Hell or High Water

by Paul Martin

  If there was any benefit to the peso crisis, it was that my colleagues could now plainly see what I had been saying all along. Our deficit problem made us vulnerable, terribly vulnerable. Something happening half a continent away could kick the feet out from under us. It had happened once and it would surely happen again if we didn’t do something about it. I believe this is the moment when the cabinet really came together with determination to meet the commitment we had made in the campaign to get the deficit down to 3 per cent of GDP. In my own mind, it confirmed an even more ambitious goal: eliminating the deficit altogether.

  One last area of government spending where I was still struggling, however, was the fourth and final pillar: assistance to seniors. There were huge issues related to the Canada Pension Plan (CPP), of course. Since the CPP was a joint federal-provincial program operating with a set of liabilities that were entirely separate from the federal balance sheet, however, I dealt with it on a separate track, and I will get to that in the next chapter. In this budget, what I had set my sights on was a reform of Old Age Security (OAS), a program paid for directly from federal government revenues.

  Inevitably, as Canada’s baby boomers aged, there were going to be more and more eligible recipients, and relatively fewer working-age people to support them through their taxes. This was a problem that was still unfamiliar to most Canadians, though it was certainly understood by the markets. Moreover, there was a serious issue of equity, with the most prosperous generation of seniors ever tapping huge amounts of money from the Treasury regardless of their personal wealth, at the expense of their children and grandchildren. We considered a number of options for the 1995 budget but eventually settled on a proposal for a sharper clawback of benefits through the income tax system: in other words, taxing back more of the benefits from better-off seniors.

  That having been said, we knew that reforming seniors’ programs had been a “no-go area” ever since Michael Wilson had tried partly to de-index benefits in 1985. At the time, Brian Mulroney had been confronted outside the Parliament Buildings, with TV cameras rolling, by a senior named Solange Denis. “You lied to us,” she said. “You got us to vote for you, and then goodbye Charlie Brown.” Within a few days, the government backed off its proposals.

  As we developed our own ideas, nearly a decade later, I decided to take an hour and visit Madame Denis, who still lived in the Ottawa suburb of Vanier. I knew that the media would run to her for the thumbs-up or thumbs-down the moment the budget was out, and that her verdict could be critical to public acceptance. The department was very jittery about my excursion because of the potential that she could blow the wraps off a politically sensitive element of the budget. I explained my plan in detail to Madame Denis and once she understood it, she endorsed it.

  As it turned out, though, our problem was not Solange Denis. I had told the prime minister I believed we needed to make definite progress on seniors’ programs in the 1995 budget. We had an aging population, and the baby boomers would start to retire in 2011, imposing huge new burdens on a potentially debt-ridden federal government. Besides, if we did not do it in the context of attacking other forms of expenditure, we would never again have a political context in which it was possible. I also felt that if farmers were sacrificing the Crow rate and provinces were losing on social transfers, we could not ignore this major area of government spending: it was an issue of fairness.

  Although the prime minister understood all these issues and shared many of my concerns, he was extremely reluctant to take on the seniors, especially with a Quebec referendum in the offing. In fairness to him it must be said that his worries were especially intense because, historically, those cheques from Ottawa had been an important part of securing federalist support in the province. He and I clashed on this again and again. And the seesaw battle continued right up to the threshold of budget day. In fact, the department had taken to operating with two drafts of the budget, one printed on blue paper and the other on pink paper, each with different text with regard to seniors. The top Finance officials were deathly afraid that somehow the wrong button would be pushed and the wrong version of the budget would find its way into the media’s hands.

  With eight or nine days to go, many of my departmental officials had come to the conclusion that the battle was lost, but I was still unwilling to concede defeat. Over the previous year there had been many battles that had seemed lost for a time but I had not given up on, and we had eventually won them. As a result of those battles, I was by this time pretty much persona non grata with the prime minister, though. In a meeting with David Dodge, Peter Nicholson, Elly, and Terrie, I decided that it might be worthwhile to have Peter make one final approach. Peter had a closer relationship with Jean Chrétien than any of us; his father, a Liberal member of the Nova Scotia legislature, had been a friend of Jean Chrétien.

  So Peter dutifully went off to 24 Sussex to make this last pitch. The prime minister, I was later told, listened as Peter explained the “four pillars” and how important it was to address each one of them. It was early evening, and as the sun went down, no lights were switched on and the room grew very dark. After about ten minutes of Peter’s presentation, Jean Chrétien stopped him dead. He told Peter that Finance should defer to his political judgment on this and that he was convinced the budget would be a success without taking on the seniors’ issue. Peter came back to the department and reported mournfully that he had fouled off a couple of pitches from the prime minister, then flied out weakly in centre field. He said that the prime minister had complained bitterly that I did not seem to understand how to take no for an answer. It was something he had said to me personally a few days before; and I had replied that if I had been prepared to take no for an answer, we never would have got anywhere attacking the deficit over the last year.

