The Federal Budget

Head Table Guests

Gareth Seltzer, Vice-President, Guardian Capital Inc. and a Director, The Empire Club of Canada; The Rev. Margaret Tandy, Minister, St. Timothy's Church, Agincourt; Rick Mahony, Lawyer and President, Ontario Liberal Party; James McCutcheon, Chairman, Empire Life Insurance, a Director of a number of Canadian corporations, a long-time trustee of The Toronto Hospital and a prominent Canadian business lawyer; Dolores Lawrence, President and CEO, NHI Personnel Corporation and President, African Canadian Entrepreneurs Association; Donald K. Johnson, Vice-Chairman, Nesbitt Burns; Isabel Bassett, Immediate Past President, The Canadian Club of Toronto; Alan Schwartz, Q.C., Managing Partner, Fasken Campbell Godfrey; Anthony S. Fell, Chairman and CEO, RBC Dominion Securities Inc.; Lyn McLeod, Leader of the Opposition in Ontario; Connie I. Roveto, President and CEO, United Financial Management Ltd. and a Director, The Canadian Club of Toronto; Paris Gardos, grade 12 student, Rosedale Heights Secondary School; Stephen R. LeDrew, President, Liberal Party of Canada (Ontario) and Partner, Cassels Brock & Blackwell; Anne Bender, Dean, Health Sciences, Humber College; F. Anthony Comper, President and COO, Bank of Montreal; The Hon. David Smith, P.C., Q.C., Chairman, Fraser & Beatty; Sheila Neysmith, Professor of Social Work, University of Toronto; Roger Parkinson, Publisher and CEO, The Globe and Mail; and Herbert Phillipps Jr., President, The Canadian Club of Toronto.

Introduction by John Campion

Lenin's Revolution in Canada

On April 8, 1917, Vladimir Ilich Illyanov, at 46 years old, was invited by the German High Command to board a sealed train in Zurich and to accept safe passage through Germany into Russia. War breeds revolution and the German military leaders also knew that breeding revolutions was an old and effective form of warfare.

Vladimir Ilich Illyanov had taken the pen name of Lenin in 1903. His fierce, single-minded, undemocratic and brutal will to power changed the course of the 20th century, but not all for the worse. Under the crack of Lenin's guns, his seizure of power, his suppression of opposition, he also sought a Utopia. The Russian Revolution gave to the people of the world the hope of permanent economic security and social welfare.

In Canada, the forces of discontent were powerful and evident as the First World War ended. The inflationary period of 1918 and 1919 collapsed into depression. In 1918, Easter riots occurred in Quebec over conscription, the mass demonstrations of the United Farmers of Ontario followed in May and angry resolutions were proposed at the annual convention of the Trades and Labour Congress. Agitation grew rapidly in Ontario and the western provinces. New political parties, including United Farmers of Ontario, and the National Progressive Party, mushroomed to challenge the established order.

Who would ride and control the forces of change, seeking social justice, public ownership of utilities, taxes on business profits and personal incomes and labour and social security? Would it be Meighen's Conservatives? Crerar's Progressives? or King's Liberals?

In the end, King's Liberals led the way to political ascendancy on policies of social justice, including a new system of unemployment, sickness and old age security.

In the seven decades that followed, changes wrought by the forces of Keynsian economics, "New Deal" enthusiasm for government stimulus, central control of the economy during war, the need to respond to the transportation and communication revolutions of this century, and the requests for evermore social justice, stimulated successive Canadian governments to new participation in Canadian life.

That participation was and remains a proud heritage. Our national and provincial policies, institutions, social welfare and civil service are the envy of the world.

But as we all know, this success could not be sustained in its present form as our governments fell into further and further crippling debt. Governments around the world are fiscal victims of the legitimate public desire for a Utopia.

As the century is turning from the 20th to the 21st, Canada faces an external revolution from faceless money managers around the world. Nothing less than fundamental change of the role of government and society built up over the last 70 years was required. Canada's revolution of the 1990s is upon us.

Paul Martin is the man who has guided Canadians to the first all-important steps leading to fiscal stability and world-wide monetary respect. At the same time, he has maintained the core of our caring society and its policies that are based on social justice and equity. Paul Martin is known to many of you as a lawyer, business man and now Finance Minister. Please welcome him.

Paul Martin

Thank you very much, John.

