Martin's 1996 Budget

If Martin has his way, there will be one more budget - if only because he could then announce the virtual elimination of the federal deficit by the turn of the century.

Declining Deficits
(courtesy Maclean's)
Budget Cuts
Ottawa has added cuts each year as the cumulative savings increase, in billions (courtesy Maclean's).

Martin's 1996 Budget

  For the jittery federal Liberal caucus, Finance Minister Paul Martin's third budget was a decidedly mixed blessing. There were no new taxes. The deficit was heading down. There was even more money for poor working families. Such good news has been so unusual during the past decade that it was no wonder that many Liberal MPs immediately started to worry about the nerve-wracking prospect of an early election. Veteran Liberals, such as Winnipeg MP David Walker, turned their post-budget celebration at a downtown Ottawa restaurant into a heated debate about the wisdom of going to the polls. When Newfoundland MP George Baker received a confidential summons to a March 11 meeting of the federal party brass in St. John's, he nervously assumed that the government was on a war footing. "The backroom boys have something cooked up," Baker told Maclean's. Such rumors have flourished - even though campaign co-chairman Senator Dan Hays insisted that there is nothing unusual about the party's advance preparations. "We have got some pretty good stuff in this budget," said Hays. "But we are only in the middle of our mandate."

If Martin has his way, there will be one more budget - if only because he could then announce the virtual elimination of the federal deficit by the turn of the century. Last week, the finance minister proudly noted the good news that will flow from the nearly $80 billion of cumulative spending cuts, most of which were built into the system during his previous budgets and which continue automatically through to 1998-1999. The deficit will drop to $17 billion, or two per cent of the domestic product in 1997-1998 - the lowest since Ottawa's free-spending ways began in the mid-1970s. At the same time, if economic growth continues, and if interest rates do not soar, Ottawa will have to borrow only $6 billion by then - the smallest amount that it has needed in relation to the size of the economy in 28 years. Most important, the amount that Canadians are borrowing from foreigners is plummeting because Ottawa and most provinces (with the notable exception of Quebec) are cutting costs. "Canadian economic sovereignty is being restored," Martin boasted in his budget speech to the House of Commons. "We will balance the books."

Once single-minded in his attack on the deficit, Martin has broadened his mission: how can Ottawa best spend the funds that remain at its disposal? Last week, the minister radically redesigned the federal old age pension that generations of Canadians have viewed as a birthright. In the year 2001, a decade before the first wave of the baby boomers starts to retire, the basic Old Age Security and the Guaranteed Income Supplement for the needy will be combined into a single Seniors Benefit targeted towards lower-income households. (The Canada Pension Plan will remain untouched until Ottawa and the provinces can agree on future reforms.)

Aware of the political risks, the government launched a hard-sell campaign to reassure individuals over 60 that their monthly cheques will, if anything, rise. The backlash may come from the fact that the size of the cheques for new pensioners after 2001 will depend on the amount of a couple's total income - no longer on an individual's income. As a result, many baby boomers who paid taxes in the belief that they would receive a pension may not receive a nickel because they have an adequate family income. That won guarded applause from many independent critics. Sherri Torjman, vice-president of the Caledon Institute of Social Policy, said in an interview: "Now, you can have couples living together in a well-off household, but the woman would qualify for the full benefit because her own income on retirement would be low. But when you calculate benefits on an individual basis the cost can be enormous. What the Liberals are doing is taking care of the people who need help most."

Despite that potentially explosive issue, the Liberals' most pressing worry was the response of the international financial markets. As the budget was released in Ottawa, three mid-level cabinet ministers - Industry Minister John Manley in New York City, Agriculture Minister Ralph Goodale in Tokyo and International Trade Minister Art Eggleton in London - briefed influential investors to assure them that Ottawa was on track in its battle to curb its deficit. That annual pilgrimage will be necessary until Canada can get its 1996-1997 national debt of $603 billion, almost 75 per cent of the size of the entire Canadian economy, under control. If Martin's cautious projections are correct, that debt will start to drop as a percentage of GDP in 1997-1998 - the first meaningful decline in 23 years. Ted Carmichael, head of research at investment house J. P. Morgan Canada, noted that, in contrast, deficits are actually rising in Europe and Japan in proportion to the size of the economy. "When financial markets look at Canada's deficit and borrowing requirements," Carmichael told Maclean's, "they now look modest relative to some other countries." As a result, the budget's steady hold-the-course approach created scarcely a tremor: the dollar rose briefly, and then went back to its pre-budget level of 73 cents (U.S.). "Everybody's now forgotten about the budget," Carmichael added.

Such victories have not been painless. And while many Canadians still remain largely untouched by federal government restraint, that is certain to change as more and more spending cuts kick in throughout the last years of the decade. Between fiscal years 1994-1995 and 1998-1999, Ottawa will have sliced almost $80 billion cumulatively from federal spending. The bulk of those cuts are to come: $19 billion in the year ahead; $23 billion in the following year; almost $26 billion on the brink of the millennium. Almost everything and everyone will be affected. Between last year and the 1998-1999 budget year, annual cash transfers to the provinces for health, postsecondary education and welfare will drop to $11.8 billion from $18.3 billion - which may prompt tuition increases and cuts to insured health services and welfare payments. Over the same period, federal spending on all departmental programs with the exception of Indian Affairs will drop by 24.4 per cent. In vivid contrast, programs at Indian Affairs will grow by 12.7 per cent. When asked how Ottawa's cuts compared with those of Mike Harris's Ontario and Ralph Klein's Alberta, hailed by fiscal conservatives as the country's trendsetters, Treasury Board President Marcel Massé retorted: "We have made less noise than they have. But in practice, we have done more real cuts."

