Prescriptions for Post-Control Canada

MR. HERMANT:

Ladies and gentlemen: Our guest of honour today, the Honourable William Darcy McKeough, once wrote a letter to the editor of the late lamented To ronto Telegram in which he said, "As a politician, I am increasingly concerned with the growing alienation from society of many of our more gifted young people. One of the major Canadian tragedies of this century may be the failure of our young people to recognize political action as an important instrument for social change."

Obviously his comments were not autobiographical because Mr. McKeough began his political career at the comparatively tender age of twenty-six when he ran for, and was elected to, the Chatham City Council-Chatham being his home town. By winning that election, Darcy McKeough became the sixth member of his family to hold public office.

So with his political background and opportunity (he was educated at Ridley College in St. Catharines and at the University of Western Ontario in London) Darcy McKeough was obviously headed for greater political heights. To a great extent he has attained them, despite the sometimes sour comments of the media, as illustrated in an article entitled "Darcy McKeough: Somehow the Mantle Missed". Our guest is described as "a man who had come into the Legislature in 1963 . . . a man with an obvious silver spoon in his mouth . . . and little else for the first couple of years ... when he was no more than a raucous backbencher."

Raucous or not, Darcy McKeough has experienced political life at its fullest--from the heights, where I suggest he resides today, to the depths, which surely occurred in 1972 when he resigned from the Cabinet for a period of eleven months because of a situation which Executive magazine later described as "more of an embarrassment than a scandal".

He has been Minister without Portfolio and member of the Treasury Board, Minister of Municipal Affairs and Minister of Energy. He was appointed Treasurer of Ontario and Minister of Economics and Intergovernmental Affairs in 1975.

He has always been fully involved with his party and its future. He ran unsuccessfully for the leadership in 1971 but, as usual, came out a stronger, more viable personality. As Robert MacDonald wrote at the time, "There is little doubt that Mr. McKeough has emerged from his campaign much tougher and more confident than when he announced."

Our guest's reaction to MacDonald's comment and his leadership bid may well signify why he has been so successful at his chosen craft. "I've really enjoyed the questioning by delegates and mixing with them after formalities. In fact, some of my advisers have complained that I'm spending too much time talking to certain people. The trouble is that I get so interested because I'm hearing from real people."

During his tenure at Queen's Park, very few ministers have had more to do with the shaping of Ontario's destiny than has Darcy McKeough. He is not afraid of controversy--of making the correct, if politically difficult, decisions. He has been referred to as a "regulator", an "authoritarian" figure, and yet no one worries more about the level of public participation in the decision-making process than he does.

"We've got to get government down to the people," he says. "They have to feel they are participating rather than thinking it is all tucked away in distant Queen's Park." And generally, he has been successful in including in the governmental process all elements of society. At the same time, he has succeeded in economic terms in that the level of the civil service in Ontario has actually dropped and the budget is inching towards acceptable levels.

As a matter of fact, he must be a real expert on budgets--having apparently had a hand in developing one for Mr. Chretien on Monday night.

Ladies and gentlemen, Darcy McKeough is a positive force in Ontario and an effective one. He is renowned for his efficiency. An example of that was included in the biographical material sent to me by his office--a number of pages entitled, "Suggested Introduction for the Honourable W. Darcy McKeough". I can assure you, and I hope he will confirm, that this was not it.

Ladies and gentlemen, it is a pleasure for me to introduce to you the Treasurer and Minister of Economic and Intergovernmental Affairs of the Province of Ontario, the Honourable W. Darcy McKeough, who will address us under the title, "Prescriptions for Post-Control Canada".

THE HONOURABLE DARCY MCKEOUGH: It is once again an honour and a pleasure for me to address The Empire Club of Canada.

This is the third occasion I have had the privilege of speaking to you, and preparing today's remarks has been a sobering experience: I made the mistake of rereading the earlier speeches.

In March of 1969, I spoke to you with unqualified optimism on the agenda for local government reform. That was nine years ago; I'm still responsible for municipal affairs, and I'm still up to my neck with much of the same agenda for reform.

Then I spoke to you again, in November of 1973, as Minister of Energy, about energy policy, and in particular, against the notion that natural gas prices would be indexed to the rising prices of crude oil. That was on the eve of a national energy conference at which I lost the argument, and decisively.

