians must be encouraged to cut down their consumption of the world's diminishing supplies of oil. It means using the extra resources from energy price increases to find additional sources and to add to distribution networks so that Canada can be more independent in the supply of this vital commodity.
Are Canadians special in some way that I am unfamiliar with that they cannot or will not accept the discipline that has been and is necessary for citizens in almost every country of the western industrialized nations? Are we so unique that we think our natural advantages in resources and geography somehow protect us from fundamental economic realities? I don't think so.
There is no magic in this. There is nothing new in it. Success will involve some hard work, some cutting back, some putting off of real increases in our standard of living, some restraint. I believe that Canadians are ready and willing to accept that self-discipline, and to pay the price now of benefits that can be available in future years.
The thanks of the club were expressed to Mr. Crosbie by Henry N. R. Jackman, a Past President of The Empire Club of Canada.