Budget 1986

Mr. Pitblado

It is a tradition of The Canadian Club to have the Minister of Finance address The Club in early January. However, this year we made a change, in view of the timing of the budgetand are happy to have him fresh from the budget presentation and able to talk to us today in an open and forthright way.

Today represents Michael Wilson's second appearance before the Canadian Club of Toronto where, as many of you know, he was some years ago The Club's First VicePresident. I am pleased that our sister club, The Empire Club of Canada, is able to share in today's meeting.

We live in a world of change-economic, political and social. Governments change suddenly, leading political figures are assassinated, and economic forces such as oil price and interest rates fall or rise dramatically. Within a bewildering array of statistics, facts, estimates and perceptions, the man who has the greatest impact on the economic wellbeing of every citizen and hence our country as a whole is, of course, the Minister of Finance.

The job is anything but an easy one. In fulfilling his responsibility, it is true he may please some people but he is much more likely to upset them, for human nature does not relish being told the harsh realities of life. It is much easier to lull oneself into a false sense of complacency, to pretend that all is well, and ignore the cost of facing up to problems that we would wish away. It is not difficult to be all for restraint as long as the burden falls on someone else.

Since his appointment in October 1984, Michael Holcombe Wilson has devoted all of his not inconsiderable energies to combatting this country's most serious and pressing problem, simply government spending far in excess of our ability to pay and a deficit that threatens to strangle our future prosperity if not attacked diligently. To his job he brings many important assets.

1. He is physically strong, so as to withstand the awesome rigours and pressures of his job. He still finds time to golf, ski and play squash, but far less frequently than he would like.

2. He has an ability to relax, and a high degree of self-discipline which allows him to control his emotions and save his energy and intellect for the careful and logical analysis of problems and the development of alternative solutions.

3. He is extremely thorough. His staff would attest to the fact that he knows his briefs in all their detail as well as, if not better than, they do.

4. He is a team player and, accordingly, has consulted widely with people in all sections of the economy and in all provinces in his desire to build as strong a consensus as possible.

5. Above all, it could be said that he was made for the job. His father had an illustrious career with the National Trust, becoming president of that organization, so that business was in his blood. Michael was educated at private schools in Montreal and Toronto before studying commerce and finance at the University of Toronto under may of Canada's most admired economists.

Upon graduation in 1959, he went to London to work for the prestigious merchant bank, Baring Brothers, where he learned international finance and securities markets. After eighteen months in London, he spent six months in New York with Morgan Guaranty before joining Harris & Partners in 1961. Three years later, he was the first businessman to go to Ottawa on an exchange program between private business and government. He spent two years in the capital markets section of the Department of Finance before returning to his firm-I could say our firm-where for the next thirteen years he specialized in corporate and government finance, both domestically and abroad. In all of this, Mike acquired an intimate knowledge of financial markets and the critical importance and interrelation of strong healthy markets to the achievement of our economic and social goals.

His sense of duty and conviction that, if one wanted to be critical of the system, one should be prepared to do something concrete about it, resulted in his decision in 1977 to enter politics. In March 1978 he captured the Tory nomination in Etobicoke Centre and in the election of 1979 became a Member of Parliament. In the short-lived Clark Government, Wilson was Minister of State for International Trade.

Michael joins with us today fresh from the tabling of his second budget, confident that he is getting Canada's financial affairs on a firm footing and determined to win over the public to his views with his logical and reasoned approach.

Ladies and Gentlemen, please join with me in welcoming the Minister of Finance, the Honourable Michael H. Wilson.

Michael Wilson

I welcome this opportunity to be home in Toronto speaking to The Canadian and The Empire Clubs. I know the

Finance Minister usually addresses this audience early in the New Year. But I think you'll agree there's more to talk about today than there was before last week.

Last week's budget signalled the start of the next phase of our agenda for economic renewal-an agenda first unveiled in November 1984, which continues to be our principal plan to take this country into the 1990s.

The agenda strategy continues to be our plan because it is working, and working well.

Over the past 16 months, we have acted to complete Phase One of our ongoing strategy. That phase called for spending reductions to halt the increase in our deficits; and policies to spur economic growth and job creation. And that is exactly what we have done.

Economic growth during the past 18 months has been outstanding-equalled only by Japan.

Our rate of job creation has been fifty per cent higher than in the United States.

We were able to reduce the deficit by $4 billion and estimate we are coming in right on target.

