Budget '85 Special Meeting of The Empire Club of Canada

Mr. Seymour

Distinguished guests, members and friends of The Empire Club of Canada: It is my pleasure to welcome as our guest speaker today the Hon. Barbara J. McDougall, Minister of State for Finance.

Against the backdrop of a record deficit and persistently high unemployment rates, the Government of Prime Minister Brian Mulroney tabled its first budget in the House of Commons on Thursday, May 23. Speculation as to its contents has ended. Examination of its impact continues with somewhat divergent opinions being reached, even amongst Canada's senior financial analysts. To quote from one report:

"As expected, the budget has one key objective-deficit reduction. The budget attacked the deficit from both sides. Personal, corporate and sales taxes gained revenue from both base broadening and higher rates... Spending cuts were more aggressive than expected"

Another group of analysts expressed a somewhat different opinion:

"The Conservatives' first full budget represents a mixture of major steps to enhance Canada's investment cli-

mate and a disappointingly cautious approach to nearterm deficit reduction... Whether these positive initiatives will be enough to overcome disappointment on the limited over-all budget reduction will depend on the extent to which the investor is willing to look beyond near-term sluggishness in North American growth."

The Hon. Barbara McDougall came to this key ministry in the Federal Government after a long and somewhat demanding preparation. Following graduation from the University of Toronto with an Honours B.A. in Political Science and Economics, she moved to Vancouver where she worked as a financial analyst for Odlum Brown Limited for eleven years.

Before returning to Toronto with A.E. Ames and Company Limited, where she became a vice-president, she qualified for the professional designation of Chartered Financial Analyst.

Fortunately, she was not content to focus all her efforts on finance. She became involved in community affairsOkalla Prison Farm, Vancouver Art Gallery, Second Mile Club and Salvation Army Red Shield Appeal.

Her political involvement began as a scrutineer in Toronto, flourished as a press and policy adviser in Vancouver and a campaign manager in Toronto. It culminated in her sweeping-and somewhat surprising- election victory in St. Paul's riding on September 4, 1984. Elaine Dewar, in the March 1985 issue of Toronto Life, expressed the degree of surprise: "Her background just didn't suggest the royal jelly needed to take St. Paul's. St. Paul's is a swing riding. Usually a cabinet minister represents it."

On September 17, our guest speaker was sworn in as Minister of State for Finance. Her duties include filling in for the Minister of Finance; responsibility for eight Acts of Parliament, including The Bank Act and The Investment Companies Act; The Tariff Board; and The Regulation of the Financial Services Industry.

Ladies and gentlemen, I am pleased to introduce The

Hon. Barbara McDougall, Minister of State for Finance, who will address us on the subject, "Budget '85."

Barbara McDougall

It is always a privilege for me to be invited to share my thoughts in Toronto, in my own community, especially before an audience as distinguished as the Empire Club, which is a haven for thoughtful dialogue and public affairs.

And it's my privilege to talk to you about what we hope will be an historic document for Canada. Historic because it marks a break with the past; historic because it puts the responsibility for our prosperity back where it belongs-with you in the private sector. Historic because it faces the reality that our future is in danger if we do not act now to build competitiveness, vitality and common sense into our economic expectations.

Any government, in developing a fiscal agenda, faces competing pressures between economic and social objectives. And, while we are sensitive of the importance to Canadians of compassionate social policy, we believe that the economic side of the balance sheet has been too long ignored. That initiative, self-reliance and personal choice are the basis of prosperity and opportunity in a democratic society.

The budget reflects our Government's view of what politics and government are all about. None of us entered public life because we believed that government should be making only the easy decisions. Any government that makes only easy decisions will find that it soon loses both the fiscal capacity and the political will to make tough decisions when they must be made.

Political morality requires us to face reality as it exists and to attempt to do everything we can to ensure that more and more of the people we serve can live full lives.

That's what Michael Wilson's budget is about. That's why I believe it's the right tonic, the right step, the right

dire--tion for a country that's committed to getting on its feet, sustaining economic growth and expansion, and providing the wherewithal to ensure economic opportunities for all.

Our Government is about change. Canadians right across the country gave us an overwhelming mandate for change and we believe our economy and our society need some very fundamental changes-changes that respond positively to the new realities in Canada. Some of those changes are tough, but we are striving to ensure that they will not be hard: that the burden will fall fairly across many sectors without leaving behind, in any one group, devastation or demoralization.

On September 4, Canadians voted for us because we promised to tackle the causes, not the symptoms, of our chronic economic malaise.

Last Thursday's budget reflects and builds on that commitment.

I can't emphasize enough that this budget makes a fundamental break with the past. Canadians have told us that they don't expect the Government to solve all their problems. What Canadians have told us is they want a country where they themselves, through risk and enterprise, through daring and commitment, can have a fair chance to build their own life and their own future.

