Canada's Six Per Cent Solution

...Taxpayers in general are largely indifferent, although they are a bit upset about losing part of the expected increase in personal exemptions In this atmosphere, the fortunes of the Liberal Party and its veteran leader are at a low point If a vote were held now, the Conservatives would almost surely sweep into office Fortunately for the Liberals, they need not call an election for another 24-30 months, giving them time to straighten out the economic mess But neither the government nor the economists really know what to do The new budget merely was an urgent response to the exhortation to "do something " Adding to the Liberals' problem is Trudeau himself The youthful man who won the voters' adoration during the late 1960s seems to be suffering the opposite passion, though he still appears youthful at 62 At the time of his aborted retirement in 1979, the Prime Minister indicated that the 1980 election would be his last He has subsequently refused to reconfirm this, and has completed more than half of the usual four year mandate Saddled with the distrust and dislike Trudeau inspires for different reasons in different parts of the country, the Liberal party is in limbo It can ill afford the diversion of a leadership contest at present, yet more and more observers are coming to the conclusion that it can ill afford not to have one Liberal prospects for the next election are further complicated by the decision of Quebec's ruling Parti Que-becois (PQ) to field candidates nationwide Until now, the PQ has entered only provincial elections, reasoning that since its objective is to remove Quebec from Canada, participating in Federal politics makes no sense But lately party strategists have begun to view the national arena as a useful site for tactical maneuvers The PQ hopes to deprive the Liberals of their Quebec-based majority and perhaps force the formation of a minority government, thereby enhancing the bargaining power of its own anticipated handful of MPs At a minimum, helping the Conservatives supplant the Liberals would create more flexibility for Quebec Premier Rene Levesque and his colleagues, who have been resolutely stymied by Trudeau Following decades of optimism about their future, Canadians fear they have arrived at what Business Week called "the brink of economic disaster " Whether the Trudeau Administration brought the country to this pass through energy and investment policies that drove out foreign (mainly American) capital, through an unduly permissive approach to labor in an increasingly ex and parapubhc sector, or through simple mis-management, the fact is that times are grim and the people blame the government For the past two years Trudeau has pursued his constitutional goals with a great deal of vigor and imagination He has always been reputed to be less interested in economic matters Nevertheless the problems that have accumulated during his constitutional quest must be confronted Neither he nor anyone else has tendered any persuasive solutions, except perhaps to hope that the long-delayed U S recovery will pull Canada along As a result, Trudeau's political career, marked by so many positive accomplishments, may well end on a note of dismal failure...

...THE CRISIS BUDGET Canada's Six Per Cent Solution BY HAROLD M. WALLER Montreal Canada is facing its most serious economic crisis since World War II Despite vast natural resources and other advantages, the country is reeling from a deadly combination of very high interest rates, record postwar unemployment and persistent inflation At this time of year, when Canadians head south of the border in huge numbers, the weakness of the economy is driven home with a vengeance They have been paying $1 30 or more in their own money for each American dollar After decades of near parity between the two currencies, the experience has been quite a shock If the Canadian dollar' s decline i s n ot enough to demonstrate the sorry state of affairs, the latest fiscal moves by Prime Minister Pierre Elliott Trudeau's Liberal Government should certainly be conclusive Toward the end of June, Finance Minister Allan MacEachen took the unusual step of presenting a new budget to Parliament, in essence admitting that the one unveiled at the usual time last November was a failure The November budget was never actually passed It sparked extensive controversy, primarily because it introduced major changes in the income tax system without prior discussion or consultation The substance of these innovations also indicated they had been drafted by theoreticians with little practical understanding of the implications for business and investors The ensuing outcry compelled MacEachen to backtrack on several points in a series of embarrassing announcements More important, the proposed budget offered little to counter the effects of what was becoming a most severe recession During the spring the economy deteriorated significantly Bankruptcies soared, capital fled the country, and there were rumors that some of the five major chartered banks were in trouble with loan exposure to shaky corporations The Opposition Conservatives, joined by the business community, relentlessly hammered away at the government's economic record and its tax schemes The Liberals—who, after all, are the majority party—were preoccupied with the struggle to shepherd the new Constitution through its various stages of approval here and in Britain They could not exercise sufficient will to break the stalemate Finally, MacEachen announced that he would deliver an "economic statement"—whatever that meant—to Parliament in late June Then, only a week before the chosen date, he informed his fellow MPs that he would bring down a new budget instead The stock market in Toronto, which had been languishing for months with prices some 40 per cent below their 1981 peak, immediate-1\ shot upward, and the dollar picked Harold M . Waller, a past contributor, is an associate professor o/ political science at McGill L nnetsin up a penny in value against its American counterpart Clearly, a lot of people had been eagerly awaiting signs of a shift in economic policy After the new budget was presented, however, both the market and the currency resumed their downward trends The June budget tacitly acknowledges that the Opposition was correct Rather than stressing tax reform (closing loopholes or mindless meddling, depending on one's perspective), it emphasizes restraimng wage increases (the so-called "wage-push" factor) in order to decrease the 12 per cent inflation rate At once labeled the "six per cent solution" by pundits, the budget's main feature is a cap on raises for Federal workers six per cent in the first year, five per cent in the second It is hoped that this example will be emulated by provincial governments and the private sector A consequent drop in inflation, it is felt, might permit some relaxation of punishing interest rates (the prime is now about 18 per cent) The government has taken other steps to break the spiral, too Personal income tax exemptions, previously indexed to inflation, will be limited to the six and five per cent formula, in effect increasing taxes The same is true of retirement benefits for government workers, family allowances and old age pensions Meanwhile, an attempt will be made to curtail increases where the approval of government regulatory agencies is required, such as telephone charges Fewer plans have been offered for stimulating the economy With a projected deficit proportionally twice that of the U S , revenue is in short supply The estimated $19 6 billion budget gap is nearly double what the Finance Minister had announced less than eight months earlier Thus even if inflation can be stemmed, critics note, the tripling of government borrowing since November is likely to keep interest high Not surprisingly, the new budget has satisfied few Canadians and has not curbed the calls for MacEachen's resignation Labor is convinced it is being asked to supply the shock troops in a war against inflation where the chances of victory are slim, while any frontal assault on the over 10 per cent unemployment level has been shelved for the moment Business is disappointed because there is no short-term answer to the interest rate dilemma, not enough is being done to revitalize economic activity, and many of the November tax changes were left in place...