The 1999 Federal Budget: Making the Right Choices

December 9, 1998

Dear Minister,

Three months ago, the Business Council on National Issues (BCNI) wrote to Prime Minister Jean Chrétien to offer recommendations for ensuring Canada’s prosperity amid growing global economic uncertainty.

In particular, we suggested that the government should exercise prudence by paying down the public debt more rapidly and should improve Canada’s competitiveness through broadly based personal income tax cuts. We also suggested that the need to achieve a meaningful degree of debt and tax reduction in an uncertain environment would leave no room at all for new discretionary spending initiatives.

The BCNI has been far from idle since. In early October, we fleshed out our proposals for significant tax relief, not just in the next budget but over the next seven years. We suggested that keeping a firm lid on spending would allow more than $3 billion in tax cuts in the 1999 budget out of a surplus we estimated conservatively at between $6 billion and $7 billion.

In our tax proposal and in our subsequent statement to the Standing Committee on Finance of the House of Commons, we emphasized that real progress in reducing the tax burden on Canadians can be achieved only if the government is willing to make tough choices between competing priorities. In addition to advocating a cap on new spending, we swam against the tide by recommending that the government resist the strong pressure at that time for major and immediate reductions in Employment Insurance premiums.

In early November, the BCNI held an Economic Summit in Toronto that brought together Canada’s business leaders with prominent economists and senior government officials. What emerged was a picture of slowing global growth with significant variations between regions and industries. Thus far, the United States economy — upon which Canada depends so heavily — continues to defy expectations. The Canadian dollar has stabilized and interest rates have begun falling again. Canadian private sector job growth also has remained surprisingly strong, with the unemployment rate falling to eight percent.

Taken together, this should result in a surplus for the current fiscal year some $2 billion greater than projected in our tax proposal in October. What I would like to address today is how the BCNI feels this short-term fiscal improvement should be reflected in your 1999 budget.

Overall, I was impressed with the report entitled Facing the Future released by the Finance Committee last week. While the BCNI disagrees with some important elements, the Committee’s approach to debt and tax reduction is very compatible with our own and deserves your support. Our major reservations reflect its recommendations for additional spending.

Because of the continuing level of uncertainty in the global economy, the over-riding priority of the BCNI remains reduction of the public debt. I have just returned from an extended journey across much of Asia that included a BCNI mission to Japan, the APEC Business Summit in Kuala Lumpur and visits to Beijing, Shanghai and Hong Kong. While we must not count this region out, there clearly remains a significant degree of danger in the short term, both for the region and for the global economy.

My somewhat gloomy personal perceptions of the situation in Asia were reinforced on my return by the World Bank, which said that there still is "a substantial risk that the world economy will plunge into recession in 1999". Its message was echoed by the International Monetary Fund’s (IMF) annual review of Canada, which said "a great deal of uncertainty clouds the prospects for the Canadian economy, with external factors posing the greatest risk".

All this suggests that the government should remain extremely prudent in its economic assumptions and ambitious in its schedule of debt repayment. I was very pleased by the Prime Minister’s commitment in his speech to the Canadian Chamber of Commerce in September to use all of the 1998/99 year-end surplus for debt reduction and not to introduce any new initiatives that would reduce the surplus this year.

The BCNI urges you to continue allocating to debt repayment all year-end surpluses flowing from prudent assumptions. I was disturbed to hear that your government is engaged in a search for ways to distribute future surpluses instead through one-time tax refunds or spending initiatives. Short-term largesse is bad policy and I trust that you will avoid any such temptation.

Tax cuts are needed urgently, but to maximize their impact on consumption and growth, taxpayers must be confident that any tax cut will continue in future years. As the IMF report put it, "in view of Canada’s relatively high ratio of personal income taxes to GDP and the significant distortions caused by high marginal rates, the IMF staff believes that priority should be given to reforming income taxes in order to improve incentives to work and save. Restructuring these taxes would leave a permanent legacy of higher growth and prosperity in Canada." We agree.

The improving economic news provides an opportunity that must not be missed. While the BCNI tax proposals were based on prudent assumptions, we said clearly that the schedule of tax cuts should be accelerated if fiscal circumstances permitted. This in effect is what the government has done with EI premiums. The BCNI recommended a gradual approach that would have cut EI premiums by 15 cents per $100 in earnings over the first three years, while the government has since decided there is room for a cut of this magnitude in 1999.

We believe that personal income tax cuts now also can be accelerated. In addition to completing the elimination of the three percent surtax, raising the floor of the five percent surtax and increasing the basic and spousal amounts, there should also be room to begin boosting the thresholds of the 26 percent and 29 percent tax brackets. As indicated in our tax proposal in October, these cuts would address the worst impacts of partial de-indexation on lower and middle-income Canadians and would improve Canada’s competitiveness with respect to the United States.

All of this, however, depends on the willingness of the government to continue restraint in spending. We support the Finance Committee’s desire both to continue applying the principles of Program Review to existing spending and to subject all new budgetary initiatives to an assessment of their impact on Canada’s productivity and the standard of living of all Canadians. We also agree with the Committee’s priorities for increased government funding, notably for health care and research and development.

But restoring discipline to federal finances has left almost all Canadians with less to spend after tax. Canada’s personal income tax rates pose the most serious challenge to the competitiveness of our economy and the future prosperity of our society. We see the potential for a tax cut of $5 billion or more in the 1999 budget. We urge you not to fritter away this opportunity. It may not come again within your government’s current mandate.

I am deeply concerned about the extent and scale of new spending proposals now on the table. If even a significant portion of these proposals is accepted, you will be condemning Canadians to stagger into the next millennium, still bearing a tax load that has stifled opportunity and growth for far too long. As you know, it takes almost $1 billion a year in personal tax cuts just to counter the effects of partial de-indexation and prevent the real tax burden from going up.

Putting tax cuts first does not prevent the government focusing its existing spending more clearly on priority areas such as health care and research. But neither should the government be relieved of the responsibility to review all ongoing spending and to continue cutting those activities that do not make a sufficient contribution to building a competitive economy and a higher standard of living for all Canadians.

We do not pretend that debt reduction and tax cuts alone can overcome all of the challenges facing Canada in the years ahead. Whatever the outcome of the short-term global economic uncertainty, serious long-term issues remain. As the Organization for Economic Co-operation and Development put it last week, Canada’s standard of living could fall far behind those of other industrialized economies unless it takes immediate action on several fronts  —  including but not limited to tax reduction.

The burning need to boost competitiveness, productivity and innovation in the Canadian economy certainly was the dominant theme at the BCNI Economic Summit last month. In addition to maintaining a high level of business investment, participants said Canada must reinforce its support for trade and investment liberalization worldwide; attract greater foreign investment; ensure that environmental policies contribute to competitiveness rather than inhibit growth; and strengthen the country’s political, social and economic union.

Canada’s business leaders understand the critical challenges facing each of their businesses in a turbulent global market, and you can be sure that competitiveness and productivity will be high on the BCNI’s agenda as we move into 1999.

But governments too must do their part in encouraging investment and innovation. If Canadians willing to put their minds and money on the line in pursuit of their dreams see no future here, Canada will not share in their successes. On the other hand, if you and your colleagues have the courage to continue to do what is right for the country, we can look forward instead to a future of steadily falling tax rates, increasing economic opportunity and greater prosperity for all.

As always, I hope that you find our thoughts constructive, and that they will help you as you and your Cabinet colleagues weigh the range of choices that your past success in imposing fiscal discipline has now made possible.

Sincerely,

Thomas d’Aquino
President and Chief Executive