Some Economic and Financial Consequences of Defence

MR. HERMANT: The Empire Club of Canada is particularly honoured today to have as its Guest and speaker the Honourable Douglas Charles Abbott, K.C., Minister of Finance. Mr. Abbott was born at Lennoxville, Quebec. He went overseas at the age of 17, with the 7th McGill Siege Battery. He later transferred to the Royal Air Force and was commissioned as a 2nd Lieut. After the War he enrolled in the Faculty of Law at McGill University graduating with the degree of Bachelor of Civil Law. He continued his studies at Dijon University in France specializing in the study of Roman Law upon which the Quebec civil code is based. Returning to Montreal Mr. Abbott practised his chosen profession there, and in 1939 was created a King's Counsel. Mr. Abbott began his political career in 1940 when he was elected to Parliament representing the St. Antoine-Westmount constituency which never before had returned a Liberal. He was re-elected in 1945, and in 1949 he won with the largest majority ever accorded a candidate in that constituency. In 1943 Mr. Abbott was appointed Parliamentary Assistant to Mr. Ilsley, the Minister of Finance. In this capacity he was particularly responsible for the administration of the Wartime Prices and Trade Board, and the establishment of the Industrial Development Bank. In 1945 he became Parliamentary Assistant to the Minister of National Defence, a position of particular importance because of the fact that the Minister, General MacNaughton, did not have a seat in the House. Shortly afterwards he became Minister of National Defence. In 1946 Mr. Abbott changed portfolios to become Minister of Finance. During the War it became fashionable for certain smart alecks and cynics to say that they were "working for Mr. Ilsley", and now I suppose we may expect to hear the same comment with respect to Mr. Abbott. The fact is that the situation is exactly the reverse. Mr. Abbott and his colleagues are working for us, and I would take this opportunity of voicing appreciation on behalf of Canadians of all political parties for the conscientious, able and dignified service being rendered to Canada by those we have chosen to represent us in Government. These are serious days, and the subject of Mr. Abbott's Address "Some Economic and Financial Consequences of defence" hardly leads us to think that despite this festive Season we are enjoying a visit from Santa Claus. It is now my pleasure to introduce the Honourable Douglas Charles Abbott, K.C., Minister of Finance to this Luncheon meeting of The Empire Club of Canada.

MR. ABBOTT: This is the second occasion on which I have had the pleasure of speaking to The Empire Club. I hope that I have been invited again because I made a good impression two and a half years ago. But perhaps Ministers of Finance are invited to speak every two years or so, and it may be that some of your members were confident in March, 1948, that the Minister of Finance in 1950 would be someone of another political complexion!

Whatever the reason for the invitation, I am very pleased to be here. The Empire Club has a record of distinguished speakers, and anyone who is privileged to address it can feel honoured indeed.

Your invitation to speak was also most timely, for I was looking for an opportunity of discussing, with a representative group of Canadians, some aspects of National policy that are of particular concern to the Minister of Finance and that no doubt are very much in the minds of every citizen and taxpayer.

When I spoke to your Club in March of 1948 I asked you to take a new look at Canada. I might well ask you to do the same thing again today, though for somewhat different reasons. Two and a half years ago it seemed to me that we should get a new perspective on our country and, from the record of accomplishments, gain a new inspiration which might invigorate our efforts to make Canada a better land in which to live.

At that time, there seemed to me to be a danger that Canadians might, through lack of confidence, or through too much concern with trivial problems, fail to seize the opportunities that lay at hand. Can anyone, looking back, say that confidence in the future of Canada was misplaced? Surely not. Surely the truth is that accomplishment has once again outstripped expectations?

It is my duty on this occasion to speak in more sober terms. None of us, contemplating the immediate future, can hold out the hope that Canadians will be free to devote their full energies to the improvement of living conditions. Indeed, it is now clear that we shall have to forgo some of the good things we have been enjoying in order to protect that which is essential--our freedom to live as we choose.

But even though the prospect before us is uncertain, perhaps even grim, an expression of confidence in the economic potential of Canada is not out of place. We are very much stronger than we were in proved resources of vital materials, in plant and equipment and in skills. It seems to me, too, that there is an ever-growing unity of purpose and outlook among the people of Canada that will enable this country to respond to the challenge of adversity by efforts far beyond what would normally be expected.

