An Update of the Economic and Fiscal Situation

Introduction:

I've been told by past presidents of The Canadian Club that there are two subjects that are guaranteed to attract large audiences: money and power. Well, Michael Wilson has the power and he's certainly going to speak about money tonight, although I'm afraid he may talk about lack of money.

Early last week, the news leaked out that Michael Wilson was returning to Bay Street to give a major statement on the economy. The very next day, the Toronto Stock Exchange took the biggest one-day nosedive in its history since 1929. Perhaps it was a coincidence, but, if I were the Minister of Finance, I'd be worried about having such a dramatic effect on the stock market. And I'm told it affected Wall Street, too.

More seriously, I'm delighted to welcome back one of our own: Michael Wilson is a former vice-president of The Canadian Club, and his father, Harry Wilson, was president of the Club for our '60/61 season. And I'm very glad that he could be here, too, joining us at our head table.

Michael Wilson has one of the toughest jobs in the country-a job he fulfills with determination and tenacity. The present Government is now entering its third year, and Michael Wilson has retained from the beginning the sometimes uncomfortable and often controversial position of Minister of Finance. In Ottawa, he is respected both for his stamina, which is legendary, and for his ability to outlast almost anybody at a party. Tonight he's here to give us an update on Canada's fiscal position-a situation report on the deficit. I'm told it's the single subject that worries Bay Street the most.

I hope the news he gives us tonight is not too disheartening. But, in any event, I'm delighted that the Minister believes in tackling these tough issues and that he has chosen to be with us tonight.

Michael Wilson

Let me say first how much 1 appreciate the opportunity to speak to the Canadian Club of Toronto once again joined by The Empire Club. It's always good to be back home and to see so many old friends and former colleagues.

Most of you are probably aware that we have already begun planning for next February's budget. Tonight, I want to use this opportunity to give you an update on the economic and fiscal situation. I consider this part of an ongoing commitment I have made to make information about the current economic and fiscal situation available in a more timely way.

Since taking office, the Progressive Conservative Government has brought a fresh approach to the challenge of achieving Canada's economic promise and potential. Our objective was straightforward: sustained economic growth and productive jobs for Canadians. That objective has not changed. And it will not change.

To reach that objective, we have been following a consistent policy agenda. That agenda, set out in November 1984, identified four thrusts essential to economic renewal:

To get the budget deficit under control. To give business a new boost.

To make the Government more efficient in its own operations and less obstructive to the work of the private sector.

And, to bring out these changes with the sense of equity and openness that characterize Canadian society.

We have made it clear from the beginning that fiscal responsibility is absolutely essential if we are to secure durable economic renewal. But fiscal responsiblity, after so many years of profligacy, cannot be achieved overnight. Therefore, we established a five-year fiscal plan to restore our public finances to a state of health.

We have defined fiscal responsibility by four fundamental principles. These have guided our actions in meeting the challenge of restoring financial health.

First, to reduce the growth in the national debt to less than the growth in the economy by the end of this decade. Second, to achieve continuing, sizeable year-over-year reductions in the deficit.

Third, to ensure substantial year-over-year reductions in the size of the Government's financial requirements.

And fourth, as the primary means of achieving these objectives, to ensure that the greater part of the progress is through expenditure restraint and tight management.

By following these principles, we succeeded in reducing the federal deficit in 1985-86 by $3.8 billion, a 10-per-cent drop from the record deficit of $38.3 billion in the previous year. This was the first time in six years the deficit had been chopped. It was only the second time in 16 years, Not only that, but last year's deficit, $34.5 billion, was virtually bang on target.

Moreover, our progress in improving the deficit last year was markedly better than the United States'. In 1985-86, the " deficit in Canada dropped 1.4 percentage points relative to gross domestic product compared to the preceding year. By contrast, the American deficit rose 0.7 percentage points.

The key to getting the deficit down is locking the door on spending. Total Government spending, excluding interest payments on the public debt, declined by almost one per cent last year. This was the first noticeable decline in program expenditures since the Second World War. It compares with an average annual growth rate of 12 per cent over the last 10 years.

Moreover, total spending came in $2.1 billion below the target set out in the May 1985 budget.

The decline in spending was entirely due to a $1.6-billion reduction in spending on discretionary, or non-statutory, programs. This considerable accomplishment was greatly aided by the comprehensive work of the Nielsen Task Force in co-operation with business and labour leaders in the private sector. After adjusting for inflation, non-statutory spending dropped more than eight per cent last year. We have also made changes to statutory programs, which will increasingly constrain spending beginning this year.

These figures are not forecasts. They are facts. They are milestones that mark the progress we are making on the road back to fiscal responsibility. They are battles that this government has won.

They are battles, but they are not the whole war. Further deficit reduction is imperative, but economic renewal will not be won by deficit reduction alone. Fiscal responsibility is not a do-nothing approach to the economy. It is not a hack-andcut philosophy that tears down but never builds. It is a discipline that demands that we set priorities so that limited resources can be used to support initiatives that will help create, shape and sustain a more prosperous, tolerant and just Canada. This is precisely what we have been doing.

