The Budget

Introduction:

Distinguished guests, members of The Canadian and Empire Clubs, ladies and gentlemen, welcome to today's meeting.

One week ago today, Finance Minister Michael Wilson presented his seventh budget to Parliament and to the country. Given the serious state of the economy and our high deficit and debt levels, it was no doubt one of the more difficult fiscal strategies that he has been called upon to produce.

And what of the specifics of the budget?--controls on spending, limits on transfer payment to provinces, minimal tax increases, inflation targets, and deficit reduction goals. Well the past week has provided Mr. Wilson with a considerable amount of feedback, and today we have the privilege of both being addressed by our Minister of Finance and providing our feedback in a question period following his formal remarks. In this regard, there are question cards available on your seats.

Ladies and gentlemen, please join me in welcoming the Member of Parliament for Etobicoke Centre, and Minster of Finance, the Honourable Michael Wilson.

Michael Wilson:

Ladies and gentlemen:

A week ago, I tabled my seventh budget as Canada's Finance Minister. The budget papers fill over 160 pages. All that material--text, numbers and charts--focuses on one essential challenge; making the fundamental choices that will lead to a real economic recovery and lasting growth.

I welcome the special opportunity provided by this joint meeting of The Canadian and Empire Clubs to discuss our action plan directly with members of Canada's largest business community. The budget reflects an extensive consultation process. Many of you here--in person, or through your industry associations--have made an important contribution in shaping the tough, forward-looking strategies it delivers.

This is a budget about choices because economic recovery must mean more than just short-term growth and higher employment. Canadians have to recognize that recovery can take quite different forms.

One type of recovery is the kind we've seen too often over the last 20 years. These have been recoveries based on ignoring key economic problems, rather than confronting and solving them: 'steroid' recoveries that used deficits to build and sustain temporary muscle, but that inevitably ended with boom turning to bust, plunging Canadians into the next period of hardship and dismay.

Our Plan for Economic Recovery chooses a different path, because Canadians want and deserve something better.

It takes the interlocking actions needed to make possible sustained growth, enduring job creation, and real gains in national productivity and competitive strength. It does this by aiming at nothing less than a fundamental change in the political 'culture' of budget-making and government spending, and in the attitudes and behaviour of Canadians regarding inflation. And the decision to take these steps makes the Plan a true watershed in Canada's economic and political history. Yes, we do want to change the culture permanently, and we must change attitudes and expectations. The Plan recognizes that the key to recovery lies in establishing the basic conditions for a further and lasting drop in interest rates.

We have heard the message loud and clear from all sectors of society. Extensive consultations with large and small business, with exporters, with labour, and with social and other interests, showed an overriding common theme. Lower interest rates are the fuel to boost consumer spending; to re-ignite the construction industry and create affordable housing; and to permit business to invest in the new plant, equipment and training that firms and workers need to succeed in a fiercely competitive global market.

But the Plan for Economic Recovery has a clear message for Canadians in turn. The bottom line is that interest rates are not set by government fiat. Market forces are the real and final arbiters. And the only economically sound foundation for lower rates is a substantial reduction in inflation, and in Canadians' inflationary expectations. So our Plan takes innovative action--through setting realistic, public inflation targets--to help make this happen.

This leads me to the second critical dimension of the Plan for Economic Recovery. It takes the rigorous, reinforcing action required to build business, investor and public confidence that our prospects for lower inflation and interest rates--and for real gains in our standard of living--won't be swallowed by the quick-sands of government deficits and debt.

This is why our Plan takes strong steps--including legislated limits to control government spending--to get the deficit back on a downward path and eliminate the need for new government borrowing by the mid-1990s. This is the only way to reduce the drag that government can impose on economic growth and individual prosperity, while also ensuring our ability to continue to help those in real need and to support vital national goals.

In designing the Plan for Economic Recovery, we have looked to the future while also addressing the needs brought on by difficult economic times today. But to do this, the Plan draws on important lessons from the past.

For nearly 25 years, from 1950 through 1973, Canadians enjoyed an outstanding record of economic growth and personal prosperity. Our standard of living virtually doubled in a single generation.

This growth was not accidental or automatic. It resulted from sound economic policies. Inflation was less than three percent. This kept interest rates down. Annual federal deficits were small or non-existent. The national debt was under control. Business investment grew strongly. We became more productive and wealthier.

