Directions for Economic Policy

BGEN. ANDRUNYK:

Distinguished guests, members and friends of The Empire Club of Canada: "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way."

Every student has read that introduction to A Tale of Two Cities by Charles Dickens.

He was describing other times two hundred years ago. Yet, any reader of today's newspapers or listener to radio or viewer of television might conclude that history is repeating itself, for current talk also swings in sharp contrasts.

Today The Empire Club of Canada is pleased to welcome as its guest speaker, the Honourable Michael H. Wilson, Member of Parliament for Etobicoke Centre and the Progressive Conservative finance spokesman. He will share with us his views on current federal economic policies which affect every one of us, and to a great degree, determine whether we judge the times as good or bad. Michael Wilson is a native of Toronto where he attended Upper Canada College and the University of Toronto prior to entering a business career. In 1961 he joined Harris & Partners Limited which later merged with Dominion Securities Limited, one of Canada's largest investment firms. In 1973 he was appointed Executive Vice-President of Dominion Securities with responsibilities for all international operations and government finance activities.

During this period, Michael Wilson also made time to serve his community. He was the Vice-President of the Canadian Club of Toronto during 1976-1978 and he worked actively with the Canadian Cancer Society between 1966-1979 serving as the President of the Metropolitan Toronto Branch and Ontario Campaign Chairman.

Michael Wilson was first elected to the House of Commons in May 1979. A month later he was appointed Minister of State for International Trade in the Clark government. The May 1979 issue of Saturday Night described him as "the brightest and the best of the covey of corporate enterprising gunslingers the Tories have sprung loose in and around Toronto." I am not sure whether he approves of the reference to himself as a gunslinger. However, the provisions of the November 12th budget have certainly given him plenty of targets to shoot at.

He was re-elected to Parliament on February 18th, 1980 and has served as his party's spokesman for industry, trade and commerce, energy and more recently, finance.

Ladies and gentlemen, it is my pleasure to invite the Honourable Michael H. Wilson to address us on the subject of "Directions for Economic Policy."

THE HONOURABLE MICHAEL H. WILSON: I am honoured to be asked to speak to The Empire Club of Canada. I have attended many of your meetings and in recent days have completed reading The Best Talk in Town by Scott Young and Margaret Hogan. As most of you will know, this book weaves together the substance of many speeches delivered to members over the first seventy-five years of the life of your club.

This book records that, in 1927, Stanley Baldwin, then Prime Minister of Great Britain, warned the club:

Freedom, which you guard so well in Canada, freedom can only be maintained, as has often been said, by constant vigilance. A democracy can only be maintained when every man, woman and child in that democracy means to do everything in their power to make that community better, stronger and freer.

In this, the first meeting of your club in 1982, I want to stand back a little from the political fray. I want to point to some of the directions in which I believe Canada is moving.

The reality is that Canada is moving in directions that are making it less strong, less free, less proud, less happy.

In the face of negative trends in our country, as a people we have become too unaware, too apathetic. We have neglected the stern advice given two hundred years ago by the Lord Mayor of Dublin that "the condition upon which God hath given liberty to man is eternal vigilance." In place of guarding our own freedoms, we have left too much of the care of our freedoms in the hands of our elected and appointed officials.

No ultimate responsibility for freedom should be left with bureaucratic officers or ministers. It is inevitably dangerous: the natural instinct of ministers and bureaucrats is to seek to broaden their own power and it is almost axiomatic that broadened governmental power roots in the carcass of individual citizens' freedom.

This, I suggest, is happening in Canada. We are becoming less self-reliant. In accepting, in our apathetic way, dubious actions and initiatives of governments today, we are preparing ourselves psychologically to demand increased government services in the future.

The growth of government power cannot fail to alter the political and economic interrelationship within a nation. The Polish people, in their gallant effort to reassert their right to personal freedom, stand as a witness to the truth of that statement.

This epic in Poland must remind us that the fate of freedom depends profoundly on the conviction to sustain the principles and values which are the foundation of our freedom and the determination to oppose any erosion no matter how small. I often wonder if we in Canada understand what freedom we have and whether we are prepared to fight to preserve it.

Consider the past ten years in Canada. Cast your mind back to the introduction of price and income controls through the Anti-Inflation Board just six years ago. It was the most comprehensive intervention into the private enterprise system this country has known outside of wartime.

Justified or not, the Prime Minister and his government found themselves in a position of great power when the prices and income policy was introduced. But power breeds an appetite for power: at the end of that year Mr. Trudeau gave voice to his thoughts that the market system was not working. He advised that we would have to become used to increased government intervention in our lives and involvement in our individual decisions.

