Memorandum for The Right Honourable Jean Chrétien, P.C., M.P.

June 20, 1997

Dear Prime Minister,

This week, the Board of Directors of our organization, the Business Council on National Issues (BCNI), met in Ottawa to take measure of where the country stands economically and politically. We had the advantage of meeting in the immediate aftermath of the national general election in which your party won a second majority. For this achievement, Prime Minister, we congratulate you and your colleagues in what we know was a tough, divisive and at times acrimonious campaign.

There is hardly a better occasion to take the pulse of Canada economically and politically than after a major electoral outcome. We particularly welcome the opportunity to share our views with you and your colleagues just as you are preparing the policy directions for the government’s second mandate.

THE CURRENT ECONOMIC SITUATION

Overall, we continue to be pleased with Canada’s economic performance and improving prospects. But we believe that Canada can do much better — provided that your government stays the course on fiscal policy and that we deal decisively with the festering uncertainty over the political future of our country.

In economic terms, the country’s growth rate, which had been lacklustre from the latter half of 1994 to the middle of 1996, significantly picked up strength in the second half of 1996. This momentum was sustained in the first quarter of 1997 with real GDP growth of 3.4 percent. International economic agencies are in agreement that Canada’s growth rate in 1998 likely will be the highest among the G-7 countries.

Interest rates at generational lows are promoting significant gains in interest sensitive purchases notably in machinery and equipment investment, residential investment, and consumer durables.

Exports, which over several years have registered overall stellar performance, have rebounded strongly after a decline in the last quarter of 1996. Canada’s merchandise trade surplus remains healthy and the country’s current account has seen dramatic improvement. Corporate profits on a before tax basis are up significantly in the first quarter of 1997. At 8.8 percent of GDP, they are at their highest level in 7 1/2 years but still considerably below their long-run average of ten percent. While the unemployment rate is still high, inflation remains low, business confidence levels are high and rising, and consumer confidence levels are improving.

THE EYES OF THE WORLD ARE WATCHING

This snapshot of recent economic performance in Canada reflects a steadily improving trend that began earlier this decade as the economy recovered slowly from recession and the effects of economic restructuring kicked in. A successful battle against inflation, the passage of the Canada-United States Free Trade Agreement and subsequently the NAFTA, global trade liberalization measures, improving private sector productivity performance, the long overdue rollback of public sector deficits, the rationalization of government operations and the commitment by governments to a more market-oriented approach — all have contributed to vastly enhancing Canada’s image as a global economic performer.

Several weeks ago, the World Economic Forum rated Canada fourth in overall competitiveness, up from 16th in 1994 — today, only Hong Kong, Singapore and the United States rank ahead of us. Adding to this international endorsement and looking to the future, the respected Economist Intelligence Unit recently placed Canada as the world’s third best country in which to do business in the period 1997 to 2001. Last week, international financial markets gave Canada a vote of confidence — bond yields across the maturity spectrum are now below those in the United States.

Finally, for the fourth consecutive year, Canada topped the United Nation’s Human Development Index, suggesting that our strong economic performance is balanced by a superior social environment.

What these assessments are saying to Canadians is that we are making solid progress. That said, we cannot afford to rest on our laurels, because we do still face some serious economic challenges.

CANADA’S THREE MOST URGENT ECONOMIC PROBLEMS

Canada faces three major economic problems. They are high levels of unemployment, high levels of public debt and high levels of taxes. In the BCNI, these are known as the "three scourges".

As you prepare for your government’s second mandate, Prime Minister, we know that these three problems are at the top of your economic agenda. Here we offer you our views on tackling all three.

1. Reducing unemployment through job creation
   

   Despite the steadily improving economic outlook and the second-best job creation record among the G-7 countries, Canada is still gripped by high unemployment levels. These rightly are cause for deep concern. Nevertheless, the May 1997 employment gains are encouraging —  61,000 net new jobs were added building on solid increases in March and April. The three month tally of 156,000 new positions is the largest since early 1989, the tail-end of the long 1980s economic boom.

   
   

   We are convinced that if Canada continues to pursue market oriented policies, job creation will accelerate. We endorse the private sector consensus among economists that over 300,000 new jobs will be created this year. An accommodative monetary policy made possible by low inflation and sensible fiscal policies is helping. This having been said, it is unlikely that Canadian unemployment rates will fall as rapidly as we would like.

   
   

   All unemployed Canadians deserve our support and help, but none more than young people who still have a lifetime ahead of them — and who today face the country’s grimmest level of unemployment. When all is said and done, experience teaches us that the best guarantee of a good job and a stable career is a sound education. Here, the provinces and our schools have paramount responsibility.