In other words, I suggest that accomplishment may again outstrip expectations. This is not a time to dwell on the difficulties that may lie ahead, or on the hopes that may be frustrated. Rather is it a time to think in terms of bringing the demonstrated energies and resources of Canada to bear where they are most needed for the common good.

It is from this point of view that I should like, for the remainder of this address, to speak to you about some of the economic and financial consequences of defence preparations. I shall begin by referring to the effect of these preparations upon federal-provincial relations, which is a topic of current interest, and shall then turn to the problem that is concerning all of us--the control of inflationary tendencies.

The federal-provincial conference met for four days last week in Ottawa. When a conference was originally suggested by the Prime Minister, in December of 1949, there were rumblings of trouble in various parts of the world. But no one, a year ago, could have foreseen the dark and tragic events that were to follow and that were to bring the world so perilously close to war.

Changes in the approach to federal-provincial relations were inevitable. The Federal Government, which has the responsibility for national defence, had no choice but to limit its commitments for other purposes. But I am bound to add that the Provincial Governments showed the most sympathetic understanding of the position, and never at any time during the discussions questioned the prior claims of national security.

We laid the facts of the situation before the Provinces as clearly as we could. I shall not attempt even to summarize the statements that were made by the Prime Minister, the Secretary of State for External Affairs, the Minister of National Defence, and myself. Suffice it for me to say that no one who listened could have been in any doubt whatever as to the need for more adequate defences, the high cost of providing them, and the consequences for the taxpayer and the general economy.

Originally it had been planned to discuss many aspects of federal-provincial relations, having to do with the development of resources and the improvement of social services. It was clear to everyone, I think, that broad discussions along these lines would be premature, to say the least. Indeed, the Prime Minister indicated that it might even become necessary to discuss with the Provinces the postponement of joint projects already agreed upon, where such postponement was possible, so as to relieve the pressure upon resources and man power.

It was decided, however, that two matters were urgent enough to merit immediate consideration--the renewal of the tax-rental agreements with the Provinces and old age security. As Minister of Finance I have a particular responsibility with regard to the tax agreements, and I shall confine my comments to that subject.

As you probably know, the Federal Government now has tax-rental agreements with eight provinces, that is, with all provinces except Ontario and Quebec. In return for exclusive use of the income, succession duty and corporation tax fields, the Federal Government makes certain rental payments to the Provinces.

These tax agreements have been so successful in underpinning the revenues of some of the provinces and in simplifying the tax structure, that the Federal Government decided to renew its offer. Some might argue that in time of such heavy demands upon the Treasury the agreements--which do involve substantial expenditures--should be allowed to lapse. These arguments were, in our minds, outweighed by the necessity of enabling the Provinces to maintain the essential services which they provide and preventing, if at all possible, destructive competition between the Federal and Provincial Governments in the field of direct taxes.

While we did not think it wise to abandon the tax agreements, neither did we think it to be in the public interest to make any changes which involved a material increase in their present cost to the Federal Treasury. Two important improvements were, however, offered. One of them involved a substantial increase in the irreducible minimum payment, proportional to the increase in national output and provincial population between 1947 and 1948. This will not mean larger payments now, but greater assurances to the provinces in the event of a recession.

The other improvement was to give recognition to recent changes in what might be termed the tax potential of the various provinces. The introduction of this new factor would involve larger payments than in the present agreement only for the province of Ontario. Not a surprising result, for the province of Ontario undoubtedly has a high income per capita, and hence a high tax potential per capita.

I do not know, nor shall I attempt to predict, how many provinces will accept the renewed offer of tax agreements. The decision is entirely with the Provincial Governments themselves. We in the Federal Government hope that every province will sign. But experience has shown that less than universal agreement is by no means a fatal defect. Whether they all do or not, I, for one, was heartened by the amicable and responsible way in which the representatives of the ten Provincial Governments sat around the table last week to discuss their financial relations with the Federal Government.

