Contents of this article:
1. Introduction
We appreciate this opportunity to present a summary of our views on the recent Federal Budget, and on the legislation that will be required to implement that budget.
While our organization was fortunate enough to be selected to appear before your Committee here in Ottawa, we would like to note that hundreds of other individuals and organizations in Canada will not have this opportunity, because of your decision not to conduct public hearings across the country. Given the fundamental nature of the social and economic changes which are being initiated by this budget, I would think that a more accessible process of public consultation is essential. May I take this opportunity to repeat a suggestion that I made earlier this month, in letters to Chairman Peterson and Monsieur Loubier--namely that the Committee extend its hearings on Bill C-76 and hold them in locations across the country.
The CAW is the largest private-sector trade union in Canada. We represent over 205,000 members, working in a wide range of Canadian industries: auto assembly, auto parts, aerospace, electronics, airlines, railways, mining, fisheries, hospitality services, and a range of other manufacturing and service industries. This year marks the 10th Anniversary of our founding as an independent Canadian union. The first Canadian locals of our predecessor organization, the United Auto Workers, were organized in the late 1930s.
This submission will be organized into two major sections. The first will express our views on the general fiscal and macroeconomic direction of the Federal Budget, since it is these broader issues which have so crucially shaped the specific budgetary measures that this government is proposing. The second section will address several of the specific components of Bill C-76.
2. The Fiscal and Macroeconomic Direction of the Budget
When we appeared before your committee's pre-budget hearings last November, we expressed our agreement that Canada's escalating debt crisis was indeed a major public concern. But at the same time we conveyed our deep concern that the Finance Minister was barking up the wrong tree in his efforts to get a handle on Canada's debt problem. Attempting to eliminate the deficit through deep cuts to cherished public programs, without addressing the fundamental underlying factors that are the true source of our problem, is a futile and socially disastrous policy strategy.
We presented detailed economic evidence to show that the dominant cause of our fiscal difficulties has been neither rampant overspending on government programs, nor cuts in tax rates. In this sense, in other words, the deficit is neither an expenditure problem nor a revenue problem.
Rather, our huge deficit, and our growing debt crisis, represent the ultimate culmination of a fundamental shift in economic paradigm--one whose seeds were sown some fifteen years earlier. It was the dramatic and permanent rise in real interest rates that occurred after 1980--resulting from a shift toward tight-money, slow-growth macroeconomic management, together with the abandonment of full employment as a policy goal--that set in motion the dynamic process of debt accumulation which has reached crisis proportions today.
Let me very quickly review the dramatic proportions of the change in economic direction that Canada has experienced over the past decade-and-a-half, with particular emphasis on its devastating implications for public finance. Table 1 summarizes several key economic indicators, comparing their average values during the three decades of vibrant growth that followed World War II, with their values during the fifteen years of tight money policy that we have since endured.
The Debt and the Permanent Recession
These last fifteen years have constituted a period of more-or-less permanent recession. Real short-run interest rates since 1980 have been six times as high as they were from 1950 to 1980. The average real rate paid on the federal debt has doubled.
These tight-money policies have deliberately and artificially slowed down economic growth. The average rate of real growth has been cut in half. Last year we were all happy with the 4.5 percent economic growth of the Canadian economy. But this is testimony to the extent to which fifteen years of permanent recession has lowered our expectations: by the standards of the 1950 to 1980 period, last year's growth was below-average.
The desired impact of this deliberate slow growth has been felt first and foremost in labour markets. Permanent mass unemployment has been recreated, with the average unemployment rate doubling to almost ten percent. Not surprisingly, the real incomes of Canadians, given this stagnant labour market context, have declined. Permanent, deliberate economic stagnation has dramatically shifted the balance of economic power in favour of employers.
But another dramatic and devastating impact of the permanent recession has been felt in the realm of government finance. From 1950 to 1980, the federal budget was, on average, roughly balanced.(1) This was despite the dramatic expansion of public programs, including the introduction of universal pensions, generous federal-provincial cost-sharing (for medicare, education, and other services), and the introduction of our modern UI system. Clearly it has not been the expansion of public services that caused our chronic deficit problem.