Thankfully there were those among us that were vigilant and vocal. There was a storm of public protest as eyes were opened to the direction he was

proposing. He backed away. His more recent musings have told us of the "magnificent" private sector! He understands the power of words.

As I work in Parliament I see Canada being moved in directions that will make it less strong and less free. Freedoms are being eroded. It is not because freedoms have produced problems and therefore must be restrained; it is because we have not understood the eroding effects of successive government and bureaucratic policies and actions.

Mr. Trudeau repudiated his earlier musings but his governments have proceeded with their substance. Think of the number of ways in which, in the past six years, the government of Canada has moved to broaden its own powers and to undermine the will of individual Canadians, to undercut the viability and confidence of Canadian companies--both small and large. We are a different country than we were six years ago. I suppose recognition of that trend may be the principal reason why I am in public life. Increasingly I sensed the taking over by government of decisions that should be made in Canadian homes, on the farms, in the fisheries and forests, in the private businesses. Governments will always try to encroach on the private domain: a strong bureaucratic government can only be successfully constrained by a strong private sector.

If the private sector is not strong the public will turn to government. Real needs clearly must be met. But government also has a tendency to push aid to the people: the politician wants to be seen to be busy and humanitarian; he wants to win the next election. The bureaucrat rises when his empire expands beneath him and so he pushes the activities of government.

Peter Russell, political science professor at the University of Toronto and research director for the McDonald Commission, recently exposed another interesting perspective:

All countries that are capitalist and are experiencing little or negative growth are going to have difficulties maintaining a society with civil liberties. There will be strikes, lockouts and negative public reactions to our economic problems. We have to make certain, that in the face of this kind of instability, government and police respect the civil rights of individuals. For those rights may be the only certainty upon which we can proceed with any assurance into the future.

For the past six years--the post-musing years, they could be called--we have been told that Ottawa is reducing regulation and cutting back their involvement in our lives. Let's look at the words used to describe the action and then look at the action itself. Let's start our examination with the recent budget. It is billed as a budget of restraint. The word from Ottawa is that government will reduce its share of the national income.

The reality is that government tax revenues will increase this year by thirty-one per cent, and by fiftytwo per cent over a two-year period. Federal government spending will increase by twenty-two per cent.

This will be extracted from a national economy that is growing at the rate of about fourteen per cent. More fundamental than the raw numbers is the effect of the budget on the motivation of individuals and corporations and on spending preferences. The budget totally misunderstands the importance of motivation and incentive in our lives.

Let's compare what is happening with what are the real national objectives of Canadians.

There is a need and desire for more investment by companies and individuals. In the short term this will result in more jobs and in the longer term a more competitive and productive economy which, in turn, means more jobs and secure jobs. We all agree that's what we want.

The budget attacks this objective.

It reduces incentives to invest--it attacks jobcreating investment. It does this when, incredibly, it reduces capital cost allowances for corporations, it restricts the ability to deduct the interest cost on funds borrowed for investment, it emasculates the Small Business Bond and requires a deemed realization for capital gains in share exchange mergers.

There is a major shift of private investment capital to government revenues from individuals through changes in income averaging annuities, RRSP deductions, the 12.5 per cent dividend tax on small business and the taxation on life insurance.

This is doubly damaging.

First, it is negative in terms of funds available for investment.

Second, Canadians have always used life insurance, pensions and RRSPS to build security for their own future. This should be sacrosanct. We save and plan to ensure continued freedom from concern and reliance on government support in later years. But the government is intruding--it will discourage this saving or, at best, make it less effective and more costly through changes in taxation of life insurance, annuity contracts, retirement allowances and RRSP deductions.

Another area: Canada's future is recognizably built upon the future of high technology companies, smaller oil and gas, mining and other resource companies. Government has intruded into their ability to manage their own growth: the budget denies them expansion capital through changes of the taxation on mergers. In today's economic situation in Canada how can these companies structure their capital base and broaden their product mix and compete on the markets of the world if Ottawa extracts the valuable capital when they effect share exchange mergers to achieve these objectives?

The budget statement focuses on equity as a newly discovered ideal, but the important statement is between the lines. For as Aldous Huxley once said: "Idealism is the noble toga that political gentlemen drape over their will to power." And de Tocqueville pointed out that "The sole condition required to succeed in centralizing the supreme power in a democratic community is to love equality or to get men to believe you love it."