The reduction in government spending means more than simply saving money. It means we are reducing the size of government. Reducing spending is part of a broader effort to streamline existing government programs, sell off Crown corporations, reduce regulation and complete our work flowing from the Nielsen Task Force. It is part of a board program to give the private sector more room to innovate, to grow, and to create jobs.

At the same time as we have acted to streamline government, we have acted to support private initiative by encouraging entrepreneurial investment, by co-operating' with industry to increase university research, and by pursuing trade initiatives designed to secure our ability to compete fairly in an increasingly competitive world.

But our program is even broader than this. We have acted to increase support for those in need. We have improved standards for private pension plans and strengthened The Canada Pension Plan. We have removed discrimination against women from the Indian Act. We have increased veterans' pensions and brought in needed reforms to our justice system. We have made strides toward greater equality in employment opportunities for women and minority groups. We have introduced a refundable sales tax credit for low-income Canadians and a minimum tax on the wealthy.

The actions we have taken have made our economy stronger, our Government more efficient and our society more humane.

The results of our policies to date can be measured, at least in part, by the economic record over the past two years. Looking back, we can see that Canada as a nation and Canadians as a people have experienced some real improvements in our economic well-being.

Take economic growth. In 1985, our real Gross Domestic Product grew at a pace exceeded only by Japan among the major industrial nations. We grew considerably faster than the United States and all other major OECD countries.

Take job creation. Since September 1984, the Canadian economy has created well over half a million jobs. The unemployment rate has fallen from a high of 11.7 per cent in September 1984 to 9.7 per cent last month. There are still too many Canadians without a job, but the picture is brighter than it has been since March 1982.

Take inflation. No more double digits. The consumer price index is down close to 4 per cent. Other price measures show an even better performance. For example, the price measure, or deflator, for Gross Domestic Product, which keeps track of price changes for all goods and services produced in Canada, is now increasing by only 2'/z per cent per annum.

Take interest rates. Today mortgage rates are more than three percentage points lower than they were in September 1984. The prime rate averaged just over 12 per cent in 1984, dropped to about 10'/z per cent in 1985 and today stands at 93/4 per cent. That is less than half of what it was in 1981. It is the lowest it has been in eight years.

Our stronger economic performance has been recognized the international community. For example, according to the 1986 report of the European Management Forum, published last month, Canada now ranks sixth among the 22 leading industrialized nations examined in our overall competitive position. This is an improvement from eleventh place in just two years.

The latest survey of Canada by the OECD stressed the very strong performance of the Canadian economy in 1985 with the growth in output being "among the highest in the OECD area" and "employment growth the fastest in the whole OECD"

The economic analyses and statements made by these objective observers have a clear, common message: Canada's economy today is a good deal stronger than it was in September 1984.

Nothing is ever static in the world. However, the world economy is in a period of transition marked by new technology, tougher competition, and changing habits. At the same time as the Canadian economy has improved, new challenges have arisen, and these require new responses. In a number of important ways, the world's economy is different today from what it was only a year ago.

For one thing, Canada's principal trading partners experienced a slowdown in growth in the first half of 1986. The main reasons are trade and fiscal imbalances, uncertainties about rapidly adjusting exchange rates and commodity prices, and debt burdens that have discouraged buying by many less-developed countries.

These pressures have contributed to the surge in protectionism in the United States, for example, which is causing great concern.

Through the first half of 1986, there have been additional problems. The sharp drop in world oil prices has hit our producing and exploring areas hard, as the citizens of these parts of the country know only too well.

Another blow has been the dramatic fall in grain prices on the world market, largely the result of the grain war between the U.S. and EEC.

These economic pressures will not disappear overnight. And they inevitably have consequences for us. In particular, they have had negative effects on our trade balance through lower prices for our energy and grain exports.

But, despite these pressures, the fundamentals of the economy remain sound and there have been some positive developments. Recent declines in interest rates are particularly encouraging. Lower international oil prices should raise the real purchasing power of consumers, in Canada and in our trading partners, and this will help strengthen economic growth.

Taking all these factors into account, the over-all outlook for this year is that economic growth will be somewhat slower than anticipated. While several current economic indicators suggest some weakness in the third quarter, real Gross Domestic Product for 1986 should increase at a rate of about three per cent. The increase in the consumer price index for the year will average about four per cent. And the unemployment rate by year-end should be at or slightly below the current level of 9.7 per cent.

Growth elsewhere among industrialized countries shows signs of being stronger in the latter part of 1986 than it was at the beginning. Looking ahead in 1987, 1 anticipate economic growth to strengthen here and elsewhere as the benefits of lower oil prices and interest rates are realized more generally. The strength of growth next year will hinge importantly on policy developments and the economic outlook in the United States, Europe and Japan. This underscores the importance of Canada's achievement in gaining full membership in the "G7;' the group devoted to enhancing economic co-operation among the world's seven leading industrial nations.

This year's fall in oil and grain prices has hit some parts of Canada hard. Once again, we have been reminded that we live in a nation of varying and uneven regional economic strengths and endowments.

