Despite Progress, Goal of Sustainable Growth Still Threatened by Rising Debt and Taxes, Business Leaders say

February 19, 1997

Finance Minister Paul Martin has steered a prudent course over the past few years, but his latest budget is a reminder that the country’s fiscal voyage is far from over, says the Business Council on National Issues (BCNI).

“The ship of state may look increasingly seaworthy, but it is not unsinkable,” said BCNI President and Chief Executive Thomas d’Aquino. “The iceberg of public debt is still lurking out there in an ocean that is bound to have its share of storms in the future. And even now, that iceberg is growing bigger, not melting away.”

The good news in last evening’s budget is that the federal government continues to make steady progress in reducing its deficit, albeit measured by Mr. Martin’s own modest targets. Where he has increased spending, he has done so intelligently, through measures that are highly focused on the needs Canadians have accepted as our most urgent priorities — tackling child poverty and the welfare trap, helping parents and students to invest in education, promoting greater innovation and strengthening the nation’s charities. Even in these areas, Mr. Martin is to be commended for being careful to ensure value for the taxpayers’ dollar.

“That said, the budget still leaves Canadians facing a major threat”, Mr. d’Aquino said. While a balanced budget now seems within reach by 1999, much of the encouraging progress being made in reducing the deficit ahead of schedule can be traced to two key factors:  falling interest rates and rising tax revenues.

Even as lower interest rates have put billions of dollars in spending power into the hands of Canadian consumers, they have done wonders for the country’s biggest borrower, the federal government. And federal revenue from Ottawa’s four main taxes — personal income tax, corporate income tax, employment insurance premiums and the goods and services tax — has jumped by more than $20 billion over the past three years.

Despite those lower debt service costs and higher revenues, Canada’s public debt is still getting larger. The federal debt alone will rise to $610 billion in the next year. Canada’s combined federal-provincial debt now stands at a staggering 105 percent of Gross Domestic Product. And the country’s foreign debt remains at an unacceptably high level.

At the same time, the federal government is counting on its major taxes to boost annual revenue by another $10 billion within the next two years. By the 1998/99 fiscal year, the budget predicts that personal income tax revenue will have jumped by 37 percent over the previous five years, that corporate income tax will have soared by 82 percent and that GST receipts will have grown by 17 percent. In short, Mr. Martin is counting on more Canadians earning higher pay, more companies reporting greater profits and more consumers opening their wallets even wider — and still does not project a balanced budget.

This reliance on rising tax revenue is in itself a threat to growth and jobs, and this threat will be compounded by the planned hefty increases in Canada Pension Plan premiums in the years ahead.

To be sure, the short-term economic outlook is positive. The private sector has produced almost a million new jobs over the past five years, and is expected to add another 300,000 or more in the year ahead. But the economy today is enjoying the best of all worlds, combining low interest rates and low inflation with strong growth. This could easily allow the government to bring in a balanced budget in the 1998/99 fiscal year, but such good fortune cannot last forever, Mr. d’Aquino said.

What happens if continuing strength in the American economy prompts a significant jump in interest rates — adding to the government’s debt service costs and slowing the pace of job creation? On the other hand, what happens if an economic slowdown pushes more people out of work, slicing into tax revenues and consumer spending and boosting employment insurance payouts? Such events may not endanger Mr. Martin’s short-term targets, but the budget admits that Canada’s finances remain “extremely sensitive” to rising interest rates in particular. And the higher Canada’s public debt rises, the more vulnerable the country is to such uncertainties.

“The immediate goal for the Liberal government may be to win re-election, but the ultimate goal for Canadians must remain to achieve sustainable economic growth, lower tax rates and a steadily increasing standard of living for all,” said Mr. d’Aquino. “That goal requires a determination not simply to live within our means, but to reduce our collective debt and so to earn greater freedom from the inevitable ups and downs of a global economy. This has been a top priority of the Business Council for over fifteen years. It remains a top priority.”

The Business Council on National Issues is the senior voice of Canadian business on public policy issues in Canada and internationally. Its membership is composed of the chief executive officers of 150 leading Canadian corporations. These companies represent every major sector of the economy and are responsible for a significant majority of Canada’s private sector investment, exports, training and research and development.

The Executive Committee of the Business Council is composed of Chairman Guy Saint-Pierre; Honorary Chairman J. Edward Newall; Vice-Chairmen Peter J. G. Bentley, A. L. Flood, Jean C. Monty and David P. O’Brien; and Mr. d’Aquino. Messrs. Saint-Pierre, Newall, Bentley, Flood, Monty and O’Brien are leaders respectively of SNC-Lavalin Group Inc., NOVA Corporation, Canfor Corporation, CIBC, Northern Telecom Limited and Canadian Pacific Limited.