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"ZERO DEFICIT: OUR COMMON OBJECTIVE"
NOTES FOR AN ADDRESS AT
THE CHAMBRE DE COMMERCE DE THÉRÈSE-DE BLAINVILLE
SAINTE-THÉRÈSE,
QUÉBEC
MAY 20, 1998
My topic today is public finances. Yes, you heard correctly, I didn't say: my
topic today is the Constitution. Don't get too excited, though: both topics can
be pretty dry. But not so long ago, when I was teaching public finances at
university, my students found that I was able to make it interesting. Let's see
if I have the same success with an audience of businesspeople, who know a thing
or two about this very subject.
I am not only the Constitution minister. In fact,
as Intergovernmental Affairs Minister, I assist my Government colleagues in
everything that affects how the federation works, including fiscal federalism. I
have also been given the mandate by Prime Minister Jean Chrétien to advise the
Government on Canadian unity. And on that very point, I feel that the link
between public finances and Canadian unity has not been highlighted enough.
After explaining how I see that link, I'll look
at one specific aspect in greater detail, namely the less agreeable aspect of
the cost of political uncertainty. But first, let me set the stage by reviewing
the state of Canada's public finances.
I hope that after this presentation it will be
clear that a zero deficit, or at least getting our public finances in better
shape, is the common objective of all Canadians, and that we will have a better
chance of achieving that goal if we resolutely decide to stay together.
1. Putting public finances in order
We Canadians want both freedom and comfort; we
want to ally individual initiative and social solidarity, to combine the best of
the United States and Europe. But we are not in Europe, we are in North America,
neighbours of a giant that is fiercely competitive in cultural, economic, fiscal
and monetary terms. In that context, and in light of our ambitions in terms of
both quality of life and social justice, we need to manage our public finances
very prudently. Without that discipline, we will not have the means of our
ambitions, and poverty and social distress will continue to plague us.
We have been lacking in budgetary discipline in
our recent history, and we have paid the price. We have had to undergo a
difficult process of putting our financial house in order. While it is still too
early to proclaim victory, the progress we have made so far is impressive.
In 1993-1994, the combined deficit of the federal
and provincial governments, as calculated by the Department of Finance, was C$62
billion, or 8.6% of our gross domestic product (GDP). The OECD pegged our
deficit as the 7th highest of 22 industrialized countries. That was the
situation just a few years ago. In comparison, in 1998, Canada is the only
country to have balanced its budget, again according to OECD projections. We can
see that we have made progress.
Cutting the deficit was done by both orders of
government. The federal government's deficit has been eliminated, while five
provinces have succeeded in balancing their budget or achieving a surplus, three
have only a small deficit, Ontario is proceeding with tax cuts, and Quebec is
continuing on its path to a zero deficit. In 1993-1994, all ten provinces were
in the red.
Canadians have had to make sacrifices to achieve
that result. Our greatest achievement is that we have done so while maintaining
the essential components of our social programs, containing inflation,
kick-starting jobs and growth, and keeping the tax burden on the economy below
the average for OECD countries. Winning the fight against the deficit has helped
to lower interest rates, a key condition for growth.
Between 1994 and 1997, Canada's GDP grew by 2.9%
a year on average, the strongest performance of the G-7 and putting us in 14th
place of the 29 OECD countries. Average annual employment growth was 1.8%, the
best performance (on a par with the United States) of the G-7 countries and in
9th place among OECD countries. The unemployment rate dropped from 11.4% in
September 1993 to 8.4% in April 1998, the lowest it has been in Canada since
August 1990. Some 543,000 jobs have been created since the beginning of 1997. On
the whole, this is a remarkable performance for a country that, during the same
period, eliminated one of the worst deficits in the industrialized countries.
Now that our finances are in order, the prospects are very encouraging: the OECD
forecasts that we will have the strongest economic growth of G-7 countries for
1998 and 1999.
This financial house cleaning has put Canada in
the best position to face the major economic and social challenges of the new
century. And those challenges are urgent, be it creating jobs, alleviating
poverty, improving our health system, or becoming more competitive. The last
Martin budget reflects that concern to step up our efforts in these sectors, but
without going on a spending frenzy.
What we need to do now is stay disciplined. Tax
cuts and new spending measures must be effectively targeted. We mustn't forget
that the Canadian public sector as a whole is $806 billion in debt, $583 billion
for the federal government and $223 billion for the provinces. Our total public
debt is equal to 97% of our GDP for the 1997-1998 fiscal year. That's one of the
highest total debt to GDP ratios among the OECD countries, behind only Italy,
Belgium and Greece.
