A New Framework for Economic Policy

Head Table Guests

Diana Chant, Partner, Price Waterhouse and Treasurer, The Empire Club of Canada; The Very Rev. Dr. Angus MacQueen, Former Moderator of the United Church of Canada; Jean Augustine, Liberal M.P., Etobicoke-Lakeshore Riding; A. Charles Baillie, Vice-Chairman, Corporate and Investment Banking Group, Toronto Dominion Bank; Joan Marie Green, Director and CEO, Toronto Board of Education; Helen Sinclair, President, Canadian Bankers' Association; Fraser Mustard, President, Canadian Institute for Advanced Research; Stanley Hartt, Chairman, President and CEO, Camdev Corporation; John A. MacNaughton, President and CEO, Nesbitt Burns and a Past President, The Empire Club of Canada; Alfred Apps, President and COO, The Lehndorff Group and a Director, The Empire Club of Canada; Maria Judas, Grade 11 student, Central Commerce Collegiate Institute; Diane Richler, President, The Canadian Association of Community Living; Bill Robson, Senior Policy Advisor, The CD Howe Institute; John Honderich, Publisher, The Toronto Star Newspaper; and The Hon. David Peterson, P.C., Q.C., Director, The Canadian Club of Toronto and Partner, Cassels, Brock & Blackwell.

Introduction by John Campion

The Long Reach of George the Third's Folly

In 1763, the British triumphed over France in the Seven Years War. Britain became possessed of Canada and its hinterlands and the trans-Allegheny Plains in the valleys of the Ohio and Mississippi Rivers, populated by hostile Native tribes and 9,000 French-speaking people. Administration and defence of this territory was an increased expense that Britain wanted its American colonies to pay for.

At that time, the British Parliament and rulers knew several important facts:

(1) the American colonies were vital to the prosperity and world status of Britain;

(2) trade was the bloodstream of British prosperity;

(3) the mere whisper, let alone reality, of a standing army in the 13 colonies raised alarms of tyranny from the American inhabitants; (4) the prospect of taxation of the 13 colonies directly from Britain, particularly taxation without representation, excited an even more pugnacious response than did the prospect of a standing army.

All of these factors were known to King George the Third and his hapless ministers who ruled from 1763 to 1783.

King George was a wonderful combination of factors: dignified, amiable, poorly educated, narrow, obstinate, troubled and unsure of himself. In short, he had strong prejudices in an ill-formed mind. His ministers in this 20-year period included George Grenville, the Earl of Bute, Lord North, the Earl of Halifax, who just happened to be in charge of the Board of Trade when Nova Scotia was founded and the rapacious Earl of Sandwich who was so busy gambling, that he had to devise a system of speedy nourishment which later took his name. Each of these men was from one of the 200 families, inclusive of 174 peerages, who ruled England and went to the same schools, intermarried with each other's families and socialized together.

Together, these men devised a set of policies and taxation measures, including the Sugar Act and the Stamp Act that, while designed to exercise British sovereignty, had little or no guarantee of revenue. In addition, to the extent that any revenues could be raised, they were dwarfed by the British profits from trade with the Americans, and the enforcement of the tax measures, would deny Americans proper jury trials. The ill-advised measures ultimately produced a great revolution and war, wholly contrary to British self-interest. As you know, the war caused a loss of 13 colonies, the loss of the trading relationship with the Americans and cost Britain 100 pounds million in the bargain, leaving the country bankrupt.

Barbara Tuchman has described this remarkable series of actions as true folly. To be folly, she suggests that the policies must have three characteristics: firstly, they must be perceived as counter-productive to a country's self-interest in their own time: secondly, there must be a feasible alternative course of action available: and finally, the policy must be developed and applied by a group and not an individual ruler.

With respect to the national debt, it is certainly perceived as counter-productive in that it restricts government options in macroeconomic policy and absorbs savings to meet current expenditures, thereby reducing options for the economy as a whole in an era of rapid technological change and where resources are needed for national reconciliation with Quebec. Additionally, it was apparent to successive finance ministers that there were feasible options to the ever-increasing debt. Finally, in order to meet the third criteria of a true act of folly, the policies leading to our national debt were pursued and supported by politicians of every party and at every level of government.

