Zero deficit: our common objective

"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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