Among the key budget measures - and their possible political consequences - are:

1) By 1998-1999, Ottawa's spending on programs will drop to $105.5 billion from $118.7 billion in 1994-1995. That will represent just 12 per cent of GDP, the lowest level in nearly half a century. In turn, that means an enormous decline in Ottawa's clout and presence in every Canadian's life. Spending on such services as the CBC, business subsidies, defence purchases and foreign aid will dwindle. Instead, more and more of Ottawa's resources will go towards paying the interest on its debt. In 1997-1998, for example, Ottawa will spend $106 billion on programs - and a staggering $49 billion on interest.

2) Ottawa clearly wants to maintain its influence over social programs. Under the previous transfer system, cash payments to the provinces were slated to disappear before the end of the first decade of the 21st century. Under the new Canada Health and Social Transfer, which takes effect on April 1, Ottawa will guarantee that the provinces will receive at least $11 billion each year - and that those cash transfers will begin to grow by the 2000-2001 fiscal year.

The continued presence of the cash means that Ottawa can still enforce the Canada Health Act, under which it withholds one dollar in transfers for every dollar that the provinces charge in user fees or extra billing. The budget also noted that Ottawa can still penalize provinces that impose residency requirements on welfare recipients - a pointed dig at British Columbia's three-month residency rule. Ottawa made only a feeble attempt, however, to end the disparity in per capita payments between the wealthier provinces, such as Ontario and Alberta, and the poorer provinces. Quebec will get $993 in 1996-1997 compared with $852 for Ontario. It will take six years to halve that gap - a lifetime in politics. As a result, the strains and squabbles within Canada are certain to increase.

3) At a time when Ottawa and the provinces are fighting over powers, the federal government has created a new way of doing business that will likely trample on provincial turf. The budget announced three new service agencies: for food inspection, parks management and revenue collection. Of the three, the Canada Revenue Commission already created an uproar last week, particularly in Quebec. Ottawa has offered to consolidate all tax collection: it would pick up the administrative tab for the sales tax, for example, if the provinces harmonize their sales taxes with the controversial Goods and Services Tax (page 18). In response, Bloc Québécois Leader Michel Gauthier charged: "If this is how Ottawa acts when it wants to mind its own business, my goodness."

»Ottawa has opted to target its scarce social resources to the neediest - children and seniors. The Working Income Supplement, which provides up to $500 per year to families with net income below $25,921, will double in July, 1998. That will funnel an extra $250 million each year into the pockets of 700,000 working families, one-third of which are headed by single parents. To pay for that measure, in a more controversial move, Ottawa changed the tax system so that the custodial parent will not have to pay tax on child support.

Senior Liberals say that the new Seniors Benefit was the most hotly debated element of Martin's budget package. Because seniors constitute the strongest lobby in the country, Ottawa decided that it could not touch the Old Age Security and Guaranteed Income Supplement of anyone who turned 60 before Dec. 31, 1995. Instead, the new system will not kick in until 2001. Then, new pensioners with household incomes above $45,000 will see rapid declines in their pensions. In turn, the poorest pensioners will receive an extra $120 per year. Single seniors with no other income will receive $11,420 tax-free each year; elderly couples will get $18,440. Perhaps Ottawa was wise to be cautious: Martin's two elderly aunts, Clare and Lucille, from Pembroke, Ont., watched the budget presentation from the parliamentary gallery in Ottawa because they were so worried about their pensions. When their nephew announced that current seniors would not be affected by the change, the two women lifted their arms in excitement.

4) Ottawa tinkered with its system of tax exemptions. It froze the annual level of contributions to registered retirement savings plans at $13,500 until the year 2004, when it will increase by $1,000. In recognition of the fact that charities must shoulder an increasing burden, Ottawa raised the general annual limit on donations from 20 per cent to 50 per cent of the donor's net income. That should encourage higher donations.

5) Federal officials are uneasily aware of the fact that the budget contains few visible job creation measures. Instead, Martin asked a blue-ribbon panel of experts to review the tax system to ensure that it rewards companies that create jobs. Future tax breaks will likely form the nucleus of Martin's next, and probably final, budget before an election. As Goodale, the chairman of the Liberal cabinet committee on job creation, told Maclean's: "I hope this technical evaluation will yield interesting and innovative ideas in terms of long-term job creation."

6) The five-year wage freeze on the public service will be lifted next February - which is rare good news for the public service, demoralized by 45,000 job losses. And in last week's estimates, which outline how Ottawa will spend its tax revenues, the government indicated that it is going through with an anticipated $98-million cut to the budget of the CBC. It also announced that implementing its new gun-control registry will cost an extra $3.9 billion in 1996-1997.

By week's end, most Liberal politicians concluded that the budget was a success - if only because few issues, with the glaring exception of child support deductions, had triggered major controversy. This week, Hays and his election co-chairwoman, Senator Céline Hervieux-Payette, must report to Prime Minister Jean Chrétien on the state of the party machinery. More important, they must assess the mood of the nation as many baby boomers struggle to accept their increasingly frugal and uncertain future. The two senators will likely conclude that it may be wiser to wait until there is better news.

Maclean's March 18, 1996