Unfortunately, these lessons were forgotten over the 197484 period. Governments let inflation soar. They spent much more than they received in taxes. We were living beyond our means.

As a result, the federal deficit jumped to $38 billion, and the national debt grew from $27 billion to more than $200 billion in just 10 years. And we still suffer the consequences of this legacy today, because it has been the interest payments on that 1984 debt that have been the cause of 80 percent of our subsequent deficits, compounding the debt so it now approaches $400 billion.

At the same time, the 197484 period saw economic growth and productivity fall as business was battered on two sides: by increasing government intervention, taxation and debt; and by growing global competition from foreign industry. And a declining Canadian dollar wasn't able to counter these problems. This had painful consequences for Canadians. The growth in real average incomes began to shrink substantially.

Since 1984, the government has worked to re-build the underlying conditions for economic growth and prosperity.

• We took historic steps to get rid of barriers to industrial efficiency and competitive strength. This included tax reforms such as the CST, which makes Canadian firms and workers more competitive at home and abroad. There was the Canada-U.S. Free Trade Agreement, giving us secure access to the world's largest market. And other structural changes included income tax reform; privatisation of over 20 Crown corporations; deregulation of the energy and transportation sectors; and action to assist unemployed workers in obtaining the training and new skills they need to find and keep jobs in today's economy.

• Action was also taken to control the vicious circle of deficits and debt, and hold back inflationary pressures. This included restricting government program spending to well below the inflation rate. It also meant using monetary policy to prevent inflation from eating away at Canadians' incomes, investments and savings.

The record shows we have made real progress in meeting these goals--especially considering where we had to start from. The growth of the debt has been slowed. The deficit--although still too high--was cut in half as a share of our national income. Inflation was held in check, to about half the average of 1974-84.

But to help Canada recover from its current economic problems--and to lay the foundations for lasting prosperity--it's obvious that more needs to be done. The Plan for Economic Recovery takes these critical steps.

That's why a key element of the Plan is to stop the growth of the public debt and eliminate the need for more government borrowing. To meet this goal, the government is acting to tightly control spending. The result will be a dramatic drop in the deficit by the mid-1990s.

Nearly $13 billion will be saved through tighter spending controls and better management.

This will help cut interest payments on the national debt by almost $2 billion.

Controlling spending to get the deficit down will take tough discipline by government. Major steps in the Plan for Economic Recovery include:

• Restraining wage increases for the federal public service and members of Parliament;

• Freezing overall spending on the internal operations of government at 1990-91 levels;

• Making it law that all revenues from the Goods and Services Tax (GST) are used only to bring the public debt under control and not spent on other things; and

• Passing legislation that sets absolute limits on government program spending for the next five years.

In taking these steps, the budget is as tough as it must be to restore confidence and rebuild the conditions for growth. But it is also sensitive to the real economic hardships currently facing many Canadians.

That is why program expenditures will grow substantially more in 1991-92 than in the years following--6.9 percent compared to only 3 percent on average for the balance of the planning period. More than 80 percent of this increase--$6.5 billion--will go for assistance to the unemployed, the elderly and to farmers in difficulty, as well as to cover our role in the Gulf War and in the peace that our forces so courageously helped achieve.

This short-term increase should not blind Canadians to the fundamental change in the political culture of budget-making that the Plan delivers. It transforms restraint from the realm of a promise into a matter of law.

Any government that wants to exceed these clear, defined limits--or to use GST revenues for any purpose but debt reduction--will have to go to Parliament. It will have to explain to the taxpayers of Canada why it plans to spend more of their money. And the government will have to justify publicly the consequences that this spending will have for the deficit, the debt, for interest rates, for taxes, and for its own credibility.

Yes, this will restrict the freedom of finance ministers--myself, and others to come--in setting our budgets. Yes, it means that cabinet members and their departments will have to balance the cost of potential new programs against existing programs that may be cut to stick within the limits. These are the basic day-to-lay disciplines that every family and every business has to apply to stay financially healthy and secure. This is the constraint our government has lived with for 6 1/2 years when we have held program spending growth to 3.7 percent per year. Surely it is time that government was required by law to do it.

There is another aspect of our spending restraint plans I want to comment on today, one that also deals with making choices. This is our decision to introduce a three-year wage restraint program for the federal public service.

There are two key elements of this program.

To start, wage budgets of federal departments will be frozen for the next year. This means departments will have to absorb any higher costs due to new collective agreements from within existing budgets. As a result, each increase of one percent in average wage settlements across the public service will lead to a loss of 2,000 jobs.