And so, as my vision of 1969 and 1973 might be a little bit frayed, I'm not sure, in view of my past record, that I was wise in accepting your invitation.

I have lasted nearly five years as Treasurer, and survived six Budgets. Despite all that, your executive, in its wisdom, has never asked me for my views on the economy! Perhaps that's because your executive was trying to protect me from myself!

In any case, I decided today that rather than defend my budget, which of course I believe is eminently defensible, I would like to tackle the wider canvas of national economic issues,. which will likely dominate our concerns as we move out of controls--starting tomorrow and for some years hence.

I'm not in the habit of putting titles on my speeches; I think it's a dangerous practice. However, in order to help you sell tickets, I was conscripted to come up with "Prescriptions for Post-Control Canada". I'm not sure how that would rate among advertisers, but I hope I didn't scare anyone off.

Since I do not believe Canada and its economy are all that sick, I almost entitled this address "The Non-Existent Disease". However, that would have seriously limited my list of prescriptions. Yet, if I had used the term "Preventative Medicine" I would be right back to OHIP premium increases--a subject I would like to see go away for this noon hour at least.

A great problem today in prescribing good medicine for our country is arriving at a responsible diagnosis. I want to deal with challenges that I believe are urgent, and I emphasize at the outset that drift is not an option. However, scare tactics are used too often in the debate about our collective future. I am a Conservative in the Canadian tradition, and I am not wedded to the status quo, but I resent and fear the almost unchallenged pessimism in the country today.

Despair and disillusion are not the badges of sophistication; and panic is not a source of new ideas.

Certainly, the seemingly relentless expansion of the immediate post-war period is over. Growth will not come without effort, and Canada's future is not without risks. We are not on Easy Street, and we should do better, but let's be accurate about our circumstances.

The first step we must make is to set aside the unworthy and unfounded notion that this country is winding down.

We are sharing in the problems of the rest of the world, but we are also sharing in its opportunities.

Statistics do not tell the whole truth, but they do not always lie either. And I would like to enumerate a very few which I believe provide a broad and responsible perspective.

In terms of average growth, our economy has outpaced the United States and the OECD total economies since 1973. Indeed, between 1973 and the end of last year, employment growth in Ontario was 4.4 percentage points greater than in the United States and 9.5 percentage points greater than was the case for Japan.

Manufacturing faces significant competitive difficulties, but its problems are not peculiarly Canadian. Again, during this most recent four-year period, real output grew almost twice as fast as in the United States (6.1 per cent compared to 3.1 per cent). Manufacturing employment in Canada is up slightly, while manufacturing jobs in the United States have declined by 2.3 per cent. Over the last four years manufacturing investment in the United States expanded by 58 per cent, compared to growth of nearly 100 per cent in Ontario.

Moderating wage pressures, devaluation of the dollar and an improved productivity performance brought our unit labour cost increases into line with increases in the United States. In fact, last year, on a comparable basis, American unit labour costs increased .3 per cent faster, while their productivity increased 2.1 per cent slower than was the case in Canada.

As well, the figures indicate that Toronto construction costs and net corporate taxes in Ontario are lower than most comparable American industrial states.

There are many explanations for the continuing devaluation of the Canadian dollar, but continuing deterioration in our relative cost position and inflation outlook are not now credible reasons.

I know that this statistical exercise strains everyone's patience, but it is vital. Before looking ahead, we should appreciate that the ground we hold is good, and that an extreme assault, from either the right or the left, on our existing economic and governmental structures is not justified and would only get in the way of feasible and sensible initiatives.

Tomorrow we begin to dismantle the Anti-Inflation Program. The challenge now, in a freer economy, is to persevere in the fight against inflation, while finding new ways to earn our way ahead.

The big levers of fiscal policy will sustain moderate growth. Furthermore, federal monetary policy is now on the right course to restraining inflation.

However, as much as I would like to, I do not believe we can return quickly to full potential growth without structural changes in the economy and in the practices of our governments. Otherwise, the untenable wage-price-profit spiral that plagued us in the three years before controls will return. That does not offer the prospect of shared or secure national growth.

To conclude and lay my analogy to rest, I do not think we need to go back to the laboratory, but we must take our medicine regularly or we will soon be under the doctor's care again.

Now I think I have arrived at the point where I can make a few assertions about how we proceed.

