The Budget

Joyce Kofman:

It is indeed overwhelming to see so many of you here today to welcome the Minister of Finance. The question in my mind is--are you here to praise the budget or to bury it?

Mr. Wilson needs little introduction. His whereabouts and thoughts about are as much a part of the daily press as the weather reports. For the past two weeks he has been headline news. In fact, he hit the headlines prematurely and, as I understand it, wasn't able to wear his new shoes for the presentation of his budget to Parliament. A custom possibly well broken for I doubt that he will be able to afford new ones next year. As a key figure in our government, he is highly respected both nationally and internationally. He is an able member of Parliament, having been in the House since 1979 and been Minister of Finance since 1984 when the Conservative Party swept into power. He has spoken to our Clubs annually since then, following a tradition established 17 years ago by Donald Fleming.

Surely there are few more thankless challenges than the one Mr. Wilson has had to face, that of not only putting the brakes on our escalating debt, but of reducing it as well. Mr. Wilson, you have dealt many of us a bitter pill let us hear your optimistic prognosis. When and how will we be cured of our ills?

Michael Wilson:

Thank you for the opportunity once again to address the members of the Canadian and Empire Clubs.

I want to talk today about the government's recent budget. This budget, more than most, is crucial for Canada's future. The reason is straightforward. One far-reaching problem stands between Canadian and the better future we want for ourselves and for our children. The problem is our large and growing public debt. The budget is about getting this debt under control. It is about what we must do--as a government and as a people--to maintain social and other programs and the high standard of living that Canadians want. It's about what we must do to respond to the challenges and opportunities of a changing world, to assert our sovereignty as a confident and mature nation, and to meet our new and continuing priorities as a people.

Canadians elected the Progressive Conservative government to provide strong economic and fiscal management. They elected us to provide leadership in responding to changing circumstances. And we are meeting that responsibility with this budget, as we have with previous ones. The world has not stood still. Indeed, the problem of our large and growing public debt requires a renewed effort to get it under control. The budget sets out our approach.

For a moment, let me outline how the debt problem developed. Only 20 years ago, Canada had an annual surplus, and our total debt after an entire century of Confederation was only $18 billion. The cost of servicing our debt was well within our means. That conservative approach to our finances was the traditional Canadian way. Soon thereafter, the problem began with yearly deficits. The deficits grew in size year after year.

By 1984, the $18 billion debt had risen to nearly $200 billion. And the annual deficit was more than $38 billion. By then, Canada had built into its public finances a self-propelling force that threatened to undermine our valued reputation for fiscal prudence and responsibility. Today, in spite of regular reductions in our annual deficits, the debt is over $320 billion and rising by more than $80 million a day.

Behind the growth of these numbers was a particular, disturbing pattern. In the 15 years prior to 1984, government spending grew rapidly, from about 17 percent of the national income to well over 24 percent. During the same 15 years, revenues fell from 17 percent of national income to just under 16 percent. While tax rates increased, revenues were adversely affected by a narrowing of the tax base as a result of the introduction of a number of tax breaks and preferences as well as by the 1981-82 recession.

This widening gap between expenditures and revenues translated into snowballing deficits and today's debt problem. Put simply, we as Canadians were not paying our way for the services we were receiving from government. The reality of a debt that is large and growing is that it places a nation on a treadmill. Each year, added effort is required from Canadians to produce new revenues that merely go to pay the interest on a growing debt. Let's be clear about what it means if we continue, year after year, government after government, to borrow and borrow just to pay debt interest. We would be borrowing from our children, not paying our own bills. It's easy to borrow from future generations because they have no say in the matter. They have no vote. Yet it is they who would have to live with the consequences if we did not act. The question all Canadians must ask themselves is this: should this enormous debt be our legacy to future generations? The government's response, and the budget's message, is a resounding "No".

My budget builds on the actions that we have taken to control the debt since we came to office. During the past fourand-a-half years, we have achieved a much better balance between expenditures and revenues. To do this, we eliminated programs that had outlived their usefulness. We cut waste and improved the efficiency of government. Total spending on government programs dropped significantly as a proportion of national income. We have held the growth in program spending to 3.5 percent per annum, less than the rate of inflation. We broadened the tax base by eliminating tax breaks for business and high-income individuals. And, yes, we increased tax revenues. We reduced the annual deficit so that it has dropped sharply as a proportion of national income. As a result, in the year ended last March 31, the deficit was $28.9 billion, almost nine-and-a-half billion dollars below the level of 1984-85.