The companion step will be to hold public service wage increases to a maximum of three percent over the next three years.

In taking these steps, the government is not trying to single out the federal public service for unfair treatment. We recognize the vital contribution these employees make to Canada's well-being. And it is a fact that over the past four years, average wage settlements for the federal government have been held consistently below those of the private sector and provincial governments.

At the same time, the public service must recognize that the financial shape of government--and our economy as a whole--makes restraint a necessity. The alternatives are either higher taxes or bigger deficits, each of which would jeopardize our mutual prospects for renewed prosperity and long-term growth.

Also, it is a basic truth that federal public service employees have largely been sheltered from the most bitter consequences of the recession. Employees in industry have faced widespread lay-offs, which government employees have not. In some cases private sector workers have agreed to give back negotiated wage increases and benefits to avoid lay-offs and maintain the ability of their employers to operate. We are only asking government workers to face up to the same tough choices as their counterparts in industry.

I don't want to take up more time today with further details of the expenditure controls in the Plan for Economic Recovery. What I do want to summarize, however, is the clear, tangible bottom-line results these will deliver.

• The deficits for 1990-91 and 1991-92 will be held to $30.5 billion despite the difficulties created by the recession. The year after that, the deficit will fall sharply to $24 billion. By 1995-96, it will have dropped to just $6.5 billion--the lowest deficit in nearly 20 years.

• The need for new government borrowing on financial markets is eliminated by 1994-95. This will be the first time in 25 years that no new borrowing is needed. This will reduce the impact of government's financial needs on interest rates, and ease the competition with business for investment funding.

To project these figures, of course, we have had to make assumptions regarding the economy and interest rates. I am confident that these assumptions are realistic, given current developments in Canada and in the international arena. And they are consistent with the consensus among private sector analysts.

As well, our deficit forecasts are given new rigour and credibility by the fact that our legislated spending limits actually 'lock in' a good part of the government's fiscal framework This will make deficit reduction less vulnerable to external conditions.

Control of government finances is a crucial step towards freeing up Canada's potential for sustained economic growth and security. But it is a fact that deficit reduction alone is not enough to deliver recovery and new prosperity.

As I emphasized earlier, the critical key to real growth and additional jobs is a steady and lasting drop in interest rates. This can happen only if we get inflation down further, and reduce our inflationary expectations.

The evidence is clear and compelling. Canadian history shows the direct link between inflation and interest rates. And it is no coincidence that during the last decade, countries with the lowest inflation rates--such as Germany and Japan--have consistently enjoyed the lowest interest rates.

Controlling federal spending and restraining wages for Parliament and the public service, will help bring Canadian inflation down. But the Plan for Economic Recovery takes another important step: setting specific inflation targets aimed at cutting inflation to two percent by the end of 1995.

Clear, realistic targets will encourage lower inflationary expectations among all Canadians, and help us work together--both public and private sectors--to achieve stable prices that much sooner and with considerably less disruption.

This will happen because the targets make more certain and specific than ever the commitment of the government to price stability. The Bank of Canada, with the full support of the government, will act to meet these targets. And this commitment will be reinforced by the government's own spending limits.

These actions will give Canadians new confidence and motivation to shift their behaviour--in terms of business pricing, wage demands at the bargaining table, and the inflation-risk premium investors demand. They will be able to settle for less because they will know that the value of their incomes, revenues, investments and savings will be maintained. The result will be a smoother transition to lower interest rates, and a greater ability by firms and workers to succeed in a competitive global market.

As you can see, the Plan for Economic Recovery is both a commitment to, and a strategy for, building the conditions for economic confidence and growth, and long-term prosperity and security for Canadians.

It will put an end to the destructive cycle of deficit and debt that adds to our tax burden and hurts our ability to compete. It will create an environment where inflation no longer pushes up interest rates and eats away at the value of incomes and savings. And through these mutually reinforcing steps, the Plan will establish the deepest possible foundations for real and sustaining gains in individual prosperity and national growth.

But the federal government is only one player in the broad, complex mosaic of Canadian economic activity and decision-making. The challenges and problems we face today and in coming years will never be resolved by action at a single layer of government. It needs consistent, committed effort and cooperation from every sector of society.

The fact is, as I said in the budget speech last week, in our increasingly competitive world, there is no room for complacency-, and there is no safe hiding place for uncompetitive industries or countries. We must all adapt to the new world reality or lose our ability to preserve and enhance our standard of living-for us, and our children.

