by John English
Garnett, at Trudeau’s invitation, had sat in the gallery of the House of Commons when Finance Minister Allan MacEachen presented his budget on June 28, 1982. It was, she told Trudeau, a “petulant, injustice-collecting time,” an opinion the prime minister shared.31 His economic programs unravelled that year as labour, business, and voters ferociously attacked the government’s economic policies. The June budget responded to the failure of the one presented on November 12, 1981, two months after Lougheed and Trudeau had toasted a new energy agreement with champagne. The celebration had been premature: as the rise in oil prices stalled, drilling rigs quickly left Canada, and the flow of funds both Trudeau and Lougheed had anticipated for their treasuries became a trickle. With the revenue underpinnings of his 1981 budget gone, MacEachen confronted an economic storm that blew from unexpected directions with devastating impact.
The winds from the south blew coldest. After the election of Ronald Reagan, Paul Volcker, the chairman of the Federal Reserve Bank of the United States, adopted monetary policies that raised interest rates to unprecedented heights in a successful effort to end the rampant inflation. Simultaneously, the Republicans began to cut taxes, a reflection of their commitment to supply-side economics—a belief that the benefits of tax cuts would create rapid economic growth that would “raise all boats.” The close integration of the Canadian and American economies quickly transferred the impact of these policies to Canada, with catastrophic results for the Canadian economy and federal government policy. The Bank of Canada followed Volcker’s path and also restricted the money supply drastically. Later, Volcker said, “Whoever expected twenty percent interest rates? But you get caught up in the process, and you can’t let go. You don’t want to let go. Letting up, giving up—that was not in my psychology.” And so unemployment soared into double digits, housing prices dropped, car lots were crammed with unsold vehicles, mortgage interest rates stood at an incredible 22 percent in August 1981—and Canadian politicians ran for cover.32
The 1981 budget had supported the Bank of Canada’s policy of wringing inflation out of the system with severe restrictions on money supply. In MacEachen’s words, the bank’s policy “has to be supported by greater fiscal restraint.” He promised to cut back on spending, counting on revenues from the NEP, rather than imposing new taxes, to produce additional income. But the NEP revenues did not come through. Meanwhile, the social programs of the sixties and seventies continued to create extra costs for the federal treasury as unemployment rose, resulting in a projected budget deficit of $13.3 billion. However, MacEachen estimated that this deficit would fall to $10.5 billion in 1982–83 and $9.6 billion the following year, so these parts of the budget, including the projections, were not highly controversial. Almost everyone believed that the NEP would flood the government’s coffers. Nevertheless, troubles came when MacEachen, whose social Catholicism gave him a passion for equality and an abhorrence of poverty, unexpectedly attacked tax breaks—the panoply of special deductions, political payoffs to insurance companies, income averaging, pension income deductibility, and “writeoffs” for mining, property, and financial firms that had accumulated in the postwar era.* The budget created an accountant’s nightmare: an end to the complex architecture of special privileges that the Carter Commission had tried to break down more than a decade earlier—though admittedly Trudeau’s own governments had added some buttresses to it in the seventies. In the view of MacEachen and his advisers, the changes would bring in new revenue that could then be spent on the small businesses, homeowners, and others struck down by high inflation and the recession.33 But those affected—special interests such as insurance companies, accounting firms, property developers, and law firms—were not pleased. They crowded Ottawa-bound airplanes with their representatives as winter set in.