This year, 29 cents out of every tax dollar you
send to Ottawa will go to servicing the debt. For every dollar you send to
Quebec City, 18 cents will go for debt servicing. If we don't bring the debt
under control, those ratios will remain too high and will hamper for too long
our flexibility for program financing and reducing the tax burden for Canadians.
The budget surpluses some provinces and the
federal government are showing are too valuable to squander on short-term
priorities. The economic upheaval in Asia reminds us that an economic slowdown
is always possible; natural disasters, which seem to be more frequent nowadays,
are very costly; and the Auditor General is calling on us to plan our finances
more effectively in connection with the aging population. We will need healthy
public finances to deal with all these long-term phenomena, and with many others
besides. And more than ever, we will need a united Canada.
2. Public finances and Canadian unity
I am convinced that Quebecers' opinion of the
Canadian economy influences their opinion on Canadian unity. It's not the only
factor that influences their judgment, but it's certainly a factor.
The difficult post-Meech Lake constitutional
debates coincided with an economic recession that hit eastern North America in
the early 1990s. Many Quebecers began to doubt not only their own place within
Canada, but Canada itself. With unemployment skyrocketing, public finances
increasingly awash in red ink and the Wall Street Journal calling us a candidate
for the Third World, many Quebecers concluded that Canada was an economic basket
case. "Canada doesn't work any more", it was often said.
"Studies" were evoked showing that the
federation was costing us "billions of dollars" in unnecessary
duplication between the orders of government. Those notorious studies were
trumped-up, to be sure, but many of our fellow citizens swallowed them hook,
line and sinker. "Show us the studies," Jacques Parizeau challenged
Daniel Johnson in the 1994 election campaign TV debate. But once he was in
power, Mr. Parizeau found only a pile of documents that proved absolutely
nothing.
Now that our economic and financial recovery has
won us the admiration of other countries, which describe it as a sort of miracle
("the maple leaf miracle", according to Business Week, or the
"top dog" of the G-7, according to the Financial Times), Quebecers,
and other Canadians as well, are regaining confidence in Canada.
Things must be looked at in the proper
perspective: Canada was not "bankrupt" in the early 1990s, but it was
starting down a very slippery slope. Like many other countries, we were the ones
that had got ourselves in trouble, and we were the ones that had to get
ourselves out of it. We have been able to regain our discipline and capitalize
on the enviable assets our union gives us.
Do you know of many countries that have as much
potential as Canada? Look at our openness to the world, with our two official
languages that are international languages, our multicultural population that
gives us a foothold on every continent, and our geographic position between
Europe, the United States and Asia. As businesspeople, you know how much
belonging to Canada opens doors for you.
But did you know that the World Economic Forum
now ranks Canada fourth (out of 53 countries) for our competitiveness, or that
the World Banks ranks us third (out of 92 countries) for the abundance of our
natural resources, or that the Institute for Management Development ranks us
second out of 46 countries for the quality of our human resources and sixth for
the quality of our infrastructure?
An independent Quebec would not have the same
potential. Oh sure, it would be "viable". But we Quebecers, like other
Canadians, have great ambitions for our quality of life. We too aspire to
nothing less than the best of Europe and the United States. To make that
aspiration a reality and beat back unemployment and poverty, we must depend on
the potential of the resources and talents that Canada comprises.
All of Canada belongs to us, and to all
Canadians. We have put enough into it: it is ours. We need to accept help from
other Canadians and continue to offer them ours. They couldn't do without us,
either, without losing a great deal. For example, while the financial recovery
of recent years is the achievement of all Canadians, its three main architects
are three Quebecers: Jean Chrétien, Paul Martin and Marcel Massé.
It is not taking anything away from the Quebec
genius, the Quebec culture, the Quebec identity, to state that we would not do
as well without a united Canada. I would say the same thing for all of Canada's
provinces, including the wealthiest ones. Professor Roger Gibbins, the head of
the Canada West Foundation, recently published a study showing how much Alberta
would be negatively influenced by Quebec's separation. The fact is, we would all
lose out.
Mr. Lucien Bouchard, as is his right, has a
different opinion. He says that Canadian federalism is hurting the Quebec
economy. How, exactly? In recent years, he has given three answers, which are
difficult to reconcile with one another.
First of all, during the 1993 federal election
campaign, it was the theory that Canada was on the edge of
"bankruptcy." Quebecers had to get off the Canadian train before it
derailed. "If they [Canadians outside Quebec] intend to go bankrupt, too
bad for them. But we're going to save our skin," he said on August 14,
1993.