First, building on a basic agreement:

With all respect to the distinguished speakers who have addressed you on the great choices before our country, those who believe in the market system, as I do, can--and should--move beyond the traditional and philosophic defence of our mixed economy and join more fully in the discussion of precise issues and ideas.

From my perspective, it could have come earlier, but nevertheless, a far-reaching and genuine enterprise strategy was hammered out at the recent First Ministers' Conference. A consensus has been reached on vital issues including: the need to set goals; to improve investment and the business environment; and to deal head on with sectoral problems.

A partnership between the business community and our community of politicians can hardly be set in granite, but a contract has been offered. The Prime Minister will have to stop his musings, and political leaders generally will have to find more constructive ways of advertising our creativity than drafting national "blue-prints" every six months. But on the other hand, we, in government, who are relying on the ingenuity and courage of our enterprisers, should expect a moratorium on the cranky adversarial mentality that has grown between us. Many of the measures we must pursue will be politically difficult and highly complex, and if we are going to succeed, we will need positive advice and support from the private sector.

Second, maintaining public-sector discipline:

In order to restore confidence and greater opportunities to the private sector, all our governments must continue to contain their growth. That is our central responsibility, and on this challenge I believe you can trust the Ontario government.

When I returned to the Treasury in 1975, provincial government spending was increasing at over 25 per cent per year. Every year since then we have reduced our rate of spending. Indeed, for two years in a row, we have come in below our spending estimates and, for next year, we are aiming to hold total spending growth to 7 per cent.

We will meet our commitment at the First Ministers' Conference of holding the spending growth rate below the growth rate of total national income. Indeed, we will do better: spending will be held below the rate of inflation, as we move to a balanced budget, which will free-up even greater resources for productive investment.

The federal government, which I expect will live up to its commitment as well, should, however, be doing better. The 10 per cent increase in their spending for this year is limiting their capacity to meet new problems and underscores the need for tough decisions on public sector manpower and salaries.

Governments have become overstaffed and that is something we cannot afford. Limiting the growth rate in government hiring is not an adequate response. Ontario's total public service has declined for three years. At the end of last year, there were 1,350 less people than in March 1975. This is continuing. Indeed, our latest twelvemonth figures report a further absolute reduction of just over four hundred positions. On the other hand, federal public service hiring increased by 3,474 last year. They can do better, and if they do, the rewards for government and the economy would be great.

The Anti-Inflation Program has had a dramatic effect in bringing public sector wage settlements in line with those in the private sector, and we want to keep it that way. It is vitally important that public servants accept a share of the real income adjustment that higher energy prices and a depreciated dollar imply. To give full and automatic protection to public servants would create two classes of workers in this society and force those without similar bargaining leverage to bear double the adjustment burden.

We must also bear in mind the burden to our taxpayers compared to those in jurisdictions in which we must compete.

We are budgeting for only a 4 per cent increase in our payroll for this year. That is very tough, but before we are accused of being draconian we should reflect on these comparisons: a full professor, in our universities, costs the Ontario taxpayer almost $10,000 more than in the United States ($35,000 vs. $25,845), and a lecturer is paid at least $3,000 more ($16,701 vs. $13,369).

Civil service salaries in southern states such as Lousiana are vastly lower, but comparisons here might be unfair. Nevertheless, I think the state of Michigan provides a fair basis of comparison with Ontario, and from that perspective, consider these facts. Last year a computer programmer and a police patrol officer in our government could earn about $1,000 a year more than in the Michigan state government (maximum rates: programmer, $17,184 vs. $16,224; police officer, $17,628 vs. $16,872). Nurses could make $3,000 more ($16,908 vs. $13,692).

I am not suggesting that we do not get value for our money. I think our public institutions are second to none, but we must bear in mind that we must compete in the marketplace with the American states. We cannot expand the burden borne by taxes in isolation from our neighbours.

Third, taming government activity in the marketplace: Beyond encouraging investment and keeping our tax system competitive and freeing-up resources for the private sector, all governments must rationalize an array of regulatory legislation, if free market forces are going to be most effective in rationalizing economic activity. Deregulation, for me, does not imply less vigilance in maintaining standards of safety or honesty in the marketplace, but we can roll back mountains of red-tape and regulations, at all levels of government, that were designed to, and have, restricted access to opportunities and the discipline of competition. We know more about stabilizing our economies than we did in the thirties or the sixties, and we need not and cannot retain, forever, many of the measures of those times.