It's a budget of understanding, prepared after a lot of deliberations with Canadians who told us they're aware that this is a time of difficult choices and painful decisions. And above all, it's a budget of challenge-the challenge of redressing the tragic problem of unemployment that is denying too many Canadians, especially our young people, from being productive members of their community. But it's not a challenge for the Government alone.

As the Prime Minister said in Winnipeg last week, Canadians have learned that spending borrowed or printed money will not create durable jobs. Government spending does not create jobs. Government spending creates deficits. We believe the challenge to create those durable jobs lies

squarely with you-with the private sector.

Increasing the deficit-and spending borrowed money and writing cheques-are easy decisions to make. But they do not create the kind of jobs that lead to satisfying careers. Direct job creation by government is at best a stopgap measure. We have proof. Canada's record of the last decade should have put and kept most Canadians working.

Our budget addresses both the tragedy and the nightmare of unemployment, in a thoughtful and consistent manner. Our initiatives on job creation and deficit reduction are realistic, balanced, and fair.

Our budget aims at securing economic renewal for Canada by restoring the economy's capacity to generate growth and create jobs and economic opportunities. We are proposing to achieve these goals by:

• encouraging private initiative
• managing government more effectively
• and controlling the national debt.

We believe that it's people who make our economy work, not government. We believe that jobs and economic renewal come from private initiative.

Mais nous reconnaissons aussi que nous ne pouvons pas demander aux Canadians de partager !'effort necessaire pour le renouveau economique sans faire notre part. C'est pour cela que nous avons etudie les affaires du gouvernement avec le but de les rendre plus efficaces et aussi pour assurer que nos programmes sociaux sont diriges vers ceux qui en ont le besoin.

But we also recognize that we cannot ask Canadians to share in the effort required to set the country on the road to economic renewal if we do not first put our own house in order. That's why our budget contains a variety of measures to streamline government operations, curb its growth and ensure that public programs are more effectively managed and better targetted to those in need.

We know that, unless we control our accumulating debt, our economy will not produce satisfying jobs for all who

need them. By acting now, we have cut $75 billion from the projected level of the national debt by the end of the decade. Since we announced $4.2 billion of savings in our November Economic Statement, the Government has identified an additional saving of $2 billion in the 1985-86 fiscal year from better management of its affairs.

This means the 1985-86 deficit will be reduced from what it would have been with no action by the Government by $4.4 billion to $33.8 billion and the 1986-87 deficit will be similarly reduced by $8.3 billion to $32.7 billion.

I would like to illustrate one of our decisions in this area of better government management and efficiency. We are closing the two heavy water plants in Cape Breton. The plants in Glace Bay and Port Hawkesbury have for many years been striking symbols of government waste and mismanagement. They cost the taxpayers of this country more than $100 million a year to produce a product for which there is no demand. But, while we are happy to abandon these plants, we will not abandon the people of Cape Breton. We will not turn our back on the people of Cape Breton affected by the closures. Workers at the plants will receive generous severance benefits and will be assisted in seeking new employment. An enriched tax incentive for new investment in Cape Breton will mean that almost all new investment in Cape Breton will be free of corporate income tax for ten years.

In this combination of measures, the Mulroney Government has indicated the heart of the philosophy. We are prepared to be realistic; but, while we will tear down plants, we will build up people to prepare them for a better future.

The actions in the May 23 budget emphasize the need for fairness in the Government's approach to policies, programmes and people. We had to face some difficult realities and put forward some hard proposals. But we maintainedand improved-the concept of fairness in Government actions.

The budget sets out internal measures that we are taking

to tighten our own belts and increase the effectiveness with which we spend our tax dollars:

• The Public Service pension plan will be put on a fully funded basis, with no taxpayer subsidy;
• The guarantee of full indexation of MPs' and Senators' pensions will be ended January 1, 1986;
• An aggressive programme is being put into place to improve the Government's management of its cash and to dispose of property that it no longer needs;
• The size of the federal Public Service will be reduced by 15,000 positions over the next six years; and
• There will be no compensation for inflation in the Government's operating and capital budgets.

We have also placed a high priority on the better management of Crown corporations and making sure that they serve a public purpose. Where Crown corporations, such as Teleglobe, Northern Transportation and Canadian Arsenals, have a commercial value but no public policy objective, they will be sold. Others will be eliminated. And still others will be rolled into the appropriate Government department.

To reduce the deficit, we have also brought in tax measures. Net revenue measures introduced by this Government amount to $0.4 billion in 1985-86 and $2.2 billion in 1986-87. By 1990, we anticipate net revenue measures to be about $4.3 billion.

These amounts are small compared to the total deficit reduction of over $20 billion through cost-cutting we've identified by 1990-91.

Only 20 per cent of the deficit reduction in 1990 will be attributable to taxation measures. The balance of deficit reduction will come from action taken on the expenditure and cost-recovery side.

Our Government designed changes to the tax system in a fair and equitable manner. While tax changes contribute to deficit reduction, they have been designed to minimise the impact on incentives to work and to invest. For example, some of the tax increases in the budget are temporary, such

as the corporate and personal-income surtaxes.