Since 1980, however, the deficit has ballooned, averaging 4.5 percent of GDP. This is despite the fact that major federal programs have been cut back repeatedly (especially including funding for UI and provincial social transfers), and taxes for most Canadians (although not for the best-off households) have increased.
More taxes, less generous programs, yet we have experienced chronic deficits--which have now accumulated into a full-blown debt crisis. The most important factor at work here, as we argued before you last fall, has been high interest rates and the economic stagnation which they have caused. These interest rates directly increase government debt servicing costs, and indirectly create further deficits by slowing economic growth (hence reducing tax revenue and increasing the cost of UI and social programs).
Without addressing this underlying constraint on economic growth and hence on public finance, the Finance Minister's attempts to slash his way out of our debt hole are doomed to failure. This is quite apart from the massive social hardship, economic injustice, and national disunity which they will promote.
Real interest rates must come down, and economic growth must be stimulated in a sustained fashion, if Canadians are ever to see the light at the end of our debt tunnel.
Mr. Martin Taketh, and Mr. Martin Giveth Away
To further illustrate the futility of the Finance Minister's strategy, I draw your attention to Figure 1. Of the $10.4 billion that the proposed budget eliminates over two years from federal program spending by the Minister's high-profile cutbacks by fiscal year 1996-97, fully $8.7 billion (or almost 85 percent) is immediately paid right back out to investors and bond-holders in increased interest charges. Only $1.7 billion is left for deficit reduction.
The Finance Minister is taking with one hand from essential public programs, but giving with the other to well-off financial investors.
All the rest of the deficit reduction anticipated by Mr. Martin is generated not by the spending cuts that have been so praised as an indication of "fiscal discipline", but rather by new revenues resulting from anticipated economic growth. Yet this growth dividend has itself been thrown into jeopardy by the same unregulated financial forces which have led to skyrocketing interest payments.
The Budget, Confidence, and the Coming Recession
Indeed, there are abundant signs that Canada's economy is already heading into another recession, driven down by the stultifying impact of outrageous real interest rates. I cannot overemphasize the damage that will be caused by a premature end to this weak and belated economic recovery--damage to the hopes and aspirations of millions of Canadians, exhausted by five years of punishing recession and diminishing economic opportunity.
Canadian sales of the Big 3 auto-makers declined by over 17 percent during the first four months of this year, compared to 1994. Building permits issued in the first quarter were the lowest in four years. The Conference Board of Canada's consumer confidence index dropped in the first quarter to its lowest level in 18 months. Statistics Canada's business conditions survey indicates that manufacturers' confidence fell to its lowest level in 3 years in the first quarter. The national help-wanted index declined in April for the first time in 18 months, and the Canadian economy created no new jobs between January and April. Canadian GDP actually fell in February; if this trend continues, the recession may already be underway.
Another recession at this point in time would be a social catastrophe for Canada--causing despair, more poverty, suicides, and violence. And I do not need to remind the members of this Committee that a recession would also be a fiscal catastrophe for our government.
Like the last recession, this one would be man-made, brought about by the deliberate manipulation of interest rates (in Canada and abroad) to ensure that full employment remains a distant dream, and that workers remain disempowered.
The Federal Budget is contributing mightily to the emerging recession. It is taking real interest rates of 6 percent or more as given--despite their key role in bankrupting government. And its huge program and employment cutbacks are undermining domestic growth and consumer confidence.
Can the Finance Minister really be surprised that economic confidence is evaporating in Canada--when he is adding 45,000 lost federal civil service jobs to the tens of thousands of jobs that continue to be cut in the corporate sector, and cutting billions of dollars out of public and private spending? To argue, as he has done, that this Budget has improved confidence in Canada's economy is to make the mistake of assuming that the starched shirts in the bond trading pits are the ones who actually make this economy work.
This budget was written for Moody's and the bond-holders, not for the Canadian people. The bond-holders may indeed have been reassured in a way--namely that Canada is following a harsh neo-conservative path, regardless of which party is in power--but it is still the Canadian people who must buy cars and build homes and pay their bills.
Domestic consumption (both private and public) accounts for 80 percent of our total economy, and has been by far the weakest component of the recovery to date (growing just 2.1% in 1994, compared to 5.3% for private investment, and 20.6% for exports). Government cutbacks, stagnant wages, and depressed consumer confidence will continue to hold back our economy--no matter how strong is business investment or exports. Increasing consumption will be all the more important as the U.S. economy slows down.
