Election? Let’s see the budget first

IAN URQUHART March 21 1977

Election? Let’s see the budget first

IAN URQUHART March 21 1977

Election? Let’s see the budget first


It was a stunning reversal. After trailing the Conservatives for a full year in the influential Gallup polls, the Liberals were suddenly ahead. In early February, even before Prime Minister Pierre Trudeau’s triumphant visit to Washington, the poll showed the Liberals favored by 41% of the voters and the Conservatives by 37%. Just one month before, the Tories had been ahead, 45:35.* Still more dramatic was a poll showing Trudeau running ahead of Conservative leader Joe Clark 43:30 on a head-to-head basis.

Outwardly, both Trudeau and Clark professed little interest in the poll. Clark said he was not concerned, and Trudeau preoccupied with the travels of his wife, Margaret (see page 63), wondered how accurate the figures were. But, behind the scenes, the polls prompted a flurry of talk of an early election, perhaps this spring, to enable Trudeau to ride the tide of a national unity campaign to another term in office. Said Trudeau: “I don’t foresee any, I don’t expect any, and, therefore, I don’t intend calling any election.” But the speculation was fueled by the announcement that the spring budget will be brought down March 31, more than a month earlier than usual.

Apart from the fact that a snap election could backfire—just as it did on Robert Bourassa in last year’s Quebec election— the timing of the polls and the announcement of the budget date were pure coincidence. The budget date, a response to public pressure for government action to revive a slumping economy, was actually scheduled several weeks before the announcement, but Finance Minister Donald Macdonald delayed making it public in case he changed his mind. Said Macdonald: “If it is an election budget, nobody told me. My personal opinion is there will not be an election in 1977.”

Election or not, the budget is crucial to Canada. The economy is in bad shape with unemployment at a 15-year high and inflation still not under control. Canada’s unemployment rate in January stood at 7.5%—above the comparable U.S. figure for the first time since September, 1974. The inflation rate, which had dropped as low as 2.4% last August, climbed to 9.2% in February. There were forecasts that both figures could get worse before they get better. But, as always, a move by the government to correct one of the problems would exacerbate the other.

*The last time the Liberals led the Gallup poll was in February, 1976, just before the election of Joe Clark as Conservative leader. The margin was 38:37.

The man confronted with this dilemma is Macdonald. Unlike most other government initiatives, which are collective efforts, a budget is almost entirely the sole responsibility of the Minister of Finance. He consults the Prime Minister and shows his work to the cabinet just before budget day. But in the final analysis he is on his own. It is unlikely Macdonald will produce anything dramatic. His record as finance minister since taking over from John Turner in September. 1975, has been cautious and. after an initial bombshell with the introduction of wage-price controls. Macdonald’s first budget last May was mostly a stand-pat. do-nothing docu-

ment involving some minor tinkering. Said Macdonald at the time: “I’d rather be seen as unimaginative than foolhardy.”

Macdonald’s no-risk approach was a disappointment to many who had expected more based on his performance in previous portfolios. As government House Leader, he had rammed through rules changes over stiff parliamentary opposition and as energy minister he had turned the national oil policy on its head and established Petro-Canada, the government petroleum company. But, as finance minister, Macdonald faced a crushing burden of responsibility that may have hampered him. In the past year, he had to oversee the controls program, bargain a new revenuesharing agreement with the provinces, and begin revision of the Bank Act as well as manage the economy. “For a while,” says one departmental aide, “he was just floating on a cloud protected by his officials.” There was also little room to manoeuvre in last year’s budget, which, in a sense, made Macdonald’s job less difficult. “Last year was easy,” says the aide. “We knew we could do very little. But this year it’s a real problem knowing which way to turn.” There is no shortage of advice for Macdonald on which direction to take, with opposition parties, businessmen, labor unions and economists all ready with suggestions. Here is a sample:

The opposition: There is rare agreement between the Conservatives and the New Democrats on the broad, basic steps that should be taken. Both favor a cut in personal income tax for lowerand middle-income people. And a quick end to controls. Neither is particularly keen on corporate tax cuts or, as Broadbent calls them, “giveaways to business.” Says Tory Finance critic Sinclair Stevens: “Corporations need their confidence restored more than their taxes cut.”