   
   

   Canada’s private sector, for its part, is accelerating its efforts in this field: helping young people prepare for and find work through transitional programs such as internships, apprenticeships and co-op education; broadening its support for education partnerships at all levels, from pre-school through university; and expanding training opportunities for employees of all ages.

   
   

   The fact is that we have virtually full employment for people with post-secondary qualifications. Indeed, Canada’s fastest-growing industrial sectors face a growing shortage of employees with the skills they need to expand. Meanwhile, few jobs are being or will be created for people with less than a high-school diploma. While improving our system of education is not a quick fix for high unemployment, it is a precondition for faster job growth over the long term.

   
   

   You will be under increasing pressure to have the government attempt to spend its way to creating more jobs in the short term. Disturbing suggestions to this effect have been heard from members of your party since the June 2 election. These calls should be resisted for one simple reason: they have not worked in the past. They will not work in the future.

   
   

   Prime Minister, we strongly urge you to focus on enabling accelerated growth of long-term, sustainable and high-quality work rather than on quick fixes that produce short-term jobs at a high cost to taxpayers. As a country, we do need to invest more effectively in the skills and knowledge of young people to ensure that we remain competitive in a global information economy. But when it comes to creating more and better jobs for Canadians today, the promotion of a supportive economic environment and the reduction of debt and tax levels will be far more effective than increased public spending.

   
   
2. Dealing with the high debt problem
   

   Governments across Canada have made important progress in rolling back chronic deficits which for years have saddled Canadians with enormous economic costs. A majority of provinces have balanced their budgets; others are well on their way to doing so. The federal government, with further to go than the provinces, also has dramatically improved its position. The original deficit target for 1996-1997 was $24.3 billion. The March 1997 Fiscal Monitor indicated that the fiscal deficit outcome for 1996-1997 would be no higher than $16 billion. By our calculations, we expect the final number to be several billion dollars lower than $16 billion due to higher revenues and lower public debt charges. It is now evident, at long last, that a balanced budget is well within your government’s reach and budgetary surpluses should be the order of the day within two to three years.

   
   

   Your government has pledged to use these surpluses to cut taxes, to increase spending and to pay down debt. We urge you to pay special attention to the debt priority. At approximately $600 billion, Canada’s federal debt is much too high. Canada’s total public debt to GDP is among the highest in the industrialized world and worse yet, Canada’s foreign debt as a percentage of GDP is the highest among the G-7 countries. We must never forget that high public debt constitutes a continuing drain on the public purse, drawing precious funds away from government programs and requiring heavy taxes on Canadians. In addition, it makes Canada vulnerable to global economic downturns and saddles young Canadians and future generations with a huge burden.

   
   

   Some are arguing that continuing strong growth coupled with low interest rates will take care of the debt problem — that it will begin to diminish as a percentage of GDP. This should not be taken for granted. While it is true that optimal economic circumstances over time will lead to gradual debt reduction, the fact of the matter is that Canada’s debt is far too high for us to be complacent. We cannot count on optimal economic circumstances for long. In due course, economic slowdowns are inevitable and interest rates will rise. In such circumstances, the debt to GDP ratio again will begin to climb. We believe that a more active approach to debt reduction is required both to exercise prudent economic management and to discharge a moral obligation to our children and to future generations.

   
   

   Prime Minister, we strongly urge you to set ambitious targets for sustained debt reduction over the course of the new government’s mandate. Progress toward this longer-term goal should be subject to achievable intermediate objectives such as the two-year rolling targets that have worked so well in your government’s approach to deficit reduction. In addition, we recommend that you coordinate your debt reduction strategy with the provinces to achieve an "all Canada result".

   
   
3. Dealing with the high taxes problem

You have pledged that your government will cut taxes and you are right to have made this commitment. Canadians pay too much of their hard earned income in taxes and the overall burden of personal income taxes continues to rise. "Bracket creep", the result of non-indexation, is pushing Canadians into higher tax brackets even when their real incomes are stagnant.

The fact that the real disposable income of Canadians is not improving is of far reaching economic and social consequence. And comparison of top marginal tax rates between Canada and the United States places Canadians at a significant disadvantage. In our enterprises, we see dramatic examples of how the Canada-United States divergence works against Canada’s interest. It is becoming increasingly difficult to attract to Canada or to retain in this country highly trained young people and professional, managerial and technical people of all ages. With many of them, the tax burden issue is of major importance.