It is the confidence of Canadian consumers that has been shattered by this budget. They are voting with their wallets. Our economy (and the federal government's financial prospects) are going to suffer dearly as a result.
Developing the Alternative
I would like to bring to the Committee's attention the Alternative Federal Budget which was developed earlier this year by a broad coalition of community and labour organizations, including the CAW. Table 2 highlights the key differences between this Alternative Budget, and the budget that was introduced by the Finance Minister.
By reducing real interest rates, and hence stimulating economic growth, the Alternative Budget actually surpasses the 3% deficit target that was adopted by Mr. Martin. His budget swims against the economic tide, by trying to reduce the deficit while simultaneously contracting the macro-economy (through high interest rates and huge spending cutbacks).(2)
In contrast, the Alternative Budget sets in motion a virtuous circle of economic growth (through lower interest rates and modest increases in public support for key programs such as child care). It was this same virtuous circle that allowed Canada to maintain balanced budgets for the first 35 years after World War II, despite fantastic increases in public spending on social programs.
We must recreate that dynamic growth process to have any realistic hope of working off the debt burden we have accumulated as a direct result of fifteen years of tight money and slow growth. The Alternative Budget shows that this is a feasible economic option for Canada--but the most important prerequisite for its success is to get financial markets under control.
Is it realistic to hope that real interest rates could be reduced? Canadians are repeatedly told by the financial pundits that it is not possible. Your Committee's pre-budget report agreed with this pessimistic prognosis.(3) The globalization of financial markets, of course, makes it more difficult to manage the interest rate at a level consistent with the nation's economic well-being. But we do not think it is impossible.
In the short to medium-run, several tactics could be adopted to bring real interest rates down. The Bank of Canada could lower its short-run rates modestly, putting more emphasis on reducing unemployment. The Bank should adopt the U.S. inflation rate as its own inflation target, rather than trying to outperform our dominant trading partner (a strategy which has simply left Canada with higher real rates). We should target an exchange rate in the 70-cent range, rather than allowing the dollar to run up as it has in recent weeks. More debt could be held in non-speculative Canadian instruments (such as Canada Savings Bonds).
In the long-run, however, we recognize that more fundamental reforms to our financial system will be required in order to bring about a permanent and stable reduction of interest rates.
We need to develop new methods of controlling inflation (such as more rapid investment in industrial capacity during economic upswings, and active labour market adjustment policies), instead of the painful and inefficient system which we have at present: de-facto wage controls, unilaterally implemented by the Bank of Canada.
We need new rules and regulations on the banking system to limit speculation and paper profiteering. We need, where possible, to regulate international financial flows (for example, by reducing the level of foreign investment allowed for registered pension funds).
And we need to build up pools of socialized capital (through public investment banks, public insurance and pension funds, and other measures) which are insulated from the profit-seeking financial speculation which has so contributed to our economic stagnation.
In contrast, the Finance Minister is hoping that by demonstrating his "fiscal responsibility", Canada will be automatically rewarded by financial markets with lower interest rates. This hope is turning out to be much more far-fetched than our proposal to bring rates down.
Interest rates (despite recent modest improvement) are still higher than they were at the beginning of this year, despite the financial pundits' endorsement of the budget. Rates have been pushed upward by global financial instability; this has inevitable consequences for small currencies like Canada's, as investors seek "safe havens". Our high rates are not the result of our debt or even our national unity problems. If anything, our rates are likely to rise even further, as the U.S. Federal Reserve continues to react to U.S. economic growth and the weak U.S. dollar.
The Finance Minister must learn how to manage financial markets, instead of fruitlessly trying to outrun them.
Winners and Losers
The financial reforms proposed above are far-reaching, indeed radical. But what is the alternative? To accept as inevitable a situation in which the owners of financial wealth earn real returns of 6 percent or more per year on risk-free bonds, while the real economy (and our public finances) go to hell.
Banks will earn all-time record profits, and their executives all-time record salaries, by successfully surfing the waves of financial instability. Table 3 summarizes the most recent and outrageous data on excessive bank profits.
