Canada's Choices

Chapter 2

A National Economic Emergency

Denial and Scapegoating.

Denial and scapegoating are two common human responses to a problem. We deny there is a problem and then we are faced with the fact we can no longer ignore that there is a real problem, we then move on to scapegoating to try and pin the blame on someone else.

I have likened the past fifteen years to a drunken binge on debt and like the alcoholic, our governments have practiced denial in all forms, the most recent being, the whole constitutional issue. While this topic occupied the front burner through much of 1991 and 1992, there was indeed a raging fire in the backroom. The origins of our economic problems today are complex but a case can be made that our governments response to the economic slowdown in the early 1980's was a turning point. Our deficit in 1980 was $13.5 billion; within 4 years it had virtually trippled to $38.3 billion, yet our gross domestic product had risen in real terms (1981 dolars) only from $343 billion in 1980 to $377 billion in 1984. Essentially what our leaders never grasped was that the compounding of debt was taking place at a rate far higher than the ability of the economy to service it. The warning bells were there for anyone to see but no one paid attention especially since borrowing money was so easy.

Let's start with a look at spending and revenues from 1980 to 1988 to get a grasp of this. Examine charts 1,2 and 3.

Our economy was being silently gutted by a dramatic acceleration in spending we could not afford, and an ever increasing tax bite as a percentage of real GDP adjusted for inflation. In order for an economy to grow on a solid foundation, the rate of real growth must exceed the rate of compounding of debt accumulation. Once the veil of inflation is ripped away, the 1980's saw GDP growth (1981$) per employee from $32,068 (1981) to $36,571 (1988)-a paltry annual compounded growth of about 1.5%. Meanwhile the net per capita federal debt grew at an annual compounded rate of just under 16% from 1980 to 1989. Was anyone in Ottawa paying attention?

It was at this turning point in 1985 that is illustrated in graph 3, that we could have avoided the pain that we will have to deal with for the next several years. If, upon the resumption of economic growth in the period of 1985-1989, we had lowered the boom on government spending, and the rate of spending growth, the scenario would be entirely different.

The period from 1988 to 1993 might best be described as a great lie. Even after the crash of '87 in New York and the collapse of the Japanese markets in 1990, both evenets that were signals of declining liquidity and tougher times ahead, the governments continued their profligate ways with even more enthusiasm and wanton disregard for the consequences. Let me assure the reader that the notorious Charles Keating of savings and loan fame was a piker compared to the looting of Canadian economy by our politicians. An attempt was made to bring current revenues to a level where they exceeded current spending other than debt service. This was the attempt to produce an "operating surplus" by a massive increase in taxation-the most massive this country has ever on all fronts-sales,income, capital gains and indirect levies. It was successful in generating an "operating surplus" but I will point out later the folly of this policy. As we all realize today in 1993, we should have curtailed the growth in spending, and not increased taxes.

Michael Porter delivered a report that told the politicians something was very wrong three years ago. After a brief flurry, the much vaunted prosperity initiative has withered away as company after company and industry after industry announced closing and layoffs. No one really knows the exact toll but half a million manufacturing jobs is in the realm of possibility. The glossy press announcements mailed in large expensive envelopes have now ceased to arrive on my doorstep. I was in the habit of returning these oversized and unnecessary envelopes to Michael Wilson's attention marked "if you want prosperity use cheaper paper and give a Canadian a job folding the sheets into small envelopes". This represents the attitudinal change necessary that the government bureaucracy is unable to grasp to date.

It has only been as recent as the past three months that the whole issue of the debt problem has been brought into national focus. We should really thank Ross Perot for the primer as when he communicated to Americans in last fall's election the gravity of America's position, a lot of Canadians woke up to the fact we have a problem too. But it has only been in the past three months with the Tory leadership campaign that the general public in Canada has become aware of the seriousness of the problem. Of course, the leadership candidates were quick to adopt positions to fight the deficit, when they recognized the shift in the public's view of the seriousness of the debt.