The 1981 budget quickly came undone as lobbying combined with the stunning impact of high interest rates to undermine the drive for equity. The assumptions underpinning the NEP also fell apart as oil prices began to collapse with the end of economic growth and the beginning of a serious recession. Canada had a terrible year in 1982. Its real GNP, which grew 3 percent, second only to that of Japan, in 1981, dropped 4.8 percent in 1982, by far the worst among the G7 nations and a number unequalled in the postwar era. Its unemployment rate (12.6 percent) was exceeded only by that in the United Kingdom (12.8 percent) and was much higher than that in the United States (9.7 percent). Volcker’s stringent actions caused inflation to drop to 6.2 percent in the United States, but it remained at 10.8 percent in Canada. More troubling was productivity growth, ultimately the source of economic growth, which declined 1.6 percent in 1982, again, worse than in any other G7 nation. In June the Canadian dollar reached a historic low of 76.8 cents U.S. before recovering to 81.4 cents at the end of the year. Ian Stewart, MacEachen’s deputy minister of finance, wrote later that “the federal budget of 1981 pursued tax reform and reductions in the rate of growth of federal transfer to the provinces in continued pursuit of deficit control, just as the bottom was about to fall out of economic activity and the automatic stabilizers were to drive deficits up rapidly.” The public blamed the government, and Trudeau tumbled in the polls.34
“Quite frankly,” Trudeau wrote in his memoirs, “neither I nor MacEachen nor anyone else in the Cabinet had realized the extent to which [the 1981] budget would upset so many private interests in so many sectors of the population.” He had paid close attention to economic matters in the seventies, but in the early eighties he seemed less interested and made almost no meaningful statements on the subject. Monique Bégin, one of his leading ministers, found him puzzlingly indifferent to economics at the time.35 There were several reasons for this behaviour. First, his two finance ministers, Allan MacEachen and Marc Lalonde, were his strongest and most trusted colleagues. A prominent public servant later recalled Trudeau saying that he “owed” MacEachen his ambitious 1981 budget—MacEachen had, after all, played a pivotal role in rescuing his political career in 1979.36 Lalonde, a dominating figure in Trudeau’s last government, was not only highly competent but also completely loyal, a quality Trudeau prized. Second, monetarism and supply-side economics, which had become the new dogma in Washington and among many Canadian economists, including those at the Bank of Canada in the case of monetarism, did not coincide with the economics Trudeau had learned at Harvard and debated with others in the seventies. He was too old to learn new ways, but too intelligent not to recognize their importance.* Third, economic events of the early eighties fundamentally undermined the policy mix that the Liberals had brought to office in 1980—the interventionist NEP, a robust Foreign Investment Review Agency, and an activist industrial strategy. Falling energy prices undermined the first, strong opposition on Bay Street and in Washington and declining direct investment defeated the second, and the third became impossible as soaring deficits limited the freedom of Trudeau’s government to intervene to secure its ambitious goals.37
And then there was the constitutional war: its battles ranked first in importance for Trudeau, as his instructions in the fall of 1981 that Lalonde come to terms with Alberta clearly indicate. Moreover, even though Trudeau was often absent from economic discussions, his philosophy suffused them all. And that approach was exemplified during a discussion in December 1980, when Alberta businessman Jack Gallagher pushed Trudeau for a quicker move to the world price for oil and the prime minister responded, “Is it fair?” Would going to the world price not penalize too many people? Similarly, in August 1981, when Trudeau and Lalonde attended a U.N.-sponsored conference on new and renewable sources of energy in Nairobi, Kenya, Trudeau declared that the rising costs of energy were the “enemy of freedom.” He announced the creation of Petro-Canada International to assist developing countries in achieving their own self-sufficiency. Lalonde followed the same path and argued that Canada was assisting developing nations by becoming self-sufficient itself, thereby freeing scarce energy resources for others.38
Self-sufficiency, programs to achieve
social and economic equity, and the use of state power to rebalance the tilt of the market toward “fairness” met with stiff opposition in the eighties as Reagan’s comprehensive neo-conservatism took hold throughout much of the Western world. Initially, strong opposition came not only from Ottawa but also from France, where the new socialist government of François Mitterrand nationalized banks and strengthened the state, but gradually, the new faith won converts and Mitterrand’s resistance faded. A few outposts remained in Scandinavia and elsewhere, where there was successful resistance, but the attack on the interventionist state and the celebration of the market became an increasingly dominant outlook within the Anglo-American democracies. It included a retreat from government regulation, massive tax reductions, and a deep faith in the rightness of the market in moral as well as economic terms. The blend of neo-conservatism and market economics profoundly challenged the platform on which Trudeau had been re-elected in 1980. Already by 1981, the government was retreating on its pledges to strengthen FIRA and to extend the interventionist policies represented by the NEP into other sectors of the economy. Reeling from the worst economic downturn of the G7 since the Depression, the Trudeau government seemed on the defensive, reacting too late to the unexpected and watching in disbelief as its carefully crafted programs quickly came undone.39
In their accounts of what happened, Trudeau, Lalonde, and others attribute their problems to the unexpected decline of the price of oil. “Had prices moved within a reasonable range of the projections [$79.65 by January 1990],” Lalonde argues, “the Canadian consumer would be paying a lot more today for petroleum products, but the oil and gas industry would be very prosperous, the governments of producing provinces would have large Heritage funds and the federal government would probably have no deficit.” He points out that the Alberta Heritage Fund reached its peak, at $12.7 billion, in 1987, when resource royalties ceased to be transferred to it and the federal government deficit under Brian Mulroney, Trudeau’s Conservative successor, stood at $34.96 billion. In the Canadian fashion, blame was placed across the board. Lalonde reminds his readers of a late eighties Calgary bumper sticker—“Oh God, give me another oil boom: I promise I will not piss it away.” The Albertans, he and others implied, had botched things, failing to take advantage of their rich resources when times were good. After all, 4.5 million Norwegians had hoarded a treasure trove from their energy resources that was twenty times the size of the fund for 3.3 million Albertans. Recriminations abounded among Albertans, with Lougheed’s successor Don Getty receiving much of the blame, but they directed most of their rancour toward Ottawa and, in particular, the NEP.40
Like the constitutional initiative, the NEP must be placed within the context of Trudeau’s understanding of his times and his belief that a weakened federal government had to reassert itself, particularly amid the economic nostrums proclaimed by Ronald Reagan and Margaret Thatcher. The federal government had been pulling back since the late sixties, as the provinces extended their reach in spending money, keeping in direct contact with citizens, and asserting their authority over language (Quebec) and resources (Alberta). Trudeau and his colleagues saw their policies in the last half of the 1970s as a series of retreats before relentless provincial assaults: the decision not to use the courts or special powers to challenge Lougheed’s claims that the resources “belonged” to Alberta; the untying of grants for established programs to the provinces in 1977; the Cullen-Couture immigration accord in 1978, which permitted Quebec to play a direct role in selecting immigrants; the constitutional proposals of 1978 and 1979, which envisaged a significant decentralization of Canada; and the move to the world price for oil, which began after Trudeau replaced the aggressive Donald Macdonald as minister of energy with the more accommodating Alastair Gillespie.