When I appeared before your Committee last November, I argued that the federal government should target these outrageous profits through a deficit-reduction surtax. Indeed, the Finance Minister followed my advice to some extent--although in a purely symbolic way, intended more for public consumption than real effect.
His token tax on the banks will raise $50 million annually over just two years. This is equivalent to a whopping 0.1 percent of the total interest income of the five largest Canadian chartered banks in 1994 (interest income that is directly related to our high interest rates), and just 0.7 percent of their 1994 pre-tax profits.
Unemployed Canadians, on the other hand, will pay over $3 billion per year in a special deficit reduction surtax, thanks to two rounds of Paul Martin cutbacks to the UI system ($2.4 billion last year, and another $700 million more this year). Some of Canada's poorest individuals are paying sixty times as much per year toward deficit reduction, as are Canada's wealthiest corporations.
I also proposed to you last November that individual Canadians who made more than $100,000 per year (myself included) should pay more income taxes to help reduce the deficit. I received a certain amount of criticism for that statement, some of it even from within the ranks of the CAW. But I recognized that it is morally and politically impossible to let well-off Canadians like myself escape the deficit-reduction burden.
I recently wrote to the chief executives of the five largest banks, to see if they would be willing to join me in this initiative. Their compensation, as indicated in Table 3, averaged $2 million each in 1994. I informed them of the key results of my 1993 income tax return: $108,665.60 in total income, and $35,775.21 in total taxes paid. I asked them to share with me their own total income and income taxes paid, and to suggest how much extra they would be willing to pay, as multi-millionaire executives, to help reduce the deficit.
You probably will not be surprised to learn that none of the five executives were forthcoming with this commitment. They are quite happy to lecture Canadians about fiscal responsibility. But when it comes to contributing a share of their own corporate or personal largesse to this noble cause, they pass the buck.
Perhaps the banks should be satisfied with $2 billion in profits, allowing them to dedicate an additional $2 billion toward deficit-reduction and all the good things that they tell us this will bring. But it is not just that the banks are making unjustified profits, and that some of those profits should be devoted (through higher taxes) to the deficit.
A greater worry is that the banks and other financial institutions are using the debt crisis and high interest rates to increase their control over the entire economy. Figure 2 shows that the assets of the chartered banks have grown almost as quickly in recent years as our skyrocketing debt burden. What is a huge liability for Canadian taxpayers shows up as a lucrative asset for these financiers.
Indeed, the chartered banks themselves are directly owed over $75 billion of the federal debt. By recycling these risk-free, high-return bonds through the financial system, our debt crisis has quite literally given these banks a license to print money.
In short, our deregulated casino economy is rewarding paper transactions and leveraged buy-outs, rather than real productivity and investment. Gerald Schwartz, president of takeover specialist Onex Corp., receives a $3 million bonus on top of his $650,000 salary. John Henry, a U.S. currency speculator, makes an annualized rate of return of 3240 percent for his billion-dollar hedge fund in ten days this year, speculating on the collapse of North American currencies.
Meanwhile, General Motors earns 2.5 percent on assets in 1994 in the risky business of making and selling cars--and that was a good year. And the private and public consumption of average Canadians is cut back further and further.
We are told we have no choice. Canada cannot afford anything else. This is nonsense. Canada as a whole is wealthier and more productive than ever.
The contrast between the growing wealth of financiers and speculators, and the poverty of Canadians and their governments, is morally and economically unsustainable.
3. Specific Comments on Bill C-76
Let us now make a few more specific comments regarding the budget implementation legislation contained in Bill C-76.
Canadian Health and Social Transfer (CHST)
Like so many Canadian social service organizations, we are desperately concerned that the cuts in transfer payments envisioned by the budget, and their consolidation into a single block transfer with considerably weakened standards and conditions, heralds the beginning of the end of Canada's system of quality, accessible, nation-wide public programs.
The proposed block transfer would have very few conditions--allowing provincial governments to transfer funds between end uses, to the detriment of programs for less politically popular constituencies. It is not even clear that provincial governments would be required to maintain any type of welfare program at all.
A perverse beggar-thy-neighbour incentive is established, whereby provincial governments could save money by reducing the quality of social services, and hence encouraging those who need such services to move elsewhere. National program funding, on the other hand, eliminates this socially destructive inter-jurisdictional competition.