Governments accept there is a problem now which as we know is the first step towards redemption. However, blame and scapegoating now occupy the forefront of the debate and it is still doubtful if the full impact of what has happened in Canada has really struck home. I want to skip the scapegoating phase and move directly towards solutions. We do not have time to lay blame and play politics with this one. Ultimately, I accept blame as every Canadian should. We voted for what we got.

Lets examine the chart on net per capita federal debt.

Every single Canadian owes about $28000.00 in accumulated federal, provincial and municipal government debt which I will now refer to as "tri-tier debt". Every single day now you owe $4.00 more. We are a family of four. We owe $16.00 more tonight than last night. What is important to keep in mind is that the red ink is not abating as you might have been led to believe. Just because the government has acknowledged there is a problem now, does not mean they have acted. In fact they are in the very early stages of trying to arrest the hemorrhaging in what might be described as crisis management. No overall national strategy is in place. Prime Minister Campbell has announced that within thirty days of the election she will convene a conference on debt management. That is at least 90 days from now. Each Canadian will be at least a further $360 in debt at the federal level alone. This should impress you with the urgency of this crisis.

To put the level of debt into another context it should be noted that not every Canadian is in the workforce. We have a workforce of about 12 million. Elsewhere I have written that it would take a workforce of 15 million-all working and making the average weekly wage of $550.00 to carry the prsent levels of expenditure and balance the budget. There is no way we can generate 3 million jobs in the forseeable future, so we must accept the alternative course and that is to cut spending back to where it can be supported by our current workforce. Every working Canadian supports close to $60,000.00 of debt now and it is climbing everyday. In 1980 that figure was close to $5,000.00.

As I have said before, it is fine to borrow money to buy productive assets that will produce a future income stream that will be greater than the investment costs today, but it is madness to borrow money to consume goods and services that provide no future income stream and that we cannot afford. It is a quick road to ruin and I hope that quantifying the amount for you in a personal way such as saying a family of four owes $16.00 more today than yesterday makes you realize on a personal level what is still being done to you as I write this. At the risk of driving the point home too hard, let me quantify it another way so that you can compare this to your weekly salary. At the end of next week, you are going to owe $28.00 more than you did this week on top of the odd $28,000.00 or so you already owe.

It is a mountain of debt that we now know cannot be repaid in the conventional sense. We have to change our ways and we will have to work this off over a long period of time.

Canada has a full fledged economic crisis on its hands that threatens everything as you and I know it. Our entire way of life is being disrupted; our manufacturing base has been hollowed out; our resource industries are faltering; even our distribution systems both retail and wholesale are being restructured in ways that we accept without question when perhaps we should. In short, the collapse in our living standard is in full flower and everyday that we delay rather than act, we will pay an even heavier price. My figures will show that even though the average Canadian may be taking home a higher pre-tax income, his actual purchasing power which determines his standard of living has been sliding for twenty years.

While productivity may have risen somewhat in terms of a per capita increase in the GDP, real wages and income have been falling. Taxes take a bigger bite of every dollar earned today and prices on all fronts have risen to a much greater extent than productivity. The day of so-called tax freedom for the average Canadian now is sometime in July. In other words, working Canadians are working to support the government for over six months of the year now and we will do so well into the future.

A Declaration of National Economic Emergency-DNEE.

Twelve percent of the work force in Canada is unemployed and welfare is at historic high levels. The Montreal Gazette reported in a story on August 27th., 1993 that Statistics Canada reported that one third of all two parent families had at least one member collect unemployment benefits over the past year. What more evidence does the government need to understand that this is an emergency. It is time to consider a declaration of a national economic emergency (DNEE) and take unprecedented measures to turn this country around. The time is long past for constitutional debates and turf fights over jurisdiction. This is a national problem and a national emergency. A quick look at Ontario's response to fiscal tightening in Ottawa gives you an idea of how policy conflicts can result in the worst possible situation. Ottawa cut back and Bob Rae in Ontario went right ahead and ran up a provincial deficit exceeding $10 billion dollars. Ontario public employees now know a year later the folly of this policy by the provincial NDP. It is time for leadership at the national level and any further attempted political interference at the provincial levels to national policy should be overridden in the national interest.