And then came the first U-turn. In the 1995
referendum, it was putting public finances in order that became the target of
Mr. Bouchard's criticisms. A Yes vote, he explained, was protection against the
"cold wind" of cuts blowing in from English Canada.
Once he became Premier, Mr. Bouchard could no
longer denounce cuts, since he now had to make them himself. So he had to make
another U-turn: first it was a bankrupt country, then it was a cold wind, and
now it's a zero deficit. Mr. Bouchard has taken to reiterating that achieving a
zero deficit would be the signal for the Government of Quebec that Quebec can
become sovereign, the proof that we need sovereignty. The following is just one
in a series of this type of declaration, this one reported in Le Droit on
December 20, 1996: "I am convinced that if we achieve the zero deficit
objective and call a referendum, we'll win it." [Translation]
So, according to Mr. Bouchard, it seems that we
no longer need sovereignty to avoid cuts; we need to make cuts to achieve
sovereignty. And we'll achieve this demanding objective of a zero deficit in a
country that should logically have gone bankrupt. Mr. Bouchard really is the
master of the U-turn. But there's no logic to his reasoning. If the federation
really is hurting us, if it really is unfair and ineffective, then we ought to
get out as soon as we can, so as to be in a better position of achieving a zero
deficit. That's what Mr. Bouchard would be saying if his arguments were
logically coherent. But he knows that almost no one would follow him. So that's
why he's relying on Canada today, to convince us to leave it tomorrow. Quite a
contradiction.
In the meantime, Mr. Bouchard is fed-bashing
every chance he gets. When things go wrong, it's the feds' fault. When they go
well, it's in spite of the feds. His main accusation is offloading: the federal
government has offloaded its deficit onto the provinces. In all fairness, it
must be admitted that the other premiers are making the same point, more or less
forcefully. Allow me to summarize the federal government's response to these
reproaches:
° The first Martin budget concentrated the cuts
in direct federal spending, and even increased transfers to the provinces. But
at the same time, Mr. Martin let the provinces know of the cuts to transfers
they could expect in the coming years. He gave them the time to adjust and
guaranteed them a predictable base of funding. The Government of Quebec, for its
part, was not only notified of the cuts to federal transfers in advance, but
went so far as to exaggerate their size in its budget estimates. The first
Landry budget referred to federal transfers $1.7 billion higher over the fiscal
years 1995-1996 to 1997-1998 than those forecast in the Campeau budget, just
before the referendum.
° Another measure that helped the provinces was
folding the major federal transfers for health, social assistance and
postsecondary education into a single envelope. This gave the provinces
additional budgetary flexibility.
° The federal government took care not to make
equalization subject to the planned cuts, which greatly helped the less wealthy
provinces, including Quebec, which currently receives 47% of equalization
payments, or $4 billion for the 1998-1999 fiscal year.
° On the whole, from 1993-1994 to 1998-1999,
cuts to transfers to the provinces (7.4%) will have been less than cuts to
direct program spending by the federal government (10.8%). The largest cuts were
made in the areas of defence (30.2%), international assistance (20.0%), and
transport (60.9%). The federal public service cut 51,000 positions and had a
wage freeze for six years, from 1991 to 1997.
° Incidentally, the provinces' finances have
benefitted from the lower interest rates that are the result of getting federal
finances in order. The Government of Quebec alone has saved a total of $1.05
billion in the past three fiscal years, according to Finance Department
estimates released in the last Martin budget.
° And now that its financial situation is
improving, the federal government is giving priority to helping out the
provinces, which will directly receive 38% of the new spending initiatives (that
is, additional spending or rescinded cuts) set out in the last Martin budget.
° The federal plan for cuts has been fair to all
the provinces, taking into account their respective wealth. For example, the
Quebec government will continue to receive, every year, about 30% of the main
federal transfers to the provinces. If Quebec had only received the equivalent
of its portion of the population in federal transfers, those transfers would
have been $1.8 billion dollars less in 1998-1999. Those transfers total $10.4
billion for the 1998-1999 fiscal year, more than those to any other province.
They represent some $3,360 per Quebec household ($1,400 a person). That's 14%
more than the Canadian average of $2,950 per household.
° Some provinces have cut their own transfers
harder and faster than the federal government. For example, the cuts to federal
transfers between fiscal years 1993-1994 and 1998-1999 represent 3.0% of the
Quebec government's total program expenditures (representing a reduction of $1.1
billion in discretionary expenditures of $35.4 billion), while the latter is
asking its municipalities, within a much shorter time, to absorb cuts
representing around 5.8 % of their program spending (a percentage taken from a
press release published by the Quebec Minister of Municipal Affairs on October
20, 1997).