More important, with the direct funding role of the federal government gradually eliminated over the coming decade (replaced by the growing value of tax points previously ceded to the provinces), it is not clear what financial clout the federal government could have in future to enforce national standards--even if (as seems increasingly unlikely) it had the political will to do so.
The down-loading of the federal deficit through these cuts in transfers (and through other measures, such as the cuts in Unemployment Insurance which have forced so many UI recipients onto provincial welfare rolls) is no solution to our fiscal mess. Provincial governments have less capacity to tax, pay higher rates of interest on their own debts, and have even less control over the key levers of macroeconomic policy. Shifting the deficit downward will increase social hardship and--in the long-run--is not likely to reduce the consolidated public sector deficit.
Unemployment Insurance
We understand that the announced further cutbacks in the UI program will be dealt with in separate legislation, under the guidance of the Human Resources Development Minister. But we would nevertheless like to express our serious concerns about the unprecedented erosion of this program, especially in light of the changes enacted by the Finance Minister in his last budget.
Figure 3 illustrates the erosion of UI coverage, in the wake of the series of program cutbacks implemented by the present and the previous government. The share of officially unemployed Canadians who can qualify for regular UI benefits has declined from 83 percent in 1990 to barely over 50 percent today. When discouraged workers and underemployed part-time workers (neither of whom are counted in official unemployment statistics) are considered, this means that unemployed Canadians have less than a 50:50 chance of receiving any protection whatsoever from the UI program.
These changes are having a devastating impact on hundreds of thousands of Canadian workers, and have been particularly painful in the less developed regions of the country.
Federal Civil Service
We are deeply concerned about the government's plan to eliminate 45,000 civil service positions. Canada's federal civil service is already "lean and mean"; relative to Canada's population, the number of federal civil servants has been declining for fifteen years. It is wrong to single out government employees to shoulder such a disproportionate share of the deficit reduction burden. These mass lay-offs will add to economic uncertainty, reduce consumer spending, and increase the government's own net costs (by reducing tax revenues, and increasing UI pay-outs).
Federal employees are not the only Canadians who will suffer from these punitive cuts. Important public services--ranging from Canada Employment Centres to Industry Canada's economic development initiatives -- will be weakened or eliminated. Together with the reductions in transfer payments, these civil service layoffs signal a disturbing willingness by government to withdraw from its public service function.
The CAW also expresses its deep opposition to the sections of Bill C-76 which, in essence, override the collective agreements which were voluntarily negotiated between the federal government and its employees. This is despite Liberal promises made to the contrary during the last election. Most notably, Bill C-76 would remove protection offered by the "Workplace Adjustment Directive".
What does this legislation imply about the "sanctity of contract" in Canada? The government has stated that these measures are necessitated by our dire financial situation; federal civil servants cannot hold the government hostage as it tries to reduce the deficit.
But is that not exactly what bond-holders are demanding and receiving from this same government? We are constantly reminded that we cannot possibly save money on interest costs, whether by reducing interest rates, inflating the economy, or devaluing the currency--let alone by simply cancelling some of our loans. This would violate the all-powerful private contract.
So the government will unquestioningly pay out close to $50 billion per year by 1997 in interest charges--far more than it spends on its own employees. This money is paid to individuals and corporations who are the real "fat cats" (not, in contrast to the stereotype, our civil servants). How about tearing up their "collective agreement"?
Grain Transportation
Bill C-76 also proposes changes to the Western Grain Transportation Act which will eliminate Canada's traditional grain transportation subsidies effective July 1996. As Canada's largest union of railway workers, we are quite naturally concerned with the impact of this sudden move on Canada's farmers, railways, and rural communities.
By facilitating the mass transportation of grain on all-Canadian transportation routes, the previous subsidy played an important role in stimulating the construction and maintenance of western transportation systems (including railways and ports). Economies of scale then allowed these transport networks to offer more competitive bulk transport services in other commodities, as well, with consequent economic spin-offs for western regions.
In the wake of the elimination of this program, the growing North-South orientation to our emerging transportation infrastructure will almost certainly be further exacerbated. Shipments not only of grain, but also of other commodities, are likely to be increasingly diverted into U.S. transportation routes, with negative impacts for the development prospects of rural western regions.