Our ability to compete abroad begins at home. We must maintain and strengthen our economic union. In this and other areas, governments must step up the pace of structural reform. That is why I have been working with my provincial colleagues to develop shared approaches to basic economic issues.

One of the key questions we face is: How much government are people willing to pay for? In our discussions, we are already looking at the rising cost of government and at overlap and duplication. And as part of the Plan for Economic Recovery, we have asked the Economic Council of Canada to carry out a major study on the impact of governments on our national competitiveness as a result of such factors as tax burdens and regulation.

There are also other key issues and concerns where we need to achieve greater national insight and consensus.

For example, there are signs that in the area of private sector spending on training and research, we are not doing enough.

In other areas, such as education, our national level of spending compares well with international standards, yet our performance appears to be falling behind.

And while many Canadians may believe we are over-taxed as a nation, international comparisons show that our overall tax burden is actually below that of many of our major industrial competitors.

These are not issues only for business or labour or government. That is why, as part of the Plan for Economic Recovery, the government will launch a national effort to build a new partnership for prosperity that draws on the talents and efforts of Canadians in every walk of life. And as a first step, we will release a discussion paper this spring to help focus public debate toward building a broader consensus on the problems we face and the solutions we should address.

Ladies and gentlemen, let me conclude by again drawing directly from my budget speech on the Plan for Economic Recovery.

• It deals resolutely with our fiscal challenges.
• It imposes strong discipline on government spending.
• It sets out a clear path toward lower inflation and lower interest rates.
• And it remains sensitive to those in greatest need.

I am convinced that economic recovery is within our sights. Interest rates have fallen substantially in recent months--more than four percentage points from the peak last May. The successful conclusion of the Persian Gulf crisis should cut oil prices, and boost American consumer confidence and economic activity. Given such stimulus, there is every reason to expect growth to resume by mid year, and to expand by 3.5 percent in 1992.

Just as important, however, the Plan for Economic Recovery sets us on the path where that growth can be sustained, and investment and confidence flourish in the years to come.

In doing this, our Plan will contribute directly to preserving and renewing the bonds that link and sustain us as a nation. One of the best things we can do to strengthen the unity of our country is to strengthen our economic union and fiscal position. This will give us the resources, the sense of security and regional confidence we need to address and resolve the other issues and aspirations that challenge us.

Last week's budget is an important step towards this goal. It is a watershed budget that institutionalizes the key elements that will ensure fiscal stability and price stability for years to come. The result will be a stronger and more prosperous country that can assure its place as an economic world leader--to the benefit of all its citizens from coast to coast, and to our children and the generations to come.

The appreciation of the meeting was expressed by Harold Roberts, President of The Empire Club of Canada.

Mr. Wilson, this morning I had an internment. This afternoon I have come to hear the tax man. You might say I feel some pain. I've listened to seven budgets that you've delivered and been to a number of these forums subsequent to that, and I must admit that for somebody who is at least perceived as making vows of poverty, chastity and obedience, I still have some feelings. I was thinking about how to thank you and there are certain times when I feel a sense of frustration with the tax man. This quote from Grenville Hicks came to mind:

"Evasion of clarity is a trait of bureaucrats, whether they are in government, business or the professions. Evasion of clarity is tantamount to the evasion of responsibility and responsibility is what the average bureaucrat wants as little of as possible. Evasion becomes a habit, and imprecise words often seem to issue automatically from the lips of most bureaucrats even when clarity could do them no harm."

What I'm really trying to say by that quotation is, as a cleric I find that when economists and ministers of finance talk, I sense double talk. I know you're trying to be clear, but for a lay person it's often confusing. It all sounds so nice, but in many ways it's very difficult. What we have here is a tough presentation by a nice guy. As we left the head table room and came in here, Mr. Wilson you said, looking at the four of us [Wilson, Pitblado, Jameson and Roberts], "The Four Horsemen of the Apocalypse," and I said, "My God, Minister, don't raise that one--war, famine, plague and death." May I suggest very humbly to you, Mr. Minister, that the gospel of virtue might be better--love, joy, peace, and hope. I thank you for coming today. You mentioned in your address the need for consultation. 1 listened to you this morning on the radio and I listened to you again today and I'm always impressed with the way you handle the questions that come from literally all over the ballpark. You know your material and you give your best and for that we thank you.