And we were able to halt the trend of rising deficits by controlling spending. Despite four per-cent inflation, total program spending this fiscal year was down-in absolute terms-for the first time in over two decades.

It is important for Canadians to understand the magnitude of these financial achievements. In recent years, our annual deficit has exceeded $30 billion. That automatically added another $3 billion of interest costs to next year's spending. We had to find $3 billion just to stay even, and $7 billion to reduce the deficit by $4 billion. And we did it.

Last week's budget builds on that record of success. It touches many aspects of our agenda. But most importantly, it continues our plan to achieve fiscal stability by the end of the decade, and to improve the Canadian tax system in an orderly and measured way.

Let me first talk about fiscal reform.

The measures I announced in last week's budget are part of a carefully balanced program of actions to reduce expenditures and strengthen revenues through the five-year period to 1990.

Phase-One halted the upward spiral of our annual deficits. In this budget, we are taking steps to put the deficit firmly on a downward path.

Our goal is to bring the deficit under $30 billion. We have set a specific target of $29.5 billion for next year-a reduction of $4.8 billion. And we have put in place initiatives to lower the deficit to $22 billion by the end of the decade. These figures relate to our annual budgetary deficit.

More important, and more relevant, is the Government's cash requirements-the money we must actually borrow in the financial markets to cover the bills. This is the closest equivalent to what the Americans call their "total budget deficit."

Under our fiscal plan, our "total budget deficit" will drop-and drop a long way. This year, it amounts to almost $29 billion. It will drop by 39 per cent over the next two years to $18 billion. By the end of the decade, we will have reduced our cash requirements to $11 billion-a cut of nearly two thirds from current levels.

This result will be achieved by the most significant debtcontrol program ever undertaken in this country, a program that will restrain the growth of our national debt by nearly $100 billion over the rest of this decade.

The growth of our debt averaged almost 23 per cent a year between 1974-75 and 1984-85. It will slow to 17 per cent this year, and to less than 12.5 per cent the following year. By 1990, our debt will no longer be growing faster than the economy. We will have achieved the goal of fiscal stability that we set in November of 1984.

Tax increases contribute to this result. Part of our plan is to restore Government revenues as a share of the economy to the level of the mid-1970s. We are asking Canadians to once again begin paying the full cost of government services-something we haven't been doing for many years.

But fully 70 per cent of the total debt reduction program will come from expenditure cuts.

Those aren't based on a "tax now-cut later" basis. Between 1984-85 and 1990-91, we will be cutting expenditures by $3 for every $1 we raise in extra taxes, relative to the size of the economy.

The fact that many Canadians haven't seen or felt the cuts is no accident. We are determined to achieve these spending reductions in the least disruptive way possible.

That means making selective cuts-real cuts. And many programs and subsidies have already been eliminated.

But more importantly, it means managing better, spending smarter and eliminating waste across the entire range of Government services. It may not be good political theatre. It's just good government.

The Nielsen Task Force has been a great help here. Many of the hundreds of recommendations of the Task Force have been implemented. They reduce overlap, increase efficiency and eliminate programs. Taken together, they form an integral part of our drive to more effective government.

But we are going beyond the specifics of the Nielsen Task Force to encourage productive management. We are trying to change the deeply rooted habits of government management by rewarding those who do more with less-not the empire-builders.

And after last year's experience, we are confident we can do it.

Through program elimination, spending restraint and better management, we believe we can hold discretionary spending to an annual increase of 2.7 per cent over the next 5 years-well below the rate of inflation. Total program spending will increase by 3.2 per cent a year-again below the rate of inflation.

As a result, federal programs in 1990-91-that is, total spending excluding interest payments-will shrink to the same share of the economy as in the early 1960s.

Some may doubt this can be done; and yes, it will be difficult. But we have a track record of success to back up our plan.

We have already made great progress in regaining control of our financial situation. And we will continue to make progress throughout this decade.

I recognize that some commentators are questioning some of the assumptions underlying our plan. Nonetheless, I remain convinced that our overall plan is based on prudent assumptions. We are well within private-sector forecasts over the medium term. In fact, if we were to use assumptions similar to official American forecasts, we could show a balanced budget on a national account basis in 1990-91. That may happen. But we are certainly not going to bank on it. It takes actions, not assumptions, to solve a financial problem.