The question then is whether the existence of our national debt is indeed an act of folly.

And yet, the complaints about our national debt for some area right-wing plot to seize the national agenda for a narrow interest group led, it is perceived, by big business and high finance. For many, government expenditure secures the dream of a safe, prosperous, healthy, educated and productive people, protected by a social safety net in every part of our land from sea to sea to sea. These dreams stand at risk and the hard efficiency called for by those who would reduce the debt supplants the caring dimension in our society that is the hallmark of Canadian life. The people are frightened that they will confront the insecurity of our forebearers, such as my grandfather who lived and worked on a prosperous farm in Muskoka, but had to kill an animal a day, for months, in order to keep his wife, my grandmother, in a Toronto hospital recovering from a stroke and brought him close to financial ruin in the caring.

The Minister of Finance is caught between two poles: that of folly and that of dreams. The choices he makes may be the defining moment for this government and could well affect the integrity of Canada, both economically and politically.

But the Minister also has a divine significance. When speaking with an active 72-year-old lawyer, he told me that he intended to continue working until the entire national debt was paid off. With a twinkle in his eye and hope in his heart, he said, "You see, that is my guarantee of immortality."

Paul Martin is Minister of Finance and Minister responsible for the Federal Office of Regional Development--Quebec. Prior to his first election in 1988 as an M.P. for the federal riding of LaSalle-Emard, he was Chairman and Chief Executive Officer of Canada Steamship Lines and a director of seven major Canadian companies. He studied philosophy and law, worked for the European coal and steel community, was a merchant seaman on the McKenzie River, the high Arctic and on the Atlantic and was a navvy in the Alberta oil fields. Politically, Mr. Martin played a key role in the development of the much-praised Red Book, the policy platform which played such an important role in the election campaign of 1993. It is my personal pleasure to welcome the Minister of Finance for Canada, Paul Martin.

Paul Martin

When the government submitted its budget eight months ago, we made a commitment to Canadians to open up the '; process of budget making permanently.

Last week, we put forward two documents to serve as the basis for the debate that is now underway. The first contained a strategy to secure jobs from economic growth. The second was an update on the state of--our economy. Naturally, perhaps, attention has focussed more on the second presentation, because that is where the bottom-line numbers are. That's unfortunate, because the first presentation--the framework for government action on the economy--deserves at least equal attention. The second presentation dealt with the deficit and the need to break its back before the downturn comes. The first presentation dealt with the need to make sure that for Canada the next downturn is as short and as shallow as it possibly can be.

Our new framework makes the point that for too long, governments in Canada have been drifting--postponing action, pushing the day of hard decision ahead. We've been pretending that the status quo can be sustained. We've been hoping that luck will shield us from the winds of change. The fact is, the world economy has been transformed-and no matter how strong the current recovery, the need for structural change in Canada has been met. The needs of Canadians have evolved, but our governments have not.

We talk glibly about a sea-change in the economy. I want to talk to you about the need for a sea-change in government. Our country is suffering from several deficits. We have a fiscal deficit. We have a deficit in innovation. We 'must address these head-on, together, and now.

Our new framework for economic policy will determine what, as a government, we will do in the future--and what we won't. It is a test that we will apply to every economic programme of the government, new or old. It is a test that asks: Will this make us a more productive country or not?

Growing economies produce jobs. Economies that aren't growing don't produce jobs. And the key to growth is productivity--it's as simple as that! Productivity is not some academic abstraction. Productivity is about how well ideas, workers, resources, technology and capital are brought together in a country's economy. Productivity is about ingenuity, about institutional change, about paying attention to the common sense of workers. History--before and after 1973--proves that incomes stagnate when productivity stagnates. It proves that unemployment goes up when productivity goes down. In short, productivity is about jobs, and so is this government.