Leader of the Liberal Party of Ontario, members of the head table, ladies and gentlemen, Liberals (who are probably not sure that they want to be seen with me in public and certainly are wondering what they are doing at the same head table with me), and the publisher of The Globe and Mail, I have to tell you that it is with a considerable amount of trepidation and unease that I find myself here this afternoon. One of the things that would occur over the course of the last year, as I would wake up at 3 o'clock in the morning, trying to figure out where each and every one of you might have squirrelled away a couple of extra pennies--I want you to know that I will lay awake next year doing the same thing--is that I would turn on the television set. In Ottawa these particular events are televised many times, so I probably watched every speech and every event. It is very clear that these events are simply a means of inviting certain speakers to be here as foils for the introductions by John Campion. And so for me to come here and not to be able to quote Lenin, and not to be able to talk about what happened in 1916 or any of the things that happened when John was young, obviously makes it very difficult for me to perform my reasonably dull recitation of numbers. And for that reason I will not make a speech, or too long a speech in any event, because I would very very much like to open it up and have a dialogue with you. Certainly one of the reasons that I am here is to explain the budget, but at the same time I think that I would like to hear from you as to what you think about the budget and what you think ought to be in the next one. In about two to three weeks we will begin to work on the next one and I have got to tell you that advice that would come in the next month would be a lot more helpful than the advice that normally comes when the document is on its way to the printer.

So within that context, let me describe the budget as we brought it down. The background is very clear. The;opportunities before us as a country have rarely been greater. Our economy is breaking new records. We are {breaking new ground as seldom before with respect to our job creation, business confidence, the balance of payments on exports, and on economic growth. You saw the numbers that came out yesterday. Real GDP grew four and a half per cent in 1994. We led the G-7 and we are in all probability going to lead the G-7 again next year. On productivity, our unit labour cost fell by 1.3 per cent in 1994. That is the first annual decline in over 30 years. In fact, by the fourth quarter of '94 our competitiveness with the United States was at its best level in over 40 years. Our inflation remains at one of the lowest levels of almost any industrial country and the targets that we have set with the Bank of Canada, I can assure you, will enable us to stay that way. And these last two numbers are very important because, in fact, productivity and our inflation numbers will ensure that whenever the next downturn comes Canada will ride through that downturn far better than the vast majority of our competitors outside our frontiers.

Now, on that basis, things look pretty good. There are, however, two clouds on the horizon. The first is the uncertainty that some would create over the future of Quebec. As a Quebecker, let me tell you unequivocally that there should be no doubt that the challenge that is being thrown up will be met. The Quebeckers do not want their country to be split apart. The second cloud is the debt and the deficit. Dealing with that challenge was the purpose of our budget.

So let me get right to it. We estimate in the fiscal year that is just ending that the underlying deficit will come in at about $35.3 billion. That is $4.4 billion below our target of $39.7 billion. This is the first time in a long time that a Canadian government has actually delivered more than it promised and I would really quite like to spend a lot of time talking to you about that. But I have learned in politics that it is not what you did yesterday that counts. It's what you're going to do tomorrow that is of interest.

So let us look ahead. On the way to balancing the books, we have two immediate targets that we have to hit: $32.7 billion in 1995-1996 and three per cent of GDP or $24.3 billion in 1996-1997. As all of us in this room have known for quite some time, because of the tremendous increase in interest rates, we will not reach those targets without further action. And it is our estimate that we could face shortfalls of $5 billion from that target in 1995-1996 and $10.6 billion the year after. Those gaps simply have to be closed, and with our budget we are closing them.

We will hit our targets in both years, but what is even of greater importance is that the downward track that is being established by the actions taken in this budget will continue in the years thereafter. Over the next two fiscal years, the budget delivers cumulative savings of $15.6 billion, and spending cuts account for $13.4 billion of that. It delivers cumulative savings of $29 billion over the next three years, of which cuts represent $25.3 billion. This is the largest set of actions in any Canadian budget since demobilisation after World War II. (Maybe, John, given your extensive look into history, you could tell us what happened in 1493?)