For 1986, we are projecting that Canadian short-term interest rates will decline rapidly, particularly over the second half of the year, and will average 9.5 per cent, roughly the same as in 1985. We have assumed that Canada/U.S. interest rate differentials will average about 200 basis points, more than 50 per cent greater than the average of last year and more than three times the level in October 1985.

Soft oil prices and recent bond market activity strengthen my conviction that these interest rates are a prudent and realistic forecast. Indeed, long-term Canadian bond rates have now fallen appreciably from January 1986 levels.

Volatile oil prices provide more difficulty for forecasters, but decidedly less difficulty for the Canadian economy and our budget plans than is often assumed. Let me be clear on this-Canada is a net winner from lower oil prices.

If world oil prices stabilize at a lower price than we assumed, economic activity will be stronger in the major industrialized countries including Canada, as well as in many less developed nations. Inflation will be lower, interest rates should decline and export opportunities will increase.

Lower oil prices would have negative effects on energy revenues and some investment plans. But our manufacturing, agricultural and non-oil resource sectors would benefit.

Consumers would also benefit, and strongly. Overall, real growth and employment would be higher in Canada; and our chances of achieving our medium-term objective of fiscal stability will be strengthened.

There are two reasons why lower oil prices will be less important to our fiscal plan than is often assumed. The first reason is the end of the National Energy Program. Unlike the former Government, we are treating the energy industry like any other industry. Direct revenues from energy taxation are projected to be only $1 billion in 1986-87-1 per cent of total revenues. That is down from $4 billion, or 6 per cent of total revenues, in 1984-85.

The second reason is that Canada is no longer a drawer of water and hewer of wood. We are a major industrialized country. In fact, manufacturing in Canada takes up the same share of our gross domestic product as in the United States-approximately 22 per cent. Our primary sectors are also of similar size at 6 per cent of gross domestic product. And because many of our manufacturing industries are more energy-intensive, they will benefit even more from lower oil prices than American manufacturers, and even more so relative to Japanese and European competition.

Let me add that recent oil price trends strengthen my conviction that raising taxes in lieu of further spending cuts was appropriate in the circumstances.

I say that, because the low commodity prices we have experienced in the '80s benefit the manufacturing heartland of central Canada and slow economic growth in the regions. Further direct spending cuts would have aggravated regional disparity. They would have caused greater unemployment in the regions, leading to a higher federal deficit.

We want to create jobs and reduce the deficit-not the opposite; and a balanced mix of tax increases and spending reductions will allow us to do so.

But the budget was not just about spending cuts and tax increases. It was also an agenda for improving the tax system.

As I said last week, I intend to propose further measures in my next budget to reform our system of social expenditures and related tax provisions.

Those measures will maintain universal access, improve the opportunities for individuals to become self-reliant, direct more revenues to those most in need and reduce the after-tax value of benefits going to high-income Canadians who do not need assistance.

We will also continue our efforts to make a more efficient and competitive corporate tax system. The budget implemented Phase One, by removing or reducing certain selective tax preferences and replacing them with lower tax rates. I will be releasing proposals for Phase Two later in the year, consistent with the principles set out in the Budget Paper I issued last May.

We also intend to reform our antiquated sales-tax system. The problems with the current system are well know. It results in serious inequities among competing business firms. It puts Canadian manufacturers at a competitive disadvantage relative to importers. It results in hidden taxes on exports. Canada is now the only industrialized country in the world that still imposes a sales tax at the manufacturers' level.

I expect to put forward a paper with a concrete proposal for public discussion at an early date. Our intention is to move to a new system that will encourage growth, improve equity, and yield revenues sufficient to replace the federal sales tax, to end the surtaxes announced in the budget and to build on our new sales tax credit for low-income Canadians.

I said at the outset that the budget is part of our overall strategy. This plan is long-term and forward-looking. It is an integrated framework in which fiscal and tax reform work together with trade policy, privatization, training programs, technology incentives, competition policy, regulatory reforms and other policies to prepare Canada for the 1990s.

And those policies are working. We are on the right track.

And maybe it is time for us all to begin feeling good about our country and the direction we are moving in.

We have much to be pleased about. Our economy has come a long way in just 18 months. Economic growth and productive activity tell the story. The future is promising.

That is what our agenda is all about: a better future. That is what we promised Canadians. And that is what we are delivering.

We will continue to act with consistency and determination. And if Canadians look back to September 1984 and see the progress we've already made, I believe they will look forward with a renewed sense of confidence.

The appreciation of the audience was expressed by Harry T. Seymour, President of The Empire Club of Canada.