In our document, we describe what we believe to be the steps toward greater productivity. They are: better skills for our work force, new gateways for trade and a recognition that ideas and innovation are the world's only true hard currency. And then there is a fourth ingredient, one I want to spend time on today--the need for constant evolution of the nation's institutions. And if this remark is true, then surely it is true for the largest institution of allthe government of Canada.

One of the reasons we have an under-performing economy is that we have had an under-performing government. This is not a partisan statement. No political party is immune from its consequences. The fact is, for too long, governments have blocked change, not facilitated it.

I believe in a positive role for government but I believe as well that government must evolve in its operations as fast and as deeply as do the shifting frontiers of the world's economic activity. If we are to preserve the credibility of government, our task today must be to focus as much on what the state should not do as on what it should do.

Our New Framework for Economic Policy addresses that fundamental issue. What should government not do? It should not put up barriers to business adjusting to change. It should not put up barriers to individuals adjusting either. The things that a government does must be the things that only it can do really well.

Why? Because for too long we have let entrenched government programmes define the nation's priorities. It is high time that priorities defined programmes. Our challenge is to not to focus only on the size of budget we need. It is also to focus on the type of government we want.

What does that mean in real terms? It means ridding the country of counter-productive regulations. It means changing our entire approach to business subsidies that too often protect the past rather than promote the future. It means no new mega-projects. It means commercialising and privatising current activities. It means improving social programmes that too often let Canadians down rather than lift them up.

For example, people ask what's driving Lloyd Axworthy's agenda--social reform or fiscal requirements? The answer is "both." Of course the main thrust is to improve our social programmes--to bring them up-to-date, to give people today's skills for today's jobs, to enable them to make the transition from dependence to independence.

But there is no way around the fundamental fact that if a country is to continue to care for its citizens, it must be a country that can pay its bills. And that brings me to the second of last week's two presentations--our fiscal dilemma. Now I am not going to go into the long litany describing the clear and present danger that the debt has become. You all know the situation as well as I. You'll also be happy to know that I've left the charts and graphs at home.

But let me provide you with the government's perspective. First, let it be clear that we are not focussing on the debt in order to enable ourselves to forget about jobs. If deficits led to jobs, this country would have zero unemployment today.

There are people who say we can grow out of our bind. I only wish we could. But we can't. This is not economic ideology. As long as the interest rate on the debt is higher than the growth in the economy, it is a mathematical reality. Growth helps--but it's not enough. Today's recovery alone won't resolve the deficit. It simply provides us with the opportunity to act without damaging the economy's capacity to create jobs. And we must not waste this opportunity. It is not responsible policy to forever subject this country to the whims of lenders abroad, putting our economic sovereignty at risk. It is not responsible policy to ask Canadian taxpayers to pay forever for past consumption--and to forego the chance to invest in future potential. And it is not responsible public policy to engage in benign neglect--bankrupting our children, not safeguarding their birthright.

Our policy is to bring responsibility back to the public finances of Canada. The impact of interest payments on our debt has to be driven home. Last year, we made some very hard decisions--closing military bases, changing UI, cutting back government operations. And what happened? A single swing in interest rates set us back billions of dollars. But it isn't only the increases in interest rates that hit us. This year alone, 1994-95, $3 billion in new burden came from the cold calculus of compound interest. That's because we are borrowing to pay the interest on the debt.

Put that in perspective. This year's $3 billion in compound interest is fully half of what the federal government spends on agriculture. And it's more than the cost of cash transfers to the provinces to fund post-secondary education.

What are we going to do about this? Allow me to quote words from the Red Book: "Any responsible government must have as a goal the elimination of the deficit." From the beginning, in the Red Book we were clear about the path we were on. We said our ultimate goal was a balanced budget--and it clearly is. We said we would set an interim deficit target--and we will.

Getting to our interim target is both an essential requirement and a substantial achievement. It is essential because for years governments have missed their targets and as deficits piled up, their credibility crumbled.