  This turned out to be the most difficult moment in my already strained relationship with the prime minister — until the few days before I left cabinet in 2002 — and it turned on an issue of pure policy. The prime minister, as was his right, was pushing back hard on what he regarded as a core political issue. I felt that it was a matter of principle that the government be seen to be taking all its fiscal challenges seriously in the 1995 budget, fearing that anything less would be seen as a failure of resolve by the bond markets that would drive us farther into a hole. I was also very concerned about fairness between the generations — something that underlay my whole approach to the deficit and the debt.

  As budget day approached, I had to face the fact that on this one issue, Jean Chrétien would not be budged. Having won so many battles, I found it hard to lose this one — a question of personality and character, perhaps, as much as principle. But I also believed this was our last shot at fixing Canada’s fiscal mess and restoring our credibility — and that if we blew it, that was it. I had a meeting with Terrie, Elly, and David Herle to consider my options. One was to resign, which some of my advisers advocated. But for me, the issue was whether this budget was good enough without the seniors’ package to restore the government’s fiscal credibility. One adviser argued that we had got 95 per cent of what we had set out to do, and that it was enough to satisfy the markets, which was our principal goal.

  I was later told that there were contingency plans in the Prime Minister’s Office (PMO) and the Privy Council Office (PCO) to replace me and rush in a substitute budget, and that some didn’t believe that would be altogether a bad thing. The clerk, I learned, was urging that I be replaced, and was canvassing potential replacements with the prime minister. In the end, though, I decided that the budget would demonstrate our absolute commitment to getting the deficit down to 3 per cent of GDP, which we had promised in the Red Book and which would constitute, by far, the most substantial attack on the deficit ever.

  I told the prime minister that I would pass on the seniors’ issue for now, on condition that I could commit in the budget to reform in 1996. He agreed. The moment of crisis passed. And subsequently I came to the conclusion that o
n this issue he was more right than I was.

  By the time I stood up in the House of Commons to deliver the budget speech, certainly the most significant I ever delivered, and arguably one of the most significant in Canadian history, I knew it was going to be a success. Every year on budget day, the media go into a “lock-up” many hours before the budget is delivered. They are given the budget documents and access to Finance and other department officials but are not allowed to publish or broadcast any of the information they have until the finance minister begins his speech. Many media outlets bring Bay Street analysts into the lockup with them to help assess the budget so that they can get their stories out the minute the finance minister starts to speak and the lock-up ends. Of course there are always many Finance officials, including ministerial staff inside the lock-up, to brief reporters and to respond to their questions. I knew from reports coming out of the lock-up that day that the financial analysts were giving the budget a very positive review. I also knew that the international media — and the international markets — would take their cue from those analysts. We had done it!

  When I rose in the House of Commons to deliver the 1995 budget, an acute observer would have noticed that a number of seats normally occupied by senior cabinet ministers were filled by others. This was not because they had decided to forgo the opportunity to hear my dulcet tones, although that may have been a side benefit. It was because we had taken the unprecedented step of sending cabinet ministers out far and wide across Canada and to key foreign financial capitals so that markets at home and abroad would have evidence of our government’s resolve.

  The success of the 1995 budget was not due to one person or even one government department. It took a prime minister’s support and the backing of cabinet members whose ministries had to make the expenditure cuts called for, and a caucus who knew they would have to work on what might be a hard sell in every big city and small hamlet in the country. I made the speech, but if ever there was a collective effort, this was it.

  As important as the immediate success was, something larger had also been accomplished: we had established a new social contract with Canadians in which the principle of zero deficits played a central part. There was no other country that went as far and as quickly as we did. And there were other countries, notably the United States, which followed a similar path, and then abandoned it, squandering the benefits of the balanced budgets and burdening future generations with the responsibility of paying for low taxes and high spending in the here and now. In this country, ordinary citizens have embraced a belief in fiscal discipline, and they are now the ones who need to keep governments on the straight and narrow.

  CHAPTER TWELVE

  Time … and Generations

  One of the great challenges of democratic government arises from the temptation of political parties to make election promises that they know, or should know, would be unwise to implement. It also leads any government that is thinking about deep structural reforms to hesitate, because the costs of those reforms may come before the next election, while the benefits surface only later. It encourages short-term planning — short-sighted planning, in fact. When we came to office in 1993, we faced a number of such dilemmas. The deficit fight, as was famously said, meant short-term pain for long-term gain. We were fortunate that the public was mature enough to recognize this was necessary. But as I mentioned in the last chapter, we also had a broader issue of fairness between generations, involving not only the deficit — which was, in effect, one generation taking out loans that its children would have to pay — but also the Canada Pension Plan, which would soon tip into insolvency without dramatic change.

  And then there was the GST.