The words of Mr. Trudeau "just watch me" should serve as a challenge to those who think the nation can stand more delay and diversion in attacking the fundamental economic problems we face. It is time to act. I repeat again that it is time for declaring a national economic emergency and taking strong action. I would not hesitate for a moment. It is only through strong leadership with new policy directives that we are going to get out of this mess. The politics of inclusion might be a catchy phrase; feeling good and touching base with everybody is a noble end but we are beyond that as a nation now. We need leadership.

What Does a DNEE Mean?

A DNEE enables the federal government to assume powers that otherwise in the ordinary course of government business, it would not normally exercise. Since it is imperative to act quickly before our economy collapses further, it is necessary to step beyond the bounds of ordinary business. We are facing an economic war on many fronts and it will be necessary to take substantive measures that a lot of Canadians would not ordinarily agree with. The type of measures needed may result in heightened confrontation but they must be taken to chart a new course for the economy for the long term.

What is important is that measures taken be fair even though they may be terribly harsh at first, particularly on the public sector. This is where true leadership comes to the forefront. We have had leaders for a long time preaching restraint while we all knew what was going on behind the scenes. A good example of this we are all familiar with is M.P.'s pensions to which I shall return. Rather than endlessly debate the issue, a national emergency would allow the government to rectify issues like this immediately at the stroke of a pen. This is defintely not business as usual.

There will be those who will argue that it is, in effect, a suspension of democratic rule. It is. But bear in mind, we are not going to have a democracy much longer in Canada if the economy implodes upon itself and our way of life disintegrates into economic and political anarchy. Twenty five percent of Montreal's population either drawing welfare of UIC benefits is an emergency. The possibility of civil strife and insurrection are not out of the question, if the situation continues to deteriorate. Moreover, the appeal of political philosophies outside the mainstream become more appealing to desperate people. The old adage, idle hands make mischief is true.

Look at the deterioration in revenues over last year. Personal income tax revenues are imploding. This is an emergency.

I will detail later the most important measures that should be taken within the bounds of a declaration of national emergency, but before I do I want to define what I perceive as the fundamental economic problem facing us.

Chapter 3.

The Fundamental Problem.

The fundamental economic problem is that the capacity of our economy is now out of balance with the governmental overheads that have been placed upon it.

As individuals, we know and have little difficulty in identifying what overheads our personal incomes can support when we are gainfully employed. We know we have to live within our means over the long run or face ruin.

Our country is no different. We cannot ask more of it than we can cumulatively support over the long run. The accumulation of a national debt (federal,provincial,municipal) that exceeds 750B is testament to the extent that we have demanded, taken, appropriated and stolen in excess of what our economy could truly support.

We may have, if we are lucky, a $700 billion GDP this year. It is not going to grow by leaps and bounds next year in that present government spending cuts will begin to slow the economy even further. We will pass through a very difficult period because we have become so accustomed to government spending as part of the economy. I believe overall tri-tier government activity in the country should not exceed 25% of the total GDP over a long term time frame. Much above that level makes demands for revenues from the private sector that cannot be met in the long run. All socialist and communist governments that have run up the participation of government to 50% plus levels have foundered. Keeping government participation at lower levels encourages competition and private business development to fill those niches that government doesn't serve.

Here I would like to give you a concrete example multiplied a thousandfold across the country of what government should not be doing. It is anecdotal and personal, but it typifies the tip of the iceberg. I recently visited a tree nursery of the City of Montreal located in Terrebonne Quebec. This facility grows potted and balled and burlapped trees for the city for use in parks and along streets. There was equipment galore standing idle and obvious overproduction. Now we all know that the city of Montreal has terrible financial problems and it has had to raise municipal taxes (to levels that have driven business away) to meet its budget requirements. The important point is that the city should never be in this business to begin with. Nurseries are abundant and are competitive in the private sector.