That's the federal government's take on the
recent history of our fiscal federalism. It's not all there is to say about this
topic, I grant you. The provinces are saying, for example, that the feds are
cooking the books by including the increased value of tax points, rather than
cash transfers only. They are forgetting that it was they who suggested this
type of accounting, back in 1977. (Federal-Provincial Financial Arrangements:
The Provincial Proposal, Meeting of Ministers of Finance and Provincial
Treasurers, December 6-7, 1976)
These are issues I'd like to look at with you in
greater detail if I had the time. For now, however, I'll merely point out that
such difficulties between governments inevitably crop up in a period of deficit
reduction. Similar difficulties occurred between Australia's states and
Canberra, to use the example of another federation that has put its financial
house in order, and no one down under felt the way to solve those difficulties
was to break up the country.
I would add that the Government of Canada cannot
have been as hard on the provinces as is claimed, since five of them managed to
balance their budget before Ottawa did. Only the two largest provinces are still
forecasting substantial deficits in their budgets. But the Government of Ontario
has chosen to cut taxes by $4.6 billion and defer reaching a zero deficit. And
what about the Government of Quebec? Why is its financial house cleaning lagging
behind that of the other provinces?
3. The referendum mortgage
I've just reproached Mr. Bouchard with blaming
everything on the federal government, which is a convenient way to explain away
all of Quebec's difficulties. I won't now do the opposite and say that the sole
source of all our problems is the political uncertainty generated by
secessionist ambitions. I'm not denying that the reason Quebec currently has one
of the worst economic and financial records in Canada is due in large part to
structural causes. Indeed, according to the most recent data, Quebec is the
province:
° whose residents, in general, have the largest
individual tax burden, and the largest total tax burden, after Saskatchewan;
° which has the highest deficit to GPP ratio,
after Ontario;
° which has the highest debt to GPP ratio, after
three Atlantic provinces;
° which spends the greatest portion of its
revenues on debt servicing, after Nova Scotia;
° which pays the highest interest on its
borrowing: since the beginning of 1997, it has had to pay around 50 basis points
more than the federal government on 30-year Canadian dollar bonds; even
Newfoundland (at around 40 points higher than the federal government) pays less;
° which has the highest unemployment rate, after
the Atlantic provinces (April 1998);
° whose per capita income is the fifth lowest of
all the provinces -- 13% below the Canadian average;
° which has the third worst rating in terms of
its share of Canadian investments (18.7%) in comparison with its demographic
weight (24.7%);
° which has had, together with Newfoundland,
Nova Scotia and British Columbia, a rate of economic growth lower than the
Canadian average during each of the past three years;
° whose poverty rate, or more specifically,
low-income rate, is the highest of all the provinces: 21.6% versus the Canadian
average of 17.6%.
While I admit that there are other causes of the
Quebec economy's poor performance, such as the aging of a portion of the
industrial infrastructure and the westward movement of economic activity, I
believe that political uncertainty is clearly a substantial hindrance. I don't
see how political uncertainty could have negative effects everywhere else it
exists in the world, but not Quebec.
Quebecers can see that cost for themselves: eight
out of ten (83%) believe that political uncertainty is hurting the economy
(EKOS, April 1998).
"Montreal is the only major city in Canada
and the United States that has to deal with political uncertainty, which has a
substantial impact on its competitiveness," noted a committee of business
leaders led by Brian Levitt, in October 1996.
"The temporary lifting of the referendum
mortgage has also helped push Canadian short-term interest rates below the U.S.
rates," wrote France's Ministry of the Economy in a document published
during a visit to France by Mr. Bouchard in September 1997.
Mr. Bouchard's efforts this week in the United
States are designed to calm concerns about his plan for independence and have
earned him some diplomatic encouragement. Nevertheless, comments by U.S.
business leaders show just how persistent those concerns are.
For example, the president of a U.S.
venture-capital firm, Palmer Partners' John A. Shane, was quoted as saying:
"I would say the only thing that has put a slight chill on that
[interesting investment prospects], I think in the last two decades, has been
the separatist actions." Mr. Shane added that it would be helpful if
Premier Bouchard announced he would put aside plans for a new sovereignty
referendum.
Mr. Ken Rossano, chairman of the New
England-Canada Business Council, stated: "Business likes predictability.
There is no guarantee of the stability of your investment 5 or 10 years down the
road with this kind of project."
A Brookline-based investment banker, Andre
Danesh, also indicated: "There is a lot of fear among U.S. investors [...].
If and when Quebec separates, what happens next? It is a drawback that no one
knows."