The truth is that the equity professed by the budget is one that seeks to deny individual differences among people. They seek a collective equality not of opportunity but of results. It is an assault on both ability and justice. That is not, of course, the way that those in power explain it. They dress it up under the moral cloak of social justice, and claim a monopoly on compassion.

Canadians don't have to be lectured on social justice and compassion, for these things are already part of our ethic. Canadians understand that all men do not prosper in life and we have always been ready to assist those who suffer unduly, those who are honestly disadvantaged or who, through no fault of their own, cannot support themselves.

In other ways the government has moved to undermine the will of individual average Canadians and Canadian companies to build and maintain the competitive and entrepreneurial base of our democracy.

Let's go back a year and look at the budget of 1980 and the National Energy Program which was its principal thrust.

The stated objectives were self-sufficiency, Canadianization of the oil industry, equity between regions and players in the economy.

The objectives, as stated, were reasonable. But the further objective--the unstated--was to centralize control in Ottawa of a dynamic, independent, growthoriented industry.

How to do it? Do it while appealing to the natural desire of Canadians to own a greater share of the industry. Do it quietly and say little of the true objectives. Do it by administrative fiat. Don't let Mr. Trudeau muse out loud!

A key element was accomplished by switching from an exploration incentive system to a grants system, while collecting the funds through very heavy taxation of the industry.

You must understand this. Under the old system you could reduce taxes by increasing exploration or through other positive activities. But now the process is to tax everybody very heavily and then give grants to companies of the government's choice. In a simple administrative /tax shuffle the control becomes total.

In addition, they nationalized twenty-five per cent of privately owned lands in the Crown Land areas. There is no time to go through the details of the effects of the National Energy Program in the past fifteen months. The reality is that the oil and gas industry has not recovered. It is in economic and administrative disarray. Activity is down. People, equipment and money are leaving the country. The government has created an environment in which entrepreneurship and risk-taking investment simply cannot function.

What happens in such an environment? It is happening. Exploration and development are down. Production of oil is not being increased now or prospectively.

There is a national need for expansion in the production of oil. What can a future government--charged with the responsibility of energy security--say or do? It will say, "The marketplace isn't working." It will say, "The private sector isn't doing the job." It will say, "We, the government, must do the job!"

The stage has already been set with the establishment of a grant system in lieu of exploration incentives. This would allow arbitrary control of decision-making in the petroleum industry.

It is easy to say, "That is great. We should have greater control of our oil companies." But governments that start to confiscate, that attain greater control, don't stop. It grows. It is dangerous.

At a minimum the experience with the oil companies will provide a precedent for expanding into other industries and nationalizing "in the public interest."

The banks may be the next victim. The mining industry is advocated by some. Maybe there will be greater control of the newspapers as, in effect, projected in the Kent Commission. It would be unwise to accept on faith the assertion in the recent budget that the National Energy Program techniques are not appropriate for other industries. Remember, the Income Tax Act was to be only a temporary tax.

The mining industry attack has perhaps already started. The 1981 budget, in fact, hits the industry hard in three areas. It has been hurt in three budgets in the last ten years. And this government squeeze has happened against the background of a weakening competitive position internationally.

I cannot take the time today to follow all the paths toward Ottawa-government control that trace through the Canadian economy. But we should be warned that our Canadian arrangements are being fundamentally altered in very subtle ways.

Government itself is tangling the paths--new objectives are defeating stated existing objectives. For example, Canadianization of the oil industry, visualized in the 1980 budget, had clear merit if done fairly and sensibly. But the 1981 budget attack on private investment funds and the disincentives to save and invest will obviously retard the Canadianization process so the process won't be working too well.

What will government say? It will say, "The market system isn't working. It needs government." It will say, "There is a need for a new government investment program." Again there is a potential for increase in government intrusion, a backing out of private decision-making, an increase of power in the offices in Ottawa.

The list goes on.

In the case of foreign investment, all agree we critically need huge capital sums over the next ten to twenty years. But we frighten international capital through provocative Prime Ministerial and other ministerial statements, through threatening to increase the regulatory powers of the Foreign Investment

Review Agency and through confiscation of the assets of foreign corporations. If the government continues to frighten foreign capital away there will be a capital shortfall in Canada. Projects will not proceed, small companies will find it hard to raise capital, our standard of living will fall. The result? Pressure on government to increase the government's role in the economy.

Consider the process in the housing industry. As a consequence of a weak economy, high interest rates, delays in regulatory approvals, a range of governmental roadblocks, we are building too few houses. Starts have declined year by year since 1976. The private sector isn't doing its job. So there's a place for new government intervention and activity.