The businessmen: The Canadian Chamber of Commerce wants the investment tax credit for businesses, due to expire June 30, raised from 5% to 10%. The Canadian Manufacturers Association (CMA) is not calling for an increase in the credit but would like to see it extended beyond June 30 indefinitely. Both the CMA and the chamber would like to see a reduction in the 12% federal sales tax, as would the Canadian Federation of Independent Business—the spokesman for small businessmen—and a cut in personal income tax. On the question of controls, there is less unanimity among the businessmen. The small businesses, which do not fall under the controls, would like to see the program continue, but big business is divided.

The unions: Labor has concentrated its efforts on ending controls, the sooner the better. Having despaired of persuading the federal government to drop the program, the unions are now pressuring the provinces to withdraw their support for it.

The economists: There are probably as many different views as there are economists, but some general themes do emerge.

Judith Maxwell of the C. D. Howe Research Institute has called for a cut in provincial retail sales taxes, which are beyond Macdonald’s control. Failing a provincial response to federal appeals for a cut, she suggests a personal income tax cut as second best. But Bengt Gestrin of the Canadian Imperial Bank of Commerce believes corporate investment, not consumer spending, should be stimulated by the government with proposals similar to those recommended by the CMA. Jack Weldon of McGill University, on the other hand, supports an increase in government spending on energy and transportation projects coupled with visible cuts in its wasteful

minded everyone several times, most recently in Washington for his meeting with U.S. Treasury Secretary Michael Blumenthal, that, unlike the United States, Canada already has a built-in system of automatic tax cuts called “indexation.” Suggested by former Conservative leader Robert Stanfield and introduced by Turner in 1973, indexation ties the basic tax exemption to the inflation index. This meant a tax cut on the order of $950 million on January 1. Combined with increases in old age pensions and family allowances and cuts in provincial income taxes and unemployment insurance contributions—all of which are also indexed—

spending “to satisfy the clamor, coast-tocoast. Otherwise, we will witness the subversion of the principle of government at a time when it is most needed.” All three favor an early end to controls.

Macdonald has dropped some budget hints, maintaining he is more concerned about inflation than unemployment, although his concern for the latter has risen with the jobless rate in recent months. Thus, he is unlikely to use the budget speech, which may be televised for the first time ever, to announce an end to controls. He is more likely to say controls will remain in place for at least six more months and to leave the date for termination indefinite.

On the tax side. Macdonald has re-

there will be a transfer of about two billion dollars back to the taxpayers this year alone. Lower interest rates and the declining value of the Canadian dollar, which dropped below 95 cents on March 9. its lowest level in seven years, will also have a stimulative effect.

Macdonald may be worried about overstimulating the economy and starting a new round of inflation if he brings in new tax cuts in the budget. But a budget is a psychological as well as an economic document. and the Canadian economy needs a psychological boost. A survey of 220 businesses by the Conference Board discovered. for example, that only 21% believed now is a good time to expand productive capacity. An indexed tax system is unlikely to change the businessmen’s minds. They need a signal from Macdonald. But any measure is likely to be relatively small in scope.

The problem may be that, where we used to suffer from one or the other, now we have both high inflation and high unemployment occurring at the same time. Says the C. D. Howe’s Maxwell: “In a very basic sense, the status quo in Canada is no longer defensible and it is time to make changes in the economy and political structure.” In his budget and in his subsequent efforts to find a system to replace

Controls, Macdonald must face this challenge head-on. If he fails, the prime issue a year from now, when an election is likely to be called, could be the economy, rather than national unity. And if that happens, Canada could see yet another turnabout in the polls.