Over the next three years the budget delivers seven dollars of spending cuts for every one dollar of new tax revenue. For the second year in a row, there is no increase in personal income tax, although as has been pointed to me by a couple of lawyers and some accountants here, there was a bit of suffering in that area. (But we had a choice. It was either the lawyers or it was the dentists and I think I'm going to have to go to a dentist before I'm ever going to have to go to a lawyer, I hope.) By 1996-1997, we will have reduced programme spending from $120 billion in 1993-1994 to under $108 billion, a decline of 10 per cent. Relative to the size of our economy, programme spending will have fallen to 13 per cent in that year and that is the lowest level since 1951. A prospect that is of even greater importance, as far as we are concerned, is that by 1996-1997 our financial requirements (that is what we actually have to borrow from the market, and that is in fact the gauge by which most countries calculate their deficits) will be down from $30 billion last year to $13.7 billion, or 1.7 per cent of gross domestic product. Now that percentage is lower than what is projected for the United States, and lower than what is projected for Germany and Japan. In fact, it is lower than what is projected for the national governments of every other G-7 country. And more importantly, in that same year the debt will no longer be growing faster than the economy. The debt-to-GDP ratio will have begun to decline and I can emphasise more strongly that we are absolutely committed to keeping this ratio on a permanent downward track.

We face an historic challenge. We believe we have provided an historic response. Our economic assumptions are more cautious than those of most private sector forecasters and once again we are backing those assumptions up with very sizable contingency reserves--$2.5 billion for 1995-1996, and $3 billion the year after. And I would ask you to consider the implications of these cautious assumptions and these reserves. If interest rates go up next year by almost 1.5 percentage points more than our already prudent assumption, our contingency reserve will fully protect our fiscal position. But if we do not need that reserve, it will not be spent. It will go to reducing the deficit even further. That is what happened this year and, because of our assumptions, I don't think that one should be unduly surprised if in fact it happened over the course of the next two years.

There is a third point. If interest rates and income growth conform to the average private sector forecast, which is more optimistic than our forecasts, the deficit in 1996-1997 could well be brought down below $19 billion, some $5.5 billion less than our budget projects. We have always said that our targets were the least that we would do, not the best that we could do. We have also said that the three-per-cent interim target was a station on the way, not our ultimate destination. Canadians want more than temporary fiscal remission; they want full fiscal health. So we will continue to set short-term deficit goals with rolling, two-year targets, until the deficit is erased. They are the surest way to get to zero. They are the most effective spending control that anyone can impose on a government, because they are public, they keep our feet to the fire, they make it impossible (and we may get into this in a discussion period) to postpone needed action and they prevent fanciful forecasts.

Now our budget demonstrates that we will hit our targets, but to be quite honest, this budget is about a lot more than simply hitting a target. It is also about how these targets are to be achieved. In fact, as far as we are concerned, the budget is about redesigning the role and the structure of government spending. In fact, it is about redefining the role of the federal state itself. Structural change is absolutely essential. Our economy has changed, but the role of government in it has not. The current structure of spending can no longer be afforded today and it cannot be sustained tomorrow. If our purpose is to get the economy right, then the best thing that we can do as a country is to get government right. We believe that this budget has certainly made a very strong start in that direction. It is this reform that is going to ensure that we will have durable financial progress. That is in fact the main achievement, we hope, of this budget.

Now you may ask how have we done that? Well, we did it by examining every activity of government, from top to bottom. We applied a very clear perspective on the role of government in the economy, what it should do and what it should not do.

What should it do? Well, essentially, it should do what only government can do best and it should leave the rest for those who can do better, whether they be in business, whether they be in labour or whether they be in the voluntary sector. For example total government spending on business subsidies will decline from $3.8 billion this year to $1.5 billion by 1997-1998. The remaining support will be targetted on the key engines of economic growth--international trade, science and technology, and small- and medium-size business. We are ending or substantially reducing most transportation subsidises, the WGTA (the Western Grain Transportation Act), and the Atlantic freight subsidies. At the regional agencies, the era of handouts by government is being ended. We are introducing repayable loans that will support the needs of small- and medium-size business. We are going to privatise and commercialise government operations, whether they be the CN, Petro-Canada or the air navigation system. Our view is quite straightforward. If government doesn't need to run something, then it shouldn't, and in the future it won't.

The results of this reform are reflected in dramatic reductions in spending by many government departments. While the Minister of Finance presents the budget, it is individual cabinet ministers who have had to put together the plans to carry this through. We all understand that no minister of finance can act if he doesn't have the full support of his prime minister. But neither can he act if his colleagues around the cabinet table are not prepared to narrow the mandates of their departments and, in fact, put these cuts into effect. And they have done so. Over the next three years, departmental spending will be cut by 19 per cent. This is not what governments normally do, which is to call a slowdown in the increase of spending. These are real cuts in real dollars.