This case shows how we have allowed our governments to slip into areas of economic activity that they should never become involved with in the first place, and this slow but sure infringement into areas of private economic activity has brought tri-tier government participation rates in Canada close to the 50% level of GDP. We may think we are a free market economy just because we have a free market pricing system, but a closer examination shows we have become a state run economy because the state is taking a lion's share of GDP for its own use and re-distribution not by market forces but by political agenda. Many Canadians have never woken up to this fact yet. Think about it if you haven't already contemplated it.

What is actually happening now is that the free market pricing system is telling the government that there isn't any more money in the till.

Let us take a look at the figures. Let's examine the trend in government revenues, program spending, the so-called "operating surplus", the cost of debt and the deficit-all at the federal level.

I have watched this data flow in monthly over the past decade and it is not possible to interpret it in any other way than negatively. No matter what kind of rosy picture was painted by monthly fluctuations that might have shown an improvement, the conclusion is solid. It has been one long slide downhill into the abyss. This crisis has been years in the making.

How on earth do we climb out? Inflate?

How do we restructure in order to bring back a balance between what we can afford and what the economy can deliver? Most third world countries that run up debts beyond their capacity to pay usually resolve the problem by destroying their financial assets. They do this through printing money and inflating the debt out. This is nothing but a disguised tax on savings held in the local currency. When you read of the horrendous inflation rates in Russia today, this is exactly what is happening. The poor communist who saved his rubles not only lost his idealism, he has now lost his shirt! Canada has many more financial assets than Russia or other third world countries like Brazil and Argentina. All western industrialized nations have extensive financial asset holdings. This is what sets us apart from the rest of the world.

It would truly be a shame for Canada to take the path of destroying its financial asset structure. It could quite easily do this if the government when faced with the need to continue financing deficits cannot tax anymore, nor borrow anymore and resorts to the printing press. The only problem with this tried and true method of political and economic sleight of hand is that our financial reporting systems are excellent and the market is aware on a day to day real time basis what the government is doing. Credit would evaporate overnight if the markets perceived that the Bank of Canada was making a concerted effort to monetize the debt. If you think we have a crisis now, this would be like nuclear war. In 24 hours the economy would grind to a halt as interest rates skyrocketed. It would be all over rather fast. So for those of you who have been critical of John Crow and his central bank policies, it would be wise to consider the other side of the coin. He has managed to get interest rates down to their lowest levels in 20 years while at the same time keeping the dollar above $0.75US which helps control inflation. If our dollar tumbles to $0.60US levels then prepare yourself for rampant inflation as import prices will skyrocket and interest rates will shoot up. We will have the worst of two worlds-high inflation and high interest rates- exactly what I predicted would happen in 1991 if no action is taken to stop the red ink.

No we cannot take this easy road and inflate our troubles away. It would be disaster and it would be a defacto admission that we just do not have the will power to pay our bills and clean up the mess. We would be thrown out of the G- 7 and we would not borrow on international markets for a long time.

What we have to do is face the problem squarely and deal with it in as fair and least disruptive manner possible. The politicians and media have made you aware of the problem but by no means have they indicated to you the full impact of the measures that are necessary to correct the situation. We have looked at data indicating the decline in tax revenues even though tax rates have escalated dramatically and the overall tax net has expanded broadly.

What is wrong here?

We are in a situation that airline pilots would refer to as being behind the power curve. No matter if full power is applied the airplane will not climb without trading off altitude. It is the worst possible scenario especially if you are close to the ground. We simply cannot raise any more revenue out of this economy. In fact the latest attempts to raise revenue actually caused the economy to stall further under the burden of higher and higher taxes. The trade off is now spending. It must be sharply reduced. Government spending must be reduced so that overall levels of financial requirements by government can be reduced which will then allow a lowering of taxes and an increase in after tax disposable income in the private sector. To get this economy moving, people need money in their pockests to spend. Private sector spending ability must be restored.