Premier Bouchard himself has admitted that
political uncertainty brings economic costs. He stated on the program Le Point
on March 21, 1996: "I'm not denying that there may be foreign investors who
are saying, let's just wait until things are settled in Montreal and
Quebec." He admitted on February 20, 1997, that "our creditors are
giving us funny looks because they don't have that much confidence."
[Translation]
And yet Mr. Bouchard is contradicted by his
Finance Minister, Mr. Bernard Landry, who said on April 7, directing his
comments at Mr. Jean Charest, admittedly: "Those who begin their political
career in Quebec by saying that the economy is not doing well because there are
referenda are making hugely erroneous statements that are not supported by any
figures. In fact, the figures say just the opposite." [Translation] To back
up that assertion, Mr. Landry quoted Statistics Canada data announcing a good
year for investments in Quebec in 1998. But that good news cannot alter the fact
that Quebec's share of Canadian investments is only 18.7%, compared with 22.3%
in 1990.
Standard and Poor's recently revoked its negative
warning about the Government of Quebec's credit rating. Mr. Landry took the
credit for that on behalf of his government, but without saying that one of the
positive factors mentioned by Standard and Poor's is, and I quote,
"moderating support for the sovereignty option mitigates potential economic
and political uncertainty."
This isn't the first time that a rating agency
has expressed concern about the political uncertainty we are inflicting on
ourselves. For example, in December 1997, Standard and Poor's noted that
political uncertainty was a serious drag on Montreal's economy. In July 1996,
Standard and Poor's downgraded Quebec's rating, again citing political
uncertainty. Moody's has also noted recently (November 1997, May 1997) not only
that Quebec's rating would have to be revised in the eventuality of fundamental
changes in its political status within Canada, but also that the impact of the
uncertainty about Quebec's status extends to the other provinces and the federal
government as well.
Political uncertainty is undeniably harmful for
the economy. Throughout the world, the very prospect of secession entails a host
of uncertainties, a political and social upheaval. No sociological law can
protect us against this universal rule.
And let's not forget the tremendous waste of
energy entailed by these "neverendums". Let's not forget how the PQ
government has twice, in 1980 and again in 1995, used our tax dollars in an
attempt to buy, at a very high price, the votes of public sector employees.
Having placed itself in an impossible financial situation, it then had to
backtrack after the referendum by confronting its former allies, the labour
leaders, which aggravated social tensions in Quebec.
Some separatists admit that political uncertainty
does hurt our economy, but add that the way to disperse those negative effects
is to vote Yes. After a Yes victory, they say, there would no longer be
political uncertainty, because Quebecers would have made their choice. I don't
know how they can say that with a straight face. It is obvious that it is not
uncertainty per se that is worrying economic agents in particular, but the
consequences of a post-Yes period; you don't have to think about those
consequences too long to realize that they would plunge us into a whole new sea
of uncertainties, be they fiscal, monetary, commercial or others. After all, if
economic agents looked favourably or even neutrally on secession, political
uncertainty obviously wouldn't hurt us. The economic agents would tell
themselves they have the choice between the current situation and an equivalent
or improved situation after a Yes vote.
So let's be a little more specific. Rather than
political uncertainty, let's talk about the possibility of secession, and admit
that this possibility is hurting our economy. Without it, there would be less
unemployment, less poverty, more investment, and the fight against the deficit
would be further advanced and less painful.
Mr. Parizeau knew full well in 1995 that a Yes
victory entailed enormous economic risks. He wanted to use $17 billion of our
savings in a vain attempt to calm the markets. Naturally, he didn't breathe a
word about that "Plan ‘O'".
And to think that Mr. Bouchard is now claiming
that it is the Calgary Declaration that is dangerous for Quebecers. He would be
funny, if he weren't gambling with their money.
Conclusion
It is true that Quebec's economy has structural
weaknesses. But it also has enviable strengths, as evidenced by the successful
reorientation of the manufacturing industries toward high technology. You won't
find the MP for Saint-Laurent with any misgivings about the Quebec economy! The
Government of Canada is proud to be a major partner. In a way, that Quebec's
economy has managed to accomplish so much, in spite of political uncertainty,
shows just how resilient it really is.
As an integral part of the Canadian economy as a
whole, it has extraordinary potential. Think of the synergy we could create if
we freed it from the threat of secession. To do that, we need a premier and a
government in Quebec City that believe in Canada. A premier and a government
that believe in Quebec's destiny within a united Canada. A premier and a
government determined to draw fully on Quebec's genius and Canadian solidarity.
It appears that the vast majority of Quebecers do
not want another referendum. And they're absolutely right.
Check against delivery.
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