The general aim of the Federal Government, in its relations with the Provinces, is to promote economic stability and progress in all parts of the nation. While this is a constant objective, the content of federal-provincial programmes and arrangements must shift, from time to time, according to the economic climate. In 1945 the conference met to discuss how best to deal with the post-war problems of reconversion and reconstruction. At last week's conference there was a realization that the problem today is not how to maintain employment and incomes at a high level, but rather how to achieve economic stability in the face of demands that are bound to place a strain upon our capacity to produce.

May I now turn to a discussion of this more general problem of economic stability as it is affected by the impact of the world crisis and our own defence preparations?

The elements of the problem are not difficult to grasp. When the crisis came upon us, Canadians were, to all intents and purposes, fully employed. There was very little slack in the economy. In fact, even before it became necessary to contemplate major defence expenditures, there had been a resurgence in business activity which seemed likely to push employment and incomes to record levels.

It was clear that, unless rising defence expenditures were to result in competitive bidding-up of the general price level, it was necessary to embark promptly upon an effective anti-inflationary policy. Accordingly, the Federal Government undertook immediate action, designed to strike at the roots of the problem.

Our first responsibility was to ensure, so far as possible, that increased government expenditures did not in themselves result in an increase in the total flow of spendable income. This meant a balanced budget or, as it is sometimes called, a "pay-as-you-go" policy.

There are two obvious ways to go about balancing the budget. One is to reduce expenditures by eliminating waste and inefficiency and by curtailing services which are not absolutely essential under existing circumstances. The other is to raise additional revenues to meet the necessary expenditures. Needless to say these two methods are not mutually exclusive.

The people of this country are concerned, and properly so, that the Government should effect every possible economy in its operations so as to minimize the burden of taxation. May I assure you that no one is more concerned than the Minister of Finance, for I have the responsibility of presenting the tax programme to Parliament.

For many months the search for economies has been pressed forward in all directions, and I believe that substantial results are being achieved. Many projects, desirable in themselves but not absolutely essential and which were not already in hand, have been postponed; others have been curtailed. Operating economies are being effected all along the line. Even the smallest are not being neglected. While higher salary scales have been approved to bring Civil Service salaries into line with those in private business, this will be accompanied by an increase in working hours, thus making possible a reduction in the total number of employees in civilian departments.

The results may not be immediately apparent in the figures of expenditures, and they may be masked by inevitable increases in the departments associated with the defence effort. But I doubt whether at any time any Canadian Government has made a more determined effort for efficiency and economy.

As a result of these economies and the additional taxes imposed at the special session of Parliament last September, there is no doubt that revenues will fully cover exponditures during the present fiscal year. Indeed, the current figures indicate a healthy surplus, which is all to the good. Apart from the stabilizing effect of a budgetary surplus when inflationary pressures are growing, it is sound policy to be paying off the public debt when we can, in preparation for the time which may come when, whether we like it or not, deficits may be unavoidable.

This policy of "pay-as-you-go" will be followed to the limit of political and administrative feasibility. As I said in my "Baby Budget" Speech to Parliament in September, "to plan to do less than this would be both irresponsible and a fraud upon the public".

The Government recognizes, however, that while a "pay-as-you-go" policy is fundamental to a successful attack upon inflationary tendencies in the economy, it may not be all that is necessary. Even though additional spending by the Federal Government may be completely offset by additional revenues, the total level of demand may nevertheless increase because of the activities of individuals, business organizations and other governments.

For that reason these measures have been supplemented by other measures designed to restrain the level of demand in the civilian sector. I refer, for example, to the consumer credit regulations. These regulations are designed to reduce the extent to which individuals can anticipate their incomes to buy goods. The regulations have been in operation only for a month and a half and they are by no means drastic. But already the results are promising. Similarly, the Bank of Canada, through its open market operations, was able to offset what would otherwise have been strong inflationary forces in the security market arising from the recent influx of capital from the United States, and has recently raised its re-discount rate. In this connection I might also mention the policy being followed by the Central Mortgage and Housing Corporation of requiring higher down payments for the building of new houses. Within a few days an announcement will be made of stricter terms of lending under the Farm Improvement Loans Act. These tools of monetary policy and credit control must be used judiciously, but they have an obvious place in a developing anti-inflationary policy.

