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
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
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
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
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.
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
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
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
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.