Our program of fiscal action has been carried out as part of a comprehensive, long-range plan first set out in November 1984. Its purpose is to build the economic strength essential in a fast-changing and increasingly competitive world. Starting in 1984, we built a strong foundation on which Canadians could achieve their economic potential. We modernized the regulatory environment for business. We reformed the federal income tax system. We negotiated the Canada-US. Free Trade Agreement. We encouraged research and development and improved job training programs. Reducing the deficit is an integral part of this broader economic program. Together with responsible fiscal actions, our economic measures created a climate in which Canadians could face the economic challenge of an increasingly competitive world. And the record shows just how well Canadians responded.

Since 1984, Canadians have created one-and-a-half million new jobs and our economy has expanded faster than most other industrial nations. We made this progress together as a government and as a nation because we made tough choices and took strong actions to deal with our fiscal and economic problems. But that progress is at risk because of rising inflationary pressures here and in other countries. In response to these pressures, short-term interest rates have risen. These in turn are driving up the cost of paying the interest on the public debt. Let me put that in perspective: This year, just to pay interest on the debt, it will take all the personal income tax paid by Canadians from January to mid-October.

I know that people right across Canada are frustrated by high interest rates. Some suggest that interest rates should be lowered by decree. But interest rates do not rise in isolation from other economic forces and they can't be made to fall that way either. To try to deal with the symptoms of high interest rates rather than the fundamental causes would be self-defeating and ultimately very painful. Printing money has never brought lower inflation. High inflation always leads to higher interest rates.

We mustn't forget the economic problems of the early 1980's: the shattering of economic confidence; the collapse of economic growth and employment in every region of Canada; and above all, the enormous damage inflicted on the lives of millions of Canadians.

If we did not act now, we would face the growing danger of a vicious circle of higher inflation and even higher interest rates that could lead to a severe recession.

The important point is, we are acting. My budget is designed to avoid a recession. We have made choices, difficult choices. We have worked to ensure that the total package of budget measures is balanced across sectors and regions, placing the greater burden on those who are better able to carry it. The reductions in program spending announced in the budget will have a significant impact on our efforts to control the public debt. When fully implemented, these spending reductions will total about $2.5 billion a year.

Some commentators have said we didn't go far enough in cutting spending. But let's look at the facts.

In this budget, we made major reductions in spending on defence, Official Development Assistance, business subsidies and other transfers, payments to Crown corporations, and the operations of government. These reductions, together with previous restraint measures taken by this government, affect virtually all government departments. None was easy. Many have a very real impact. For that reason, the reductions should be a pretty clear indication to Canadians that we do have a very serious debt problem that required serious action.

As a result of spending reductions in this budget and earlier budgets, program spending has declined from 19.5 percent of GDP five years ago, to 16 percent this year as this budget takes effect. By 1993-94, it will fall further to just over 15 percent, the lowest level in a quarter of a century. Think carefully about those numbers when you are assessing the scope for spending reductions. Let me put it another way: if we had maintained program spending this year at the same share of the economy as it was five years ago, spending would be $22 billion higher. Let me give you another measure of spending control. Over the past four years we reduced the costs of running the government--in effect our overhead--by $1.3 billion in absolute terms. We cut over 10,000 positions from the public service, reducing it to the size it effectively was in 1973. By 1993-94 the level of spending on the operations of government will be 25 percent lower in real terms that it was in 198485. This is record many businesses would be proud to call their own.

In addition to spending reductions, increased revenues through higher taxes are also essential to control the public debt. The revenue measures in the budget are designed to weigh more heavily on taxpayers with the means to contribute. They are balanced among the major revenue sources, including the corporate sector, personal income tax, and sales and excise taxes. Taken together, the spending and revenue measures in the budget will amount to more than $5 billion this year and $9 billion next year. This year they will almost offset the rise in interest costs and leave a deficit of $30.5 billion next year. With the budget measures, the deficit is projected to drop to $28 billion next year.

The debt-to-GDP ratio will stabilize next year. The debt will stop growing faster than the economy. This will represent an important achievement. After that, the faster growth of the economy will reinforce our efforts to control the debt and reduce the interest burden. The result is that in five years the deficit will be cut in half. But on the basis of how budgets are prepared in the United Kingdom and the United States, we would have a balanced budget. In other words, current revenues would be sufficient to finance current consumption and service the debt. We would then have a zero cash requirement. This would mean that we would no longer be passing on the bill for our current consumption to future generations. So I want to take issue with those who, in one moment, criticize us for allowing the debt to grow and, in the next breath, criticize our efforts to reduce the annual deficit. They are simply distorting the facts. The only way to stop the debt from growing is to have a balanced budget. So, to those who say our debt is too high, I say you owe Canadians a realistic package of alternative policies to reduce the deficit.