In this respect, we are implementing zero-base budgeting; sunset provisions; and the formal requirement for the assessment of the economic and fiscal impact of all new legislation. We may not be able to roll back our involvement significantly, although I, for one, think we can. But we will be forced to think more carefully before taking new initiatives, and private interests will have to be more convincing for more particular government measures.

The other side of the equation, inevitably, is that government, in the form of tax stimulus, can only play a limited role, if we are ever going to eliminate the present inflationary bias of public-sector debt.

With indexing of the personal income tax, and with our floating exchange rate, we can no longer afford the good old days of massive tax cuts. We went into an election last spring with a budget that provided some $286 million in business tax relief to keep Ontario competitive. We provided an additional $50 million of selective tax stimulus for tourism, energy conservation, and mining development in my last budget. And, of course, we will provide our fair share in financing the temporary reduction in retail sales taxes which Mr. Chretien proposed in his budget on Monday.

Nevertheless, if we have learned any lesson over the last decade it is that governments must be able to pay their way, and that selective and temporary stimulus is all that we can honestly afford. Reducing overall taxes irresponsibly simply means raising more with runaway inflation, which is the most vicious tax of all.

Fourth, strengthening innovation and excellence:

At the First Ministers' Conference we presented a proposal for a tax credit for new jobs in research, design and development. The measure proposed by Mr. Chretien on Monday night reflects our concern on this matter.

First, it is incremental; it will stimulate new investment in research and development. As well, it is not limited only to domestically owned firms. Some 60 per cent of the firms which would likely take advantage of the tax incentives are not Canadian-owned, and many, like the other 40 per cent who are Canadian-owned, are not investing enough in innovation and new technology. Nevertheless, unless we want to kick them out, I believe we should use them fully, as a source of growth, for employment, for innovation and for excellence.

Fifth, strengthening our energy and transportation infrastructure:

While the entire western world has an immense stake in President Carter's determination to implement a comprehensive energy policy, the fact is that Canada will likely be able to put things right well before our neighbour to the south. In terms of pricing, taxing and investment policies, I believe, the dynamics are in place for more efficient consumption and adequate supplies in the next decade.

This is vital, and it is desperately important that we not become complacent or assume that we will succeed without making fundamental changes in our economy. Vast sums of public and private financing will be required and, by necessity, many other demands will have to assume less than traditional shares of growth. If other sectors, generally, try to resist the shift of resources to energy development, we will most certainly face severe cost inflation throughout the economy.

As well, we must upgrade our transportation system. Here, government must maintain its traditional responsibility in nation-building. In particular, in that respect, we are still waiting for the federal government to act on our proposal to improve key rail corridors, for example--Quebec-Windsor.

Sixth, preparing for freer trade:

I have spoken on numerous occasions on our strategic goals at the current round of GATT negotiations, but I would like to say a couple of things about how we conduct ourselves at home.

First, we must make up our minds on the basic question. Do we want to build a more protected society or are we going to face up to the challenges and opportunities of the wider world? For spiritual, and for very pragmatic reasons, I believe we have no choice but to gear up for freer trade.

In choosing that course, however, we must make the best of our opportunities, and that means significant industrial rationalization. Thus, in framing adjustment policy, government must not only ease some of the pain but must encourage our best bets, for instance, our steel, wood, nuclear, agricultural, petrochemical, plastics, and electronics industries.

I believe too that sound large-scale financial institutions are essential to this task. Recognizing the competition and vitality that foreign banks give to Canadian financial markets I am receptive to the idea of formal recognition and supervision of foreign banks operating here. Ontario's major concern, however, is that Canadian banks are able to obtain reciprocal recognition abroad. Canadian banks provide invaluable assistance to our firms in penetrating foreign markets. This should be encouraged by insisting on foreign reciprocity to Canadian recognition of foreign banks in Canada.

We believe there is a place for an intelligent "buy Canada" program. However, along with such a campaign, there should be a commitment by all our governments to allow all our enterprises to do business in all our provinces. We are going to have to tackle the purchasing policies in certain provinces, which discriminate against interprovincial competition. Any balkanizing policy is inconsistent with any brand of federalism, even that peddled by M. Rene Uvesque.

Seventh, developing our human skills:

As the Ontario Economic Council pointed out recently, a significant portion of our unemployment, over the next decade, will be caused by our inability to match labour markets with appropriate skills. This is something we cannot afford.