The 1981 budget provides a classic example of my concern. First it hits the industry with three adverse tax changes. Then it replaced a successful incentive system, the MURK program, with a direct government loan program with all its arbitrary implications.

When queried as to the reason for the shift from the incentive-based MURBS to direct loans, the Minister's response was that there was some misallocation of revenues, some homes were built where they were not needed. So because the private sector wasn't performing perfectly, he took unto the government the decision-making power of how to allocate those resources. Builders in effect now work for the government because government says where the money will be spent. They have lost some freedom of decision.

I don't need to tell you that there is always the potential for some misallocation! That's why private investors sometimes suffer the severe discipline of losing money. That's the nature of our system. But can an Ottawa bureaucrat better decide whether there should be investment in a subdivision in Scarborough versus Etobicoke--in West Vancouver versus North Vancouver--than can the local people putting up their own money? It is a basic issue--whether to use grants or incentives.

The bureaucrats prefer grants. It gives them control over investors and entrepreneurs. They claim grants are more cost-effective. But to be cost effective a bureaucrat, with no money on the line except that of the taxpayers, must consistently make better judgements than a large number of businessmen and investors who suffer personal losses if losses occur. Will the bureaucrat more often than the private investor be right when he says "yes" or "no"? I don't think so.

Grants are sometimes the right procedure but the inherent danger must always be recognized. They are an instrument for expanding Ottawa's control of decision-making everywhere. As a general process they are dangerous.

This example clearly shows how, as the effectiveness of the private sector enterprise system is undermined by government policies, the machinery for greater government involvement is being established. I am deeply concerned that this continued undermining of the private enterprise system will irrevocably damage that system. It can take us not only to a less productive economy, but to a central and concentrated system with greater dependency on a powerful centralized bureaucracy, and a less effective free market.

On previous occasions I have expanded on a program of government policies which would introduce productive economic tools to work with the producers in the marketplace. These policies would not interfere with the producers but would constructively encourage them in developing competitive capability and leadership in new technologies. Canadian business is already recognized throughout the world for its leadership in mining and oil exploration technology, agricultural advances and breeding stock, in medicine, communication and high-tech sciences, in urban transit development and a host of other accomplishments.

We know that we have the innate skills. What we must do is bring out the best in these skills through conscious incentives. Government must work with these skills--not try to control them. If we are able to strive for excellence in this country, if we are able to encourage the international leadership that we know is within our grasp, we will reap greater rewards--rewards that will allow us to provide the government revenues to finance the social services that we have come to expect.

These policies of productive economics, as I have called them, must encourage investment in new technology, new plant and equipment, new mines and advanced farm machinery. It is this investment which will strengthen the industrial base and the small and medium-sized companies which form the heart of our economic capacity. It will also build the safeguard to allow our system to resist government encroachment, to make more government unnecessary, to protect the framework of freedom that Stanley Baldwin spoke of in 1927.

Freedom is the power to fulfill our emotions without hindrance or restraint. When embodied in a political principle, it is the right to act or not to act according to one's own judgement, so long as one does not perpetrate fraud or initiate force or hindrance against anyone else exercising the same freedom.

Freedom means that no individual is bound to a permanent position of class or economic status. Freedom means every one has equal opportunity to the challenges of life, to achieve what they can by their own wit or merit. Freedom means not having to rely on arbitrary government decisions.

In the depths of the Great Depression, Stephen Leacock addressed the Empire Club with these thoughts on what he called the "profit system." After all, what does the Profit System mean? That every man works for himself, that the economic interest of the individual is the basis for society; fundamentally, my property is mine, my work is mine, and the fruits of my work, the results of my brain and my industry ... That is mine, and there is no other system of running society and there never will be.

Leacock brought the meaning of economic freedom down to its very basics.

It is in the context of what I have outlined here that clearly demonstrates the distinction between the philosophy of the party in power in Ottawa and that of my party.

The equality being directed by this government is a collective equality not of opportunity but of the results of the output of the various producers--the small businessman, the farmer, the worker, the scientist--all important contributors to our society. The party that I represent believes in the paramountcy of individual rights of equal opportunity, with compassion and help for those not privileged to participate in such opportunity.

There is an important role for government. But it is a fatal fault of government to neglect its own responsibilities while trying to expand into areas in which it is not needed, it is not wanted, it is not competent and in which it can do great harm.

We want a government that fills the role of governing, not of running our private community its way.

The thanks of the club were expressed to Mr. Wilson by Douglas L. Derry, Third Vice-President of The Empire Club of Canada.