The Budget

Introduction:

It is not often that a president of The Canadian Club of Toronto has the honour of welcoming the Minister of Finance twice in a season. I believe it has happened once before, but it certainly is not a custom. However, it has become customary for the Minister to address a joint meeting of both the Canadian and Empire Clubs following the tabling of the budget in the House of Commons, a tradition begun 18 years ago by The Honourable Donald Fleming. Mr. Wilson, you have followed this tradition since you became the Minister of Finance in 1984. You spoke to us last on May 8th after a budget that got out before you were ready to let it out. This time, there were no mishaps. I can only assume that you had the GST on your side which, in this context, stands for a Good Safe Tent.

Aside from the usual run of pundit forecasts, there wasn't a leak. Perhaps the sub zero weather in Ottawa helped. Last year, you were forced to break the new shoe custom that accompanies the tabling of the budget. This year, you spurned the custom, telling us clearly that this is not the time for unnecessary expense. Frankly, new or old, not many of us would want to be in your shoes.

Jeffery Simpson, writing in the Globe and Mail last Thursday, said "Finance Minister Michael Wilson has done it. He has got just about everyone and every region mad at him . . ." Unfortunately, having to trim expenditures is no way to win a popularity contest in this country. However, to quote from a Coopers & Lybrand budget analysis, it seems that the real question is one of trust combined with good luck. We are grateful that a man of your integrity and intelligence is trying his utmost to meet the challenge. We welcome to the platform The Honourable Michael Wilson, Minister of Finance.

Michael Wilson:

I welcome the opportunity to be with you today. It is now something of a' tradition for me to appear at this podium shortly after bringing down a budget in Ottawa, and I am pleased to do so again.

Last week I presented my sixth budget as Minister of Finance. It is a tough budget, tough because it calls for some serious belt-tightening in federal programs and services, tough because it also calls on the provinces to do their part. But I believe it does so in a way that is sensitive to the circumstances of individual Canadians as well as the relative financial strength of the provincial governments.

No one likes hearing that they will have to do with less. So, in a purely conventional sense, it was not a good news budget. But that is not the whole story, or even the most important story, of the budget. Most people, when they tighten their belts, also instinctively straighten their backs, and in this sense it is a good news budget.

It declares in no uncertain terms that, as a government and as a people, we are straightening our backs. We are taking hard but unavoidable decisions to get our financial house in order. We are dealing squarely with the closely-linked problems of the deficit and inflation--the two problems we must resolve if we are to build a secure and rewarding future for ourselves and our country.

No one can doubt that we are moving into a new world in the 1990s. Long-standing barriers to change are crumbling at a dazzling pace. This new world is at once more open and economically more competitive than we have ever known.

It is a world that is going to test our ingenuity and competitive abilities to the hilt. For only an innovative and expanding economy, an economy open and responsive to change, can create the growth and jobs and wealth that will make it possible for us to realize our individual and national goals.

As Canadians, we have every reason to regard our future with confidence. But 1 put it to you directly: we cannot expect to secure our future if we expect to carry into it an increasing burden of debt, and increasingly heavy interest payments on that debt.

That is why we have asked Canadians in the budget to join in a broadly-based program over the next two years to reinforce our efforts. to control government spending. We are doing so without raising taxes. This program will get us over the hurdle and keep us on track to reduce the deficit from $30.5 billion this year to $28.5 billion next year, or $26.7 billion if you exclude the start-up costs of the Goods and Services Tax. We will cut the deficit in half to $14 billion in three more years and reduce it further to $10 billion in the year after that.

This will mean that within five years the government will begin to buy back its bonds and Treasury bills. The country will be on a clear path of substantially reducing its debt.

Since November 1984 the government has pursued a coherent and comprehensive plan to build a solid foundation for Canada's economic future. That plan was designed to put Canada and Canadians in a position to meet the challenge of a changing world in a stronger and more flexible way. The plan had two main thrusts. The first is to put the government's financial affairs in order, so that we can reduce and ultimately eliminate the federal deficit. The second is to put policies in place that free the creative energies of the private sector, so that it can meet the competitive challenges and opportunities of the new world economy.

We have made substantial and clear progress in each of these areas.

In 1984, when we came to office, the federal government's spending was out of control. After 15 years of living beyond its means, the government had accumulated a national debt of $200 billion.

As a result, in a very real sense, Canada was saddled not with one deeply-ingrained federal deficit, but two.

On one hand, the government was spending $16 billion more on programs and services than it collected in revenues, and had to borrow the difference. That was the first deficit--the operating deficit.

On the other hand, the government was spending another $22 billion in interest charges on its mountain of debt, and had to borrow that, too. That was the second deficit. Together they added up to a crushing overall deficit of more than $38 billion.

Before we could begin to do anything about the second deficit, we had to tackle the operating deficit and its root causes--over-spending and eroding government revenues.