Skilled tradesmen are essential to the development of manufacturing in Ontario. But traditionally we have relied on other countries to fulfill our skilled-manpower requirements. For example, a recent study of the durable-goods industry in my part of Ontario indicated that fully 73 per cent of the skilled tradesmen employed were trained abroad. Moreover, 87 per cent are middle-aged, while only 2.6 per cent are in their early thirties.

In light of the glaring need to better train our young people, and to improve flexibility in our job markets, my colleague the Minister of Labour, in June, will convene a conference on the labour market. Representatives from labour, business and the academic communities will address themselves to the issue of jobs and skills. This challenge will require a rigorous co-operative effort on the part of all the main sectors of our society.

Eighth, calming industrial strife:

In 1975, industrial disputes caused 359 work-stoppages in Ontario, resulting in 3.2 million man-days of lost output. By 1977, this fell to 230 stoppages and 1.1 million lost working days--a dramatic reduction of over two million days in work stoppages.

We must maintain this pattern despite the fact that without controls government will not be so visible-and-unifying, as a common enemy. Personally, I do not feel government can find magical legislative devices to bring management and labour closer together. But, while European ideas of co-determination do not seem to be appealing models for Canada, changes are required. I find it amazing that so many chief executive officers only meet their union counterparts after both parties are well into the second or third week of a strike or lockout, if at all.

I suppose my advice is a bit gratuitous but our total economic well being is at stake. We in government will have to bargain very hard with the public service as, I am sure, will the private sector. I believe, however, that private employers and employer associations must come clean on one inescapable reality. Certainly, trade union leadership must admit that their members have a stake in healthy profits and greater productivity, but the labour movement should no longer be fighting for its existence. The labour movement is here to stay as is the Bar Association and the Canadian Manufacturers' Association, and only until that is fully appreciated, will common understanding and collaboration effectively take place.

Ninth, maintaining our social commitments more efficiently:

I believe the fight against inflation is a social, as well as an economic responsibility, and it would be wrong and counter-productive to pursue greater economic productivity by abandoning longstanding and legitimate social obligations.

For government to follow such a course, no matter what the temper of the moment, would be unfair, divisive and demoralizing. Therefore, while I do not believe government should undertake major new social policy initiatives for perhaps another five years, the need to continue to reform and reshape existing social policy is immediate and urgent.

Our social policies must be more productive and more efficient, and on this challenge government needs the ideas and skills, not simply of its clients, but of all of you who have a stake in building a good, as well as a strong Canada.

Tenth, disentangling our governments:

Finally, of profound importance to our steady economic advance is the task of disentangling much of the overlap and the confusion of tasks between our three--and even four--level federal-provincial-local system.

I will not go on about who does what, but I want to make the point that coherent economic leadership and

more effective government urgently requires a down-to-earth effort to sort out exactly what are the primary responsibilities of each level of government in this country and how accountable they are to the people they serve.

Economic concerns must have a significant place in the debate on the reform of our federal structure. From this perspective, economic and constitutional issues are not in conflict, but indivisible.

Ladies and gentlemen, you have allowed me to speak at length on the economy, and I appreciate your hospitality and forbearance. But I will have failed in my ambition today, if I conclude simply on the tactics of how we advance.

Realistic expectations are vital--a 32-hour week or a three-martini lunch must be earned--but our most immediate task is to renew and rekindle pride in our country and in its economic system.

Certainly, there is "political uncertainty", but let's put that in perspective. As a free society, Canada is a symbol of social harmony; lawful union-and-business practices; urban safety; and clean politics. As a federal nation, we have demonstrated, only just this week, that diversity and democracy need not frustrate timely and co-ordinated leadership.

We are not immune from error or trouble, but it is time we stopped underselling our assets. Our mixed economy is mature and enjoys wide public support. Our democracy is secure and can withstand a fundamental debate about our future. We have a reputation for honesty; this is not a land of agents' fees.

We have an abundance of apologists, but we are short of salesmen. Canadians should be aggressive international investors, but I believe "smart" money should have confidence in Canada.

With its abundant and diverse resources, its strong institutions and its people, Canada can regain its sense of promise. If we continue to take good medicine, for the right reasons, we can choose to be the star of the remaining two decades of the 20th century.

Thank you very much.

The appreciation of the audience was expressed by Ronald Goodall, C.A., Treasurer of The Empire Club of Canada.