Medium-term targets--no matter how absolute--allow governments to postpone the day of decision. Short-term targets, no matter how interim, keep everybody's feet to the fire. Meeting one's targets matters. The confidence hasn't been there. Our commitment is to return that credibility, that confidence, to our finances.

But the three per cent target is about more than credibility. It is about turning the corner. The three-per-cent target hasn't been met since 1974-75--two decades ago. It hasn't been met by any government, of any party, including my own. The three-per-cent target means that we will cut the deficit in half as a portion of the economy--down from six per cent in only three years.

But most important, at three per cent, under normal circumstances our economy will be growing faster than the debt. We will finally be in a position to control it, rather than have it control us.

This is not trivial. When we are through getting to our target, this government will have engaged in the largest set of fiscal actions in Canadian history. They will be dramatic. They will be difficult. But they will be done.

Now people have asked: Why are we consulting? Why is it so important to open up the budget process? Why aren't we acting?

The answer is that the next budget is going to involve the biggest change in programmes that Canadians have ever seen. It is important to have the input of Canadians on what those changes should be. The budget decisions will come in the new year--that is, they should. The budget discussions must take place now. Government has the last word. That is why we believe that Canadians should have the first say. For decades, Ottawa has been dictating how it will tax. Now is the time for Canadians to tell Ottawa how it should spend.

There is tremendous responsibility on all of our shoulders today to make the opening up of the budget process work, so that in the end, we make the right choices for the right reasons. What we need in this consultation process are people prepared to come together to say "yes"--not people practised in only saying "no."

If Canada can't afford the old style of government, cannot we afford the old style of debate. We can't afford the usual chorus of "Don't cut me" from special interest groups. We cannot deal with the question of who should pick up the burden they refuse to share. We can't afford to deal with those who would say "Don't cut now," because the fact is that if we don't cut now when the economy is strong, we will have to cut more when the economy is weak. Nor, on the other hand, can we afford people saying "Cut more now" without saying precisely who or what they would cut.

This opening up of the process is essential. Because although there is much support today for the elimination of the deficit, there is less understanding of what the consequences of the necessary action will be. Canadians must understand the nature of the trade-offs that have to be made. Because the devil is in the detail. Yet it is detailed decisions that we must make.

Let me point to an example. The C.D. Howe Institute has come forward with an extremely constructive contribution to this debate. It is a model of serious purpose and professional work. I would hope others will follow their example. But even here the difficulty we face is clear. Because in their study, the Howe Institute says we should go beyond the three per cent yet becomes vague on the impact of that reduction and the detail of the measures it says should be put in place to get us there.

That is important, because the challenge today is not choosing a target. The challenge is showing how to get there. Over the next couple of months, I would hope that other organisations will emulate the constructive approach of the Howe--and that the Howe itself will be able to flesh out its recent report.

A final comment. Someone said to me the other day that the two presentations of last week gave signs of a shift to the right by the government. That is pretty simplistic. No one I know in the government went to Ottawa bent on dismantling Canada's social programmes. We went there to help build a better country--a Canada of growth and jobs.

And the news on that front is encouraging. The recovery is strong. Growth is up. Employment is up. Exports are up. The productivity numbers are superb. Inflation remains under control.

The opportunity for the Canadian economy has rarely been brighter. But there is one great storm cloud on the horizon. It is debt. It is a storm cloud that has been building for decades. It is a storm cloud that no government has had the will to address. We have too much to lose by letting it persist. And we have so much to gain by addressing it now. We are going to address it. I don't know if this is our last chance, as some have said--but I do know that this is our best chance.

There are 1.4 million Canadians who want jobs. To provide those jobs, this country needs firm decisions. It needs clear action. It will get both. This is neither left nor right. It is dealing with the problems and enjoying the opportunities before us. That is the course we are on--because that is the course Canada deserves.

The appreciation of the meeting was expressed by The Hon. David Peterson, P.C., Q.C., Director, The Canadian Club of Toronto and Partner, Cassels, Brock & Blackwell.