On the spending front, we looked first at the overhead costs of running the government itself--salaries, travel, equipment and'the like--to see where we could do with less. We looked carefully and we took action. We have reduced the number of public servants by more than 12,000. Today the public service is the same size as in 1973, and carrying a larger workload. The cost of running the government is less than in 1984. We have reduced the number of Crown corporation employees by 75,000, partly through privatization and partly through rationalization and by the elimination of waste and inefficiency.

We have brought the same discipline to spending on government programs and services. By 1987-88, through rigorous management and realignment of programs, we turned the first of the two deficits--the government's operating deficit--into a surplus. Today, instead of spending $16 billion more on programs than we take in, we are spending $9 billion less--a $25 billion turnaround in just five years. Put another way, if it were not for the interest we pay on the public debt, we wouldn't be talking about deficits at all. We would be in the black.

About 70 percent of this progress results from expenditure restraint. To achieve it, we have reduced program spending as a share of the economy to its lowest level in almost 20 years. Since 1984, as a result, we have slowed the annual growth of the public debt from 24 percent to less than 10 percent this year. Yet for all of this progress, the debt is still growing faster than the economy--faster than our ability to pay the rising interest charges on it.

The reason for this is what is often described as the magic of compound interest--the interest paid on interest. If you are a saver, compound interest indeed has a touch of magic to it. Money invested and left to grow at a rate of 10 percent doubles in about seven years. But if you are a debtor, the magic turns to dust: you have to keep on borrowing to pay interest on interest.

This is precisely what is happening in the case of our public debt. It has grown from $200 billion to $350 billion in five years. Fully $120 billion--or more than 80 percent--of this increase consists of the compounding interest on the original $200 billion. These stark figures help to explain why the government's deficit for this year is still $30.5 billion, despite the spending cuts and tax increases we have brought in. They also explain the urgency of breaking the vicious circle of growing debt and debt service costs.

Some critics say that we shouldn't worry about getting our deficit down any further. I don't for a minute accept this position, for several reasons. This year alone, interest payments will cost us $40 billion--equal to $1,500 for each and every Canadian. This amounts to 35 cents for every dollar the government collects in revenue--money we could otherwise use to get taxes down, maintain existing programs and meet new priorities such as environmental protection, research and development and skills training.

By reducing the deficit, we can get that 35 cents down and gain much greater control over our destiny.

Another reason is that, having turned the corner with our operating surplus, we are already a good part of the way there. Now is not the time to give up the fight. Consider, for example, how far we have come compared to other major industrial countries. In 1984, Canada's deficit, on a national accounts basis, was 6.8 percent of GDP. That was 2.4 percentage points above the Group of Seven average. Now it is down to 2.8 per cent of GDP, or 7/10ths of a percentage point above the G-7 average. On the expenditure side, our performance in reducing program expenditures is better than that of both the U.S. and Great Britain.

Achieving an operating surplus is a considerable milestone. It marks a fundamental structural change in the balance of spending and revenues. In 1991-92, we will reach another milestone when we stabilize our debt-to-GDP ratio--our debt will no longer be growing faster than the economy. We're doing well. We know we must go further. But let's not give in to the habit of denigrating our accomplishments. Let's measure up to a better Canadian tradition, and finish the job.

The government's new expenditure control plan will ensure that our operating surplus continues to grow. It must, to offset the growth of the debt. And to ease the burden that interest payments impose on our freedom of action, we must continue to deal firmly with the greatest single threat to our continued fiscal and economic progress. That is the threat of inflation.

As Canada's strong economic expansion of the last seven years has matured, demand has increasingly outstripped the economy's productive capacity. This has fuelled inflation. A slowing economy is helping to ease the strain, but underlying inflationary pressures remain too high. Only by lowering inflation can we get interest rates down, keep them down and put the economy back on the path of sustainable expansion.

The prospects for lower inflation and interest rates depend crucially on responsible price and wage behaviour. Prices have consistently been inching upward. The consumer price index (CPI) rose from 4 percent in 1988 to 5 percent last year to 5.5 percent in January. The appreciation of the Canadian dollar in 1989 restrained inflation. Without it, the CPI would have been above 6 percent.

On the wage side, federal government wage increases have been below the inflation rate and below the pace of wage increases in the private sector since 1984. In 1989, federal wage settlements averaged 4.2 percent. However, the combined settlements of other levels of the public sector averaged 5.6 percent.

I have asked my provincial colleagues to join me in a commitment to responsible restraint. I urge leaders of the business community to recognize this need as well in both price and wage policies. And 1 urge labour to do the same. Quite simply, if we try to take more out of the economy than it is capable of producing, we will all pay the price of higher inflation.

I understand the frustration that people feel about the persistence of high interest rates. I share their frustration. But hard experience makes clear what the inevitable cost of a premature easing of interest rates would be. It would lead to an increase in borrowing and new demand pressures, leading in turn to more inflation and still higher interest rates. None of us wants to relive the nightmare of the early 1980s, the loss of confidence and personal tragedy brought on by soaring interest rates and soaring inflation.