One of the basic principles of our nationhood is that we respond in times such as these to support regions in particular economic difficulties. To a large extent this happens automatically-through those mechanisms that economists call "automatic stabilizers." Higher stabilization payments to farmers hurt by low grain prices-or an Unemployment Insurance cheque to an oil worker out of a job-are among the important ways we in Canada help minimize the effects of economic shocks to regions and sectors.

In the current circumstances, lower oil prices mean that this year government tax revenues will be reduced. Similarly, with the fall in grain prices stabilization payments to our grain farmers will grow.

This reflex response is built into Canada's economic and fiscal structure. It is a necessary response. But it is not always a sufficient response. The Government has taken further steps to help the energy and farm sectors. For example, last April the Prime Minister announced an increased exemption for small oil and gas producers from the Petroleum and Gas Revenue Tax, and an enhanced Fuel Tax rebate to help ease the farm community through its financial difficulties. And earlier this month, my colleague, the Minister of Energy, announced that the PGRT would be ended as of October 1. That measure in itself will rrfean a sizeable benefit to activity in the energy sector. But it also represents a corresponding loss in government revenues.

These actions are providing welcome support to Canadians and to Canadian communities and regions. Without this support, Canada could not be, and would not be, the kind of nation we all take pride in.

But this support, so vital to our well-being as a people, has a corresponding impact on the deficit. As a result of lower oil prices and somewhat slower economic growth than previously foreseen, revenues this year will be $2'/z billion lower than expected

In these economic circumstances, with the regional dif-

ficulties that confront us, I do not believe that this fall in revenues should be offset by tax increases. Equally, it is not appropriate to make up the shortfall through further major cuts in spending this fiscal year. Expenditure reductions of this magnitude at this time, given the expenditure cuts we have already implemented, would be more disruptive and harmful to the economy than a slower decline in the deficit this year. Indeed, it is simply wrong to think that such cuts could be made in the balance of this year without significantly affecting spending on regional economic support programs and social assistance. To cut spending on these programs-so important to regions, sectors and individuals in difficulty, would doubly harm those communities and Canadians that are already hurting.

I want to make it clear, however, that a slower decline in the deficit this year, in the face of extraordinary economic events, does not throw us off our track or lessen our commitment.

We are as committed today to our four principles for fiscal responsibility and to our five-year fiscal plan as we were in 1984.

We said we would reduce the growth in the national debt to no more than the growth in the economy by the end of the decade. Reductions in revenue this year will not deter us from this track, and I will take appropriate action in future budgets, if necessary, to ensure that this goal of our five-year fiscal plan is met.

We said we would achieve the greater part of this progress by tight expenditure control. Our record in expenditure control is excellent. Our expenditure plan for this year is still on track. We will meet or better the $89.4 billion target for program expenditures set out in my February budget.

We said we would achieve a substantial year-over-year reduction in the size of the deficit. We will. Given the economic outlook for the rest of the year, by holding to our expenditure target the deficit will come in at or under $32 billion. This will mean a substantial decline from last year. And it will be the first time in 16 years that the deficit has decreased two years in a row.

We said we would ensure year-over-year reductions in the size of the Government's financial requirements. Exclusive of foreign exchange transactions, the Government's financial requirements will fall by almost $7 billion this year.

Our decision not to offset the deficit increase this year was taken consciously and positively. We are willing to plan for a slower decline in the deficit this year for three reasons: first, because it cushions the blow of recent economic pressures to hard-hit regions of Canada; second, because our spending is still on track; and third, because a higher-than-expected deficit this year is not inconsistent with either our five-year fiscal plan or our fiscal principles.

Since coming to office, we have made continued progress in restoring health to our nation's finances. We will continue to do so. This progress is reinforcing the sound foundation on which we can continue to pursue our primary objective of sustained growth and jobs for Canadians.

But, to achieve this objective, we must also meet challenges that go far beyond the imperative of controlling the national debt. We will respond to the challenges of tax reform, including our commitment to review our social transfers and related tax provisions. We also face bold and far-reaching challenges in securing and enhancing our trade prospects, in developing stronger regional economies, and in promoting social justice and equality of opportunity for all Canadians.

These issues and others will test our wits, our courage and our capacity to transform the vision of a better Canada into reality. But, rest assured, in pursuing them we will do so within our framework of fiscal responsibility.

These challenges hold out great opportunity and promise. In addressing each of them, the Government is prepared to deal with the issues constructively, openly, creatively, and co-operatively. We will continue to show the leadership that Canadians expect of their government. I am confident that Canadians will seize the opportunity and work with us as we strive to build a better future.

The appreciation of the meeting was expressed by Nona Macdonald, President, The Empire Club of Canada:

We are proud to have our platform as your podium, Mr. Minister, for this significant meeting.

You have outlined our country's fiscal policies at a time when the economies, both here and abroad, are subject to volatile changes. Tonight, Mr. Minister, you have dealt with these realities in your traditional forthright and courageous manner.

You leave us with a clear awareness of the problems we face and how our representatives in Ottawa must deal with them. It is obvious too, from the response of this audience that we respect your firm hand at the helm.

Thank you for bringing us this state-of-the-nation report and on behalf of The Empire Club, our appreciation, and, to The Canadian Club of Toronto for hosting this landmark meeting.