  The Goods and Services Tax, since its inception, has been good policy and bad politics. A succession of governments has faced this contradiction. Brian Mulroney’s government, which introduced it, delayed revealing the details until after it had secured re-election in 1988. Arguably, the political fallout contributed more to Brian’s political demise, and that of his party after he had left the scene, than anything else he ever did. Replacing the old but invisible Manufacturers’ Sales Tax (MST) with the omnipresent GST, paid at the cashier by every Canadian every day of the week, inflamed public opinion. And yet, the tax made eminent economic sense. The MST really was a “tax on jobs,” as the Mulroney government argued, and it really did curb investment that could create employment. At the time, they also insisted that the switch to the GST was “revenue neutral,” meaning that the new tax would not generate any more income for the government than the old one did. In a bit of sleight of hand, Brian later claimed that the GST was such a prodigious revenue-earner that he deserves credit for our government eliminating the deficit! I think I am content to let history adjudicate that claim. But the fundamental importance of the GST as a building block in the federal government’s balance sheet is undeniable.

  Unfortunately, many years later, the continuing unpopularity of the tax led Stephen Harper to promise a reduction in the rate of the GST, something that no doubt won him some crucial extra votes in January 2006 — but at what cost! To keep that promise he forced the government to take a $12 billion to $13 billion reduction in revenues. As a result, he removed the government’s cushion against falling back into deficit, and left himself with no room to cut personal income taxes or to accelerate the tax relief manufacturers needed to modernize machinery and plants to partially compensate for the rising dollar. The Conservative government did all this without even leveraging the GST reduction to induce the provinces to harmonize their sales taxes fully — which would have been some compensation.

  But in between Brian Mulroney’s and Stephen Harper’s GST woes was the little matter of how we, the Liberals, were going to handle the same hot potato. In Opposition, some of our MPs wanted to take advantage of the stunning public reaction against the tax by promising to “scrap” it. Jean Chrétien was not among them, however. His experience as a finance minister, as well as his naturally cautious nature, meant that he was reluctant to box himself into a promise that would be difficult to keep. He appointed a caucus committee led by John Manley and Diane Marleau, which took the responsible position that the revenue generated by the GST would have to be found elsewhere. This became party policy.

  Of course, one of the fundamental principles that the Red Book embodied was that all our promises would be costed. Here is what the Red Book said: “A Liberal government will replace the GST with a system that generates equivalent revenues [my emphasis], is fairer to consumers and to small business, minimizes disruption to small business, and promotes federal-provincial fiscal co-operation and harmonization.” No one who read this passage in our platform document could be in any doubt as to what the official policy of the party was. But what party platform documents say — even the Red Book, the most closely examined platform document ever in Canadian politics — and what candidates say on the campaign trail can sometimes be quite different. Furthermore, what candidates say can sometimes be different from what voters hear. In the 1993 election campaign, some Liberals weren’t especially careful with their language, promising to “scrap” or “kill” the GST, wording that would lead some voters to think that the party’s policy was much more adventurous than it actually was. Sheila Copps went so far as to say that if the tax were not abolished, she would resign. Once we were elected, my challenge was, like it or not, to deal with the expectations created by some Liberals on the hustings while trying to achieve the more precise goal we had laid out in the Red Book.

  Indeed, as finance minister, my challenge was more than just addressing an election promise. I had made restoring our fiscal credibility a fundamental element of our policy, and the way in which we addressed the GST would be a significant marker of our credibility both to Canadians and to our lenders. I set the department to work coming up with options. But the fact was that replacing the GST with another tax would inevitably have shifted the burden elsewhere. Simply redesigning the GST as a re
tail value-added tax would have invited the justified criticism that the GST was being disguised instead of replaced. We did work hard on harmonizing the GST with provincial sales taxes — and made headway in the Atlantic provinces — but ran into a brick wall in Ontario, where Mike Harris turned against it, despite having espoused the idea on the campaign trail.

  As we were wrestling with these issues, I remember having an argument with Terrie, Elly, and David Herle. “Look it, I never said I would scrap the GST and to the best of my knowledge Jean Chrétien never said he would scrap it, and I don’t see why we have to do anything beyond what we said in the Red Book.” But they pointed out that there was videotape of Jean Chrétien going further than that — a political fact we had to reckon with. The problem was that not everyone saw this situation the same way. The prime minister’s attitude was simply to ignore it and get on with life — certainly not to apologize. Sheila Copps’s position was that we should simply eliminate the GST. But I was the finance minister and I needed to deal with the situation, and clearly, neither of these two options were the answer. I needed to lance the boil, and in the end I saw that the only way to do that was to admit that we were not going to succeed in “scrapping the GST,” to apologize, and to move on.

  To pretend that harmonization of the GST with provincial sales taxes (which was a good idea) or some more gimmicky solution (which would not have been) met the standard established by some of the language used in the election campaign would only invite derision and undermine our credibility, which in my case, as finance minister, was deeply connected with the faith of the markets and the public in our management of the deficit. The prime minister — always reluctant to admit a mistake — was clearly unhappy with my decision; nonetheless, I was determined to go ahead and do it. Terrie worked closely with Eddie, who was trying to make the best of a bad situation. There may have been a difference in opinion about the approach I was taking, but there were no surprises. I made a statement in the House of Commons in which I made it clear that we would not change the GST. Then I went to a press conference in the national press theatre, where I said, “We made a mistake. It was an honest mistake. It was a mistake in thinking we could bring in a completely different tax without undue economic distortion and within a reasonable time period.”