It has been recognized that the defence programme has an uneven impact. It will conflict more sharply, for example, with private capital investment than with consumer demand in general. Particular shortages are bound to appear from time to time. An anti-inflationary approach, designed to restrain total demand, may therefore have to be supplemented to a greater or less degree by more direct action to get at what might be termed the "bottlenecks". This was the primary purpose of the Essential Materials Act passed at the last session of Parliament. It enables the Government to put selective controls into effect at critical points and is a most useful aid, in fact, a vital part of any economic stabilization programme. The order issued a few days ago under the Essential Materials Act by my colleague, Mr. Howe, controlling the use of steel and prohibiting its use for non-essential purposes, is an excellent illustration of how it can be used.

There are some people, however, who are now urging the Government to move at once into a comprehensive system of price controls. The attitude of the Government towards this question has been stated on several occasions, but it might be well for me to restate it here.

The Government of Canada was the first Government in the democratic world to place an over-all ceiling on prices during World War II. This action was taken not as a result of political pressures or pressures from outside sources. We were not pushed into the price ceiling. We took the step deliberately--and to the surprise of most people--when events showed clearly that only by a comprehensive system of direct controls of prices, wages, production and distribution, coupled with a rigourous fiscal policy was it possible to maintain economic stability.

In this matter the Government therefore speaks from experience. We have reason to know the value of comprehensive price and wage controls. We have reason to know their limitations. We have reason to know the conditions necessary to their success.

The time may come when comprehensive direct controls are necessary but, as I said in my Budget Speech last September, they should be reserved for periods of great crisis. Under less severe conditions, comprehensive direct controls of prices, wages, production and distribution--and they are inseparable--are incompatible with a free society and a free economy. For comprehensive controls on prices and wages to be effective, the people must be prepared to accept willingly a huge and burdensome bureaucracy and a high degree of regimentation.

As the stage of total mobilization approaches, there comes a point when expenditures take so large a part of the national output that it is not humanly possible to cover them fully by taxation and direct savings. It is at this point that it becomes necessary to buttress fiscal measures by comprehensive direct controls. But does anyone seriously suggest that our present defence effort, even though large and growing, is yet of such dimensions in relation to our national output?

Nor, it must be borne in mind, are direct controls a substitute for a vigourous fiscal policy. On the contrary, their proper role is to support and buttress fiscal and monetary policy. The direct controls cannot carry much of the load by themselves, otherwise they are bound to collapse.

One last point, and I say this without any implication that Ottawa is bound to follow Washington in these matters, Canadian prices cannot be effectively insulated for any long period of time from prices across the line. One of the chief reasons why we in Canada were able to hold the price ceiling so effectively during World War II was that the United States followed policies similar to our own. And when price controls were removed abruptly in the United States at the end of the war it was only by dint of extraordinary efforts and large expenditures on subsidies that we in Canada managed to follow a policy of orderly decontrol.

All of us are watching with great concern the developing international situation. Like the rest of the world and perhaps with even greater interest than other peoples, we Canadians are watching the course of events in the United States. For the United States is not only a powerful friend and ally but also our largest customer and largest source of supply.

According to the newspapers, President Truman is expected to make an important statement of policy within the next few days which may relate to some of the matters about which I have been speaking. Whatever is done by the United States Government in the field of economic policy cannot help but affect our position in Canada to some degree at least. It cannot, however, alter the necessity of proceeding as we in Canada have been doing to strike at the roots of the inflationary problem by appropriate fiscal and monetary policy, supplemented by such direct controls as become necessary and feasible.

I might sum up the position in this way. The Canadian Government is determined to fight inflation by the only method that can ultimately succeed, namely, by vigourous fiscal and monetary measures. It is prepared to use direct controls on a selective basis and is now doing so. It will use such controls on a comprehensive basis should that become necessary. The Government, however, does not wish to use over-all direct controls unless they are necessary and will be effective, nor does it believe that such direct controls can, by themselves, stop inflation.

VOTE OF THANKS, moved by The Third Vice-President, Brig. Colin Campbell.