We support the continuation of the western grain transportation subsidy, and urge this Committee to recommend a more thorough economic impact study of the subsidy's effects before any proposed changes are implemented.
And while we recognize that the privatization of Canadian National railway, proposed in the Federal Budget, is dealt with in separate legislation introduced by the Transport Minister, we would like to take this opportunity to state our support for the continuation of CN as a Crown Corporation. Contrary to the rhetoric of deregulation which has become so dominant in transportation policy in recent years (represented both by the end of the grain subsidy and the privatization of CN), we recognize that public investment and support for a vibrant transportation infrastructure has been key to the industrial and regional development of this country. We believe that our transportation system can continue to play a leading role, but not if all decisions are simply handed over to private, profit-seeking markets.
4. Conclusion
In summary, let me restate the anger and worry with which the members of our organization greet this proposed Federal Budget. The broad policy direction signified by the budget points to a historic reversal of the role which Canadians have entrusted to their government.
The members of the CAW recognize that this budget represents far more than just a yearly fiscal plan for the federal government: rather, it is a manifesto for a radical making of Canadian society. By withdrawing so dramatically from its responsibilities to promote full employment, regional development, and social security and equality, this government is heralding its willingness to guide Canada back to an era of laissez faire--a dog-eat-dog world of competition, inequality, and survival of the fittest.
This historic change in direction is justified in the name of fiscal responsibility and economic necessity. We reject this assumption completely. Our economy is more productive than ever. And if the full potential of our economy could be unleashed--through lower interest rates, sustained growth, and full employment, instead of the 15-year permanent recession which has ultimately caused our fiscal crisis--then our ability to pay for social and regional equality would be fantastically enhanced.
Our members, and millions of other Canadians, will not stand for a fiscal and economic policy which takes billions from working people and poor households, and hands it right over to bankers and financiers. Many Canadians have no doubt been lulled by the daily barrage of pro-cutbacks hysteria that dominates our mass media into believing that there really is no alternative--or as the Globe and Mail's Andrew Coyne puts it, that "some things are not worth debating".
But I want to assure you that our union, along with the rest of the labour and social movement in Canada, will do our utmost to preserve the institutions and programs which we have fought for for generations, and which have made Canada such a desirable place to live. There is an economic alternative; there is nothing inevitable about your proposed vast transfer of wealth and power to the rich. The CAW is going to do everything we can to fight for that alternative.
| Real Short-Term Interest Rate | ||
| Real Interest Rate on Federal Debt | ||
| Unemployment Rate | ||
| Economic Growth Rate | ||
| Federal Deficit (as share of GDP) | ||
| Annual Change, Real Wages(1) | ||
| Share of Capital in GDP(2) | ||
NOTES: 1. Change in average weekly wages less change in CPI. 2. After-tax corporate profits plus interest and investment income, divided by GDP. | ||
Table 2 |
||
|---|---|---|
| Martin's Budget | Alternative Budget | |
| Real 90-day interest rate (1996) | ||
| Real GDP growth (1996) | ||
| Change in Revenue (by 1996-97) | ||
| Change in Program Spending (by 1996-97) | ||
| Change in Interest Payments (by 1996-97) | ||
| Deficit as Share GDP (1996-97) | ||
| Job Creation Target | ||
| Change Federal Government Employment | ||
| SOURCE: Federal government "Budget Plan"; Canadian Centre of Policy Alternatives | ||
Canada's Five Largest Chartered Banks, 1994 | ||||
|---|---|---|---|---|
|
SOURCE: The Globe and Mail. NOTES: 1. Salary, bonus, and exercized share options. 2. Salary and bonus only. | ||||
1. Government financial data reported in this submission is taken from Statistics Canada, Canadian Economic Observer and is reported on a national accounts basis.
2. We also note that the economic growth assumptions which underlie Mr. Martin's budget forecasts have not been altered to consider the negative macroeconomic side-effects of his own cutbacks. These forecasts are not, therefore, logically consistent, and must be viewed with considerable scepticism.
3. See Confronting Canada's Deficit Crisis: Building our Next Budget Through Consultation (Ottawa: Parliamentary Publications Directorate, December 1994), pp. 15-18.
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