The budget will help get inflation down. Our expenditure control plan, when combined with the cost-cutting measures announced last December, will produce savings of $3 billion in the fiscal year beginning April 1 and almost $4 billion the following year. Over the next five years, the total savings will come to well over $19 billion.

This restraint will require the patience and understanding of Canadians. We are putting a cap on the growth of spending for a number of major programs and freezing spending for others.

I would like to say just a brief word on business subsidies. Since we came to office, a government priority has been to get out of the subsidy business--especially for business. The fact is that we have reduced or eliminated a wide range of business subsidies. The Shipbuilding Industry Assistance Program, the Canadian Home Improvement Program, the

Petroleum Incentives Program, VIA Rail subsidies--all have been cut out or cut back. And in last week's budget, we cut some more, including the Canadian Exploration Incentives program, the Polar 8 icebreaker and the OSLO oil sands project.

As well, we have substantially reduced business subsidies conferred through the tax system, including reducing capital cost allowance rates, eliminating non-regional investment tax credits, eliminating the inventory allowance, and phasing out the earned depletion allowance, to name only a few.

There are still subsidies we do provide--subsidies for social housing, agriculture, transportation. But in this budget we have firmly committed ourselves to a more businesslike approach to business assistance. With limited exceptions, federal assistance will now take the form of repayable loans, rather than straight grants or subsidies.

The restraint measures are tough--tough but essential to restore the deficit to its downward path and hold the line against a resurgence of inflation. Taken together, they will hold the growth of federal program spending to 3 percent next year, well below the expected rate of inflation. By 1994-95, program spending will fall to 14.2 percent of national income, its lowest rate since the late 1960s.

The deficit is a national problem. It demands a national solution, and the provincial governments must play their part. But that part should be kept in perspective. Federal cash and tax transfers to the provinces are equivalent to about a third of all federal program spending. Over the past five years, while we have been holding the growth of federal program spending to 3.6 percent, transfers to the provinces have been growing at over 6 percent. They will continue to grow--but, under our expenditure control plan, no faster on average than our own program spending. Bear in mind, as well, that this means a reduction in federal transfers amounting to less than one percent of provincial revenues.

In the case of Ontario, along with British Columbia and Alberta, a little extra effort is required. These are the three wealthiest provinces.

The transfer of payments Ontario receives will increase at 2 percent in each of the next two years, compared with 4 per cent in the Atlantic provinces, for example. 1 believe the people of Ontario will agree that the provinces which are less well off should bear a lighter part of the national debt-reduction burden. What we are doing may not be welcome, but it is fair, necessary and reasonable.

I have been concentrating on the fiscal problem which we committed ourselves to bring under control starting in 1984. That is only half of our economic policy. The other, equally important part, is the range of policies we have introduced in a co-ordinated way to improve the efficiency of the economy--our structural policy initiatives. The Canada-U.S. Free Trade Agreement, deregulation of the energy and transportation sectors, tax reform, our new Labour Market Development strategy, privatization of Crown corporations, the Goods and Services tax--all are designed to lessen the burden of government and remove obstacles to economic growth.

We will continue to privatize Crown corporations and sell investments where government ownership is no longer needed to meet public policy objectives. We have decided the time has come to sell the government's shares in PetroCanada and Telesat Canada, which will enable them to strengthen their roles in their two key sectors of the economy. The sale of these corporations will reduce the government's borrowing requirements. This in turn will reduce interest charges on the debt.

Taken together, all of these reforms will significantly increase the capacity of the Canadian economy to produce goods and services. Over the first half of the 1990s, they will raise our potential growth from an average of 2 3/4 percent annually to more than 3 1/4 percent. Over this five-year period, achieving that increase in potential growth will translate into an income gain of $2,500 for a household of four. Achieving it will mean more jobs and an improved standard of living for all Canadians.

The challenge we face, in the current testing period for the Canadian economy, is not to falter in dealing with the problems of inflation and debt. If we maintain our resolve, the prospect of lower inflation is within sight and we will have the deficit under control. By persevering, we will attain greater control over our destiny, and a greater freedom to build the Canada we want for ourselves and future generations.

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

Honoured Guests, Head Table Guests, members of The Canadian and Empire Clubs; ladies and gentlemen. It is my honour to express the thanks of our members and guests to you today Mister Minister.

It is not without reason that I number myself among the many friends you have in this room and across Canada. Your continuing courage in a portfolio of such enormous responsibility has earned you the accolade of all of us. Thank you for helping us to understand the complexities of a budget which brightens the light at the end of the tunnel. And thank you for answering questions about it today.

There remains only one question, which only I would dare to ask-why is the creation of a budget thought so difficult, when after its presented, everyone in Canada can tell you how you should have prepared it in the first place? Can it be that A. A. Latimer was right when he wrote that, "A budget is a mathematical confirmation of your suspicions?" Michael, we can leave the answer to your next budget.

Thank you again for your time today, and your continuing contribution to the welfare of Canadians everywhere.