Thus they would have little impact on savings and incentives.

The Unemployment Insurance rate is not being increased, thereby providing substantial relief to the private sector. Some tax changes improve incentives to save and invest, as in the case of the RRSP and private pension plans, and capital-gains-tax proposals. In other cases, they help remove existing relative price distortions, as in the case of broadening the sales-tax base.

As a result of the net tax increase, revenues-to-GNP will reach 15.9 per cent in 1990-91 (in the mid-range case) compared to a peak of 18.7 per cent in 1974-75 and a level of 15.2 per cent in 1984-85. Program expenditures, on the other hand, are projected to drop from 18.4 per cent of GNP in 1984-85 to 14.9 per cent in 1990-91.

Time and time again, you in the private sector have told us to bring down the deficit, so that you can expand and produce more jobs. We are reducing the deficit. We are giv,,ing you the framework to create those jobs.

With this measure, the Government is sending a clear message to Canadians across the country. If we work together, we can build a strong and prosperous country.

This Government is challenging more of you to create jobs and wealth by investing in Canadian enterprise. The lifetime $500,000 capital-gains exemption is a strong signal that our Government wants people with good ideas and the will to persevere to enjoy the fruits of their success. And we are confident that Canadians will accept that challenge.

Small and medium-sized businesses will also benefit from our proposals to change regulations governing RRSP and pension-fund investments. These measures will allow greater investment by pension funds in new businesses and in small businesses seeking to expand. RRSPs will be eligible to invest directly in smaller Canadian businesses.

The budget contains many other measures to encourage private-sector growth and job creation. These include:

• Assistance in the form of tax credits to individuals investing in labour-sponsored venture-capital funds set up within a province to invest in small and medium-sized businesses;
• Small business will be exempt from the five-per-cent oneyear corporate surtax, in recognition of the importance of strengthening small business and facilitating job creation:
• Small businesses and farmers will benefit from the extension of the small-business bond program until 1987;
• New and growing research-and-development companies will be entitled to a direct refund of the full tax credit they earned on their first $2 million of R and D each year;
• Action will be taken to make the tax system more fair and to improve tax administration. These actions will benefit all of us, but especially entrepreneurs and small-business owners, by reducing administrative headaches.

The budget establishes a very important premise about the Progressive Conservative Government, and that is that the Government must serve the people and not the other way around.

Canadians did not have to wait for the budget to see our philosophy at work. Let me illustrate how we've been practising what we preach since we took office.

The energy accords reached between my colleague, the Hon. Pat Carney, and her counterparts in British Columbia, Alberta, and Saskatchewan and in Newfoundland deserve mention. These are significant agreements because they represent arrangements between the provinces, the private sector and Ottawa that are equitable and responsible. These energy accords signify a new era of federal-provincial cooperation.

These accords mean more jobs for Canadians. An oil rig in Alberta doesn't just mean jobs in Red Deer or Peace River. An oil rig in Alberta means jobs in the plants of Hamilton and Sarnia. A rig on the Grand Banks means jobs on the rigs, jobs on supply vessels and on land. A new rig anywhere in Canada means jobs for young engineers from

St. John's to Victoria.

Canadians were tired of all the shouting. And we intend to use energy as a policy of unity, not a policy of division. This mood of federal-provincial harmony is an essential part of our national goal for economic renewal all Canadians want. This Government intends to make it possible for us, whether we are individual Canadians or businesses, to achieve our potential. That's the way to our future prosperity. We need a concerted and concentrated effort by all Canadians, particularly by the private sector.

Our budget measures to encourage growth are designed to promote job-creating investment, especially in the smallbusiness sector. Our measures to manage government more effectively will create an environment for enterprise that will promote this growth, while checking the influence and intervention of the Government bureaucracy. And our measures to reduce the deficit are carefully balanced to do this over the medium term, so as not to threaten our tenuous economic recovery.

This is what our budget can do for you-for Canada. We have created the environment for you to prosper; now go out and invest. Go and help put Canada to work.

We, as a government, have taken the lead to create lasting jobs.

We made fair but tough decisions to reduce the deficit because, as Michael Wilson stated in the budget, our national debt is $200 million-and growing. I do not need to remind you what this means. But let me remind you c,f the consequences of not addressing this issue, of "doing nothing": nothing gets done. Except, of course, that we become more deeply mired in debt and, I would venture to add, our job security-yours and certainly mine-becomes more tenuous.

The Progressive Conservative Government's first budget marks a new beginning for Canada, as we veer away from the tired and unsuccessful ways of the past.

This budget is a pledge from the Progressive Conservative Government to all Canadians that we will fulfill our man-

date for change, for economic renewal and job creation. And it demonstrates our most fundamental message of hope and opportunity: that democracy and enterprise lead to extraordinary achievements by ordinary people.

The appreciation of the meeting was expressed by H.N.R. Jackman, a distinguished Past President of The Empire Club of Canada.