Prime Minister, within the limits imposed by credible debt reduction targets, we strongly urge you to announce a tax reduction strategy no later than in the February 1998 budget. What a "tax relief" package might look like no doubt still needs to be worked out. Among the options, a high priority in our view should be given to reductions in personal income tax rates and in particular, to the elimination of the basic federal surtax. Another means of providing tax relief is to reduce Employment Insurance premiums which at their present levels are adding enormously to the Employment Insurance cumulative surplus. (If no steps to provide relief are taken, the cumulative surplus could easily surpass $16 billion by 1998-1999.) Over time, we should also take steps to end the continuing hidden tax increases imposed by "bracket creep".

We do not purport to suggest in this communication to you what the exact balance of tax reductions should be among the various options. The core message that we wish to impart to you, however, is that without significant tax relief, Canadian incomes will continue to stagnate, jobs and investment will be lost and Canadian competitiveness will suffer.

THE ECONOMY AND POLITICAL STABILITY

Prime Minister, we have offered you our perspectives on Canada’s economic performance and prospects and on how to deal with the three most urgent economic problems facing the country. We will conclude with some observations and suggestions on the darkest cloud hanging over our future, the possibility of Quebec’s secession.

Business leaders traditionally have been cautious in intervening in the unity debate, perhaps too cautious. But at the risk of renewing accusations of "economic terrorism", we must state bluntly that Canadian unity is part of the jobs issue. Certainly Quebec secession would have severe consequences for all Canadians, although Quebecers would suffer the most. But just as important, the continuing uncertainty over our country’s future has been hurting Canada’s economic growth for years, and continues to affect growth and job creation today.

The lingering threat of renewed international concern and of another abrupt loss of confidence in our currency leaves us constantly vulnerable to an unnecessary upturn in interest rates that could reverse our fiscal progress, damage business and consumer confidence and reduce employment growth. And while it may not be fair to blame anxiety over separation for all of the unemployment rate gap between Quebec and the central and western regions of Canada, that gap is large and political uncertainty must bear a significant share of the responsibility.

Your government has taken some positive steps. We agree with the intent of the legislation passed by Parliament to recognize Quebec’s unique place within Canada. We approve of federal efforts to improve the structure of the federation through rebalancing of powers and responsibilities. And we support the government’s attempt to clarify the legal status of separation through the reference to the Supreme Court. But with great respect, the efforts made by your government to date are insufficient.

We, for our part, have tried to contribute to a new vision of Canada, most recently through the Confederation 2000 conferences held last year and other ongoing initiatives. As a result of this work, we believe that the framework for a solution is clear.

We need to intensify efforts to rebalance the Canadian federation, giving the provinces more powers where this will provide more efficient delivery of services to citizens, but also strengthening the federal power to make our economic and social union work more effectively for all Canadians. Aside from this redistribution of powers, the time is long overdue for recognition of the unique characteristics that French-speaking people have brought to our federation and of the role that the government of Quebec has played and must continue to play in protecting and promoting their culture within Canada — recognition in a form that goes significantly beyond a simple parliamentary resolution.

We believe that both of these elements are essential to ensuring a stable base for rapid economic growth and job creation in the years ahead. While we support an incremental approach, our goals remain ambitious. Furthermore, we believe that time is very limited.

We believe that the scale of change required to decisively resolve the unity question needs not merely passive co-operation, but active leadership by the provinces and all First Ministers dedicated to strengthening the federation. We also believe that other Canadians, including business leaders, must take active roles in this process of renewal.

Prime Minister, we acknowledge that you too feel passionately about the future of our country. But we strongly urge you to accept both the need for more rapid progress in renewing our federation and the limitations of the federal role in this process. We believe that the needs of Canadians must come before either partisan or jurisdictional interests, and we ask that, in addition to providing leadership at the federal level, you give your heartfelt support to any worthwhile initiative that may emerge from other levels of government. We are all citizens of a great country, but our time is limited, the challenge remains formidable and we must welcome and draw on every ounce of creativity and goodwill that Canadians together can generate.

As senior business leaders, we will play our part in promoting change, understanding and accommodation across Canada. We are convinced that we can be a positive force because our community — the business community from British Columbia to Newfoundland — is a united and remarkably cohesive force. Building one of the world’s strongest economies is our first priority — to achieve this goal, we must continue to count on the high level of political stability that has made Canada number one in overall quality among the countries of the world.

Sincerely,

On behalf of the Policy Committee
Business Council on National Issues

A. L. Flood
Chairman

Thomas d’Aquino
President and Chief Executive