There will be those who will dismiss this idea as being comparable to Reagan's tax cuts in the U.S. Yes, Reagan did cut taxes but he also embarked on a spending program, particularly with the military, that ran up the deficits to record levels. The key to getting our economy moving is to get the spending cuts nailed down first and then lower taxes. Under no circumstances should taxes be lowered without real cuts in spending. I will state with confidence that the present Clinton plan in the U.S. will fail because government spending was not meaningfully cut and taxes were raised.

We can already see with the so-called "social contract" in Ontario that salaries are being frozen and forced "days off" without pay are being instituted. This is only the first wave of spending reductions. Wave two and wave three, four and five are coming. A $700 billion GDP just cannot support the levels of spending by government that exist.

The government has made much about how Canada has achieved the raising of revenues to the level where the government has an operating surplus. In fact Michael Wilson was always championing this point as a great achievement. Of course, the government through virtual extortion from the taxpayer, can temporarily raise revenues to a level at which Canada will generate an operating surplus. But this level of taxation has had such a negative effect on the economy that it forced the economy behind the power curve.

In fact, the trend as noted in graph #### clearly shows that the operating surplus peaked in 1990-91 and we have now slipped into a situation where an operating surplus is doubtful this year. So spending must be cut. It is simply not enough to make government more efficient or take days off. Actual spending in real dollars must be reduced as a proportion of the GDP.

By how much?

Last year total federal expenditures not including $39B for debt service amounted to $116 Billion. The target I propose is to reduce this by 5% a year over 5 years in 1993 dollars. The target expenditures for 1998 would then be about $80 B in 1993 dollars. This is draconian and drastic medicine but it is the only way out of the mess. We have witnessed many companies downsizing over the past 5 years by equal or greater amounts. To those naysayers who say it cannot be done, I say it must be done. It is now time for the government to face reality and downsize to a level more sustainable in the long run.

The reality is that we must have the courage to cast aside many expenditures that we have taken for granted and at the same time it will allow us to preserve the national programs most important to us such as old age pensions and medicare. You had better believe universality is on the table-we cannot afford it. It is as simple as that. Whole areas of activity such as culture and sports are in for very deep cuts if not total elimination. It is time the private and volunteer sectors took over these and many other activities.

To put it bluntly, it is just going to take an extremely tough approach to getting the situation under control. It is about priorities. Ross Perot likened it to a war. It is akin to war; resources will have to be re-allocated to the most essential areas and whole other areas will have to be abandoned as fields of government activity. It is massive restructuring and as I have written above, a lot of Canadians are not going to like it-especially a lot of public service workers who have become accustomed to the idea of their "rights" to guaranteed employment, benefits and pensions. If you, the reader, are a public service employee, my recommendation to you is that you should begin to budget and prepare yourself for this restructuring. There is truly no magic way of avoiding it. Accept your pay cut willingly, otherwise you may find yourself out of a job. It will be labelled as union bashing and all the old arguments and confrontations will be brought to the fore, but the reality is reduction of government activity is going to happen.

That is why I argue that effective measures can only be implemented through a declaration of a national emergency. If half measures are taken and no true break with the past is made, we will achieve nothing but continued stagnation.

If everybody understands the point that we are essentially undergoing an economic revolution and better days lie ahead, and if we accept the bitter medicine now, we will emerge in a position to regain our living standards, pay our bills, and hopefully, not repeat our errors. The alternative is to slip into third world status and have chronic stagnation. As I look at current data, I fear we are perilously close now to stagnation. GST collections are not accelerating and if the economy was building up steam, we would immediately see it reflected in GST numbers. Although it is not the media's fault, we are constantly barraged with government press releases that things are getting better in an attempt to put as best a face on the situation as possible. In real fact, I think the first Ministers' Conference just held (August 25- 27th., 1993) indicated their desperation. Jobs are at the top of the agenda. People need jobs period. Full time jobs are not being created. The coming election will be about jobs. The following policy initiatives are about creating jobs.

Chapter 4