Ladies and gentlemen, this budget has a clear economic objective. It will help reduce inflationary pressures and provide the Bank of Canada with the scope to reduce interest rates more quickly than would otherwise be the case. Let me repeat, the budget will help us avoid a recession--by helping to moderate demand and keeping the economy on a course of sustainable growth. A healthy economy is necessary to achieve our economic potential in the years ahead. It will provide more and better jobs and the ability to meet the social and cultural priorities of Canadians.

For the longer term, we will continue to build the foundation for economic progress by moving forward with a balanced agenda of fiscal and economic action. We will move ahead with many important economic initiatives, such as the final stage of regulatory reform of the financial sector, privatization of suitable Crown corporations, and implementation of our new labour force development strategy.

In this regard, the budget also reaffirmed our plan to -replace the existing, outmoded federal sales tax with a new and modern sales tax system. The new Goods and Services Tax--or GST--is a key element of our strategy to safeguard essential programs, strengthen the economy, improve our competitiveness, and achieve revenue stability. As I indicated in the budget, the Goods and Services Tax will replace the existing federal sales tax on January 1, 1991. It will be imposed at a rate of 9 percent on a very broad base, including the vast majority of goods and services consumed in Canada. Basic groceries, prescription drugs, and medical devices will not be taxed. Residential rents, day care, legal aid and most health, dental and educational services will be tax-exempt.

Sales tax reform will make the system fairer by introducing a new Goods and Services Tax Credit. The GST Credit will substantially increase the current sales tax credit. It will more than protect low-income earners. The government's goal is to assure that families earning less that $30,000 per year are better off as a result of sales tax reform.

An important goal of comprehensive sales tax reform is to ensure that the GST is as simple as possible for businesses to comply with. Special measures will be adopted to minimize the compliance burden for small businesses in particular, including raising the small traders' exemption threshold, reducing the frequency of tax calculation, introducing simplified accounting schemes, and compensating small businesses for collecting the tax. We will be consulting with the small business sector in elaborating these and other simplifying measures.

In summary, sales tax reform will provide a more stable foundation on which the government can maintain vital public services and effectively manage the problem of Canada's debt. It will bring an overall improvement in the fairness of the tax system. It will make federal sales taxation more visible to the consumer. And it will result in major gains in economic output in the range of $9 billion a year--gains that will be felt in all sectors of the economy and in all regions of Canada.

I said at the outset that this budget is about Canada's future. As Canadians, we want a Canada that is able to protect and strengthen the fundamental values that define us as a nation. Let me paraphrase the recent Speech from the Throne. We want: a Canada which is caring and compassionate, with the capacity to maintain the social and cultural programs and other important public services that Canadians need;

- a Canada, economically strong and fully competitive with the world's trading nations, that continues to create good jobs and opportunities for all its people into the 1990's and beyond;

- a Canada, progressive and adaptable, able to meet priorities such as skills training and the protection of our environment;

- in short, a Canada that can guarantee a rising standard of living and a better quality of life to pass on to the next generation.

That is our duty as a government. That is our obligation as responsible managers. That is surely our goal as Canadians. This budget helps us achieve that goal. The combination of actions set out in the budget will help us safeguard the kind of Canada we want to leave to our children and our grandchildren.

The appreciation of the meeting was expressed by Sarah Band, President, The Empire Club of Canada.

Sarah Band:

Madam President, Mr. Minister, Mr. and Mrs. Wilson, honoured guests. Let me first thank The Canadian Club for the wisdom it has shown today in inviting a great Canadian to speak to us. No other person in our country has demonstrated the care for his country and willingness to work for it that Michael Wilson has. Let me express my appreciation for the way he has tried to make our country better for all of us. Thank you for that Michael.

I could stop there, however the relationship that I've had with Michael Wilson goes a lot further than that, and I welcome this opportunity today to publicly thank him. My admiration for our speaker is totally apparent, partially because I share a very small responsibility and a very large degree of pride in getting him out of the Bay Street closet and into the Ottawa Cabinet.

When I was first introduced to Michael it was to encourage him to enter politics. When I called I was told he was at home with a strained back. My immediate reaction was to identify the prospective candidate as a stockbroker with a weak back. Today he has shown us that he has a very strong back. He rose from his bed of pain and swept to victory. Michael Wilson is now the longest serving Finance Minister in Canada and, in spite of those who would insist that's because he has taken a long time to learn the job correctly, he is the first to have addressed the critical fiscal emergency in which we find ourselves today.

Today you have had the opportunity to see the Michael Wilson I know and admire. He has given us medicine that is hard to take, but with true compassion. His choice of career was made with the same concern for others that he has shown today. Michael, on behalf of The Canadian and Empire Clubs, and of course myself, please accept our sincere thanks for your contribution to Canada and for expressing your concerns so eloquently to us today.

Thank you.