We're also setting in motion substantial reform in three major areas of government spending--unemployment insurance, transfers to the provinces and the support and protection for Canada's seniors. The end result of the unemployment insurance reform will be a programme that does a much better job for our workers, one that allows them to make the transition from passive assistance to active assistance, from dependence to independence. It will effectively lead to lower and to more stable premium rates. The budget reforms the system of transfers to the provinces, making it more affordable and more effective. Anybody who has been in government at either level understands that the cost-sharing approach of the past limits the ability and the flexibility of the provinces to innovate and it increases costs at both levels. Therefore we are combining the major three transfers--health, education and the Canada Assistance Plan--into a single block transfer. We could not leave the funding for those transfers alone. They constitute almost 25 per cent of our spending, and therefore, compared to 1994-1995 the transfers are being reduced by $1.6 billion in 1996-1997, and by $3.1 billion by 1997-1998.

Now, as some of you know, there has been some outrage from some of the provinces over this rather modest effort of ours. I'm not sure what I should say here, except that six provinces have made it very clear to us that they are being asked to bear the majority of the burden. Six provinces have now told us that combined they are carrying 217 per cent of the burden. I am beginning to understand why we have had some problems with the nation's finances.

But there is something that I would like to say further on the reforms here, especially in Ontario. As I saw in a press announcement, Mr. Laughren said that in fact the cuts to Ontario are absorbable, and that they do represent under two per cent of the provincial revenues. So I was glad to see that. I am not surprised that Mr. Laughren would say that, because it has always been my experience that finance ministers are by far the most rational of any members of the cabinet in any government. But when we met with the provinces, what they essentially said to us was, "Look, we know you're going to have to cut, and you're going to have to cut in terms of the transfers if you are going to get your own act together. It's very important to us, as provinces, that you get your act together, because you're a tremendous burden on our own financing requirements." And what they said to us, essentially, in the meetings that we've had is, "We want no surprises." Well, there aren't any. We have given them a year's notice. The second thing they said was, "Hit yourself first," and we have. And then they said to us, "Make sure you hit yourself harder than you hit us," and I can tell you again we have hit ourselves harder than anyone else.

We've also built in tremendous flexibility, so that the provinces can innovate in the design of their programmes. But it is also important to understand that that flexibility doesn't mean a free-for-all. The conditions of the Canada Health Act will be maintained. And in addition, we will maintain the existing principle that the provinces must provide social assistance to applicants without minimum residency requirements. And at the same time, Lloyd Axworthy will be sitting down with the provinces to discuss whether there shouldn't be other shared values. We are also ready for a bottom-up review with the provinces on the financing of both levels of government. We think there is an enormous amount to do together to make fiscal federalism more workable.

Then the last thing the budget does is to set in place the reform of our public pension system. A number of you will have seen the report on the CPP that came out last week, demonstrating that without massive increases in CPP premiums over the course of the next 15 years, the Fund itself will simply not be sustainable. And in the course of subsequent budgets, and in the course of negotiations with the provinces, we will be looking at the entire system of retirement and assistance in this country in order to make sure that the most vulnerable of our citizens, senior citizens, who have given so much to this country will not find themselves simply in a shortfall. And indeed we want to make sure that a lot of the people in this room, the younger generations, will be able to enjoy a healthy retirement.

Well, Mr. Chairman, I'll conclude now to open this up to discussions. But let me just say that we believe that this budget sets the country on a path to renewed fiscal health and renewed government for all Canadians. We have secured unprecedented structural reform. This should help insulate our fiscal position during downturns. It is reform that will keep our debt-to-GDP ratio on a permanent and steady decline.

But our efforts are not over. One budget does not complete fiscal health make. New targets are going to be set. Reform will continue and we are not going to let up as the next election approaches. And that is not simply an economic statement. Nor is that the statement by a minister of finance with a certain goal. That is an eminently political statement. The fact is that people who think that governments today can give up because there is an election in the way simply do not understand the overwhelming degree of national will by Canadians from coast to coast to clean up the balance sheet, to make this country sound and not pass on to the next generation the terrible legacy that we have in fact inherited and created at the present time. So it is good political sense. It is more difficult today for a politician to have his picture taken giving money than it is for him to stand up and say that he is cleaning up the national act.

So our course is clear. And the only thing that I ask of all of you is that you join with me and the other political leaders who are here, so that at some future meeting of these two clubs a minister of finance can stand up and say, "We have succeeded."

Thank you very much.

The appreciation of the meeting was expressed by Herbert Phillipps Jr., President, The Canadian Club of Toronto.