The 1979 election defeat and Lougheed’s subsequent failure to reach an energy accord with the Conservative Clark government left a mark both on the Trudeau Liberals and on the officials within the Department of Energy, Mines, and Resources, who had become exasperated with what they believed were truculent provincial governments. As political scientist Bruce Doern wrote in 1983: “Revenue was a genuine issue, but it was also a surrogate for many of the normative concerns that are inherent not only in energy policy but in Canadian politics in general: different views of federalism, the role of western Canada, the control of resources, regional disparities, growing budgetary deficits, and Canadian ownership of the economy.” Trudeau, on his return to politics in 1980, vowed that he would retreat no more.41
The NEP was not simply about revenue but also about the Trudeau government’s sense that it must seize the agenda it had lost in the seventies. The federal government’s spending had soared in that decade, but its authority, Trudeau believed (and most agreed), had weakened.42 It was imperative now for the federal government to confirm its relevance and effectiveness to Canadians, wherever they lived. Most, of course, lived in central Canada, and the tensions between the claims of Alberta in energy and those of Quebec in provincial rights ran counter to the interests of Ontario, as they were defined by the Conservative government there. Premier William Davis supported Trudeau against René Lévesque and Joe Clark, and he and Frank Miller, the Ontario finance minister, backed the NEP, even though central Canadian business interests were generally not supportive. Ontario even bought a 25 percent share in oil sands producer Suncor in 1981—an action that implicitly endorsed the Canadianization approach of the NEP. “Fairness” in regard to energy meant different things in Edmonton and in Toronto.
Faced with rising costs caused by the high unemployment of the early eighties, the tax expenditures of the seventies (such as indexing of payments and of taxation), and the rising payments on the national debt stemming from record high interest rates, Trudeau’s government fought hard to maintain a coherent economic focus. In the seventies Canada had pursued two approaches. The first approach, trade liberalization through international negotiations such as GATT, meant that the historic protectionism of Canada’s National Policy dissolved and Canadian manufacturers now faced challenges from Toyota automobiles and Sony electronics and, increasingly, from textiles imported from many developing countries. Political considerations—particularly the concentration of textile manufacturers in Quebec—caused much delay in freeing some of the trade, but the trend was clear. These liberalization policies had strong support from trade and finance officials, the government-appointed Economic Council of Canada, and a few ministers such as Jean-Luc Pepin,* as well as from Bay Street, the conservative and business-supported Fraser and C.D. Howe Institutes, and, most vocally, Simon Reisman.
The second economic approach—that Canada would thrive through an interventionist government that supported critical new industries—was advanced by the government-appointed Science Council of Canada. The November 1981 budget’s economic statement, in the words of Kenneth Norrie and Doug Owram, “was based on [the] view that Canada’s economic future lay in its rich natural-resource base. These sectors would be the leading ones around which manufacturing and services would evolve to serve them.” The result would be “resource mega-projects such as oil-sands plants, offshore exploration and development, pipelines, and hydro-electric developments.” This statement was a deliberate slap at Reagan’s famous declaration that government was the problem; for Lalonde and Trudeau, it remained a solution and a source of future Canadian opportunities.43
But increasing numbers of critics believed that government was not the solution, and the Reagan tax cuts attracted many Canadians who were distressed that their country was recovering more slowly than the United States from the recession. In June 1982 MacEachen’s new budget reflected the confusion about how to proceed amid the most dramatic economic slowdown since the Great Depression. The budget limited wage increases for public servants to 6 percent for one year and 5 percent the following year. Government agencies and firms with rates needing government approval were also limited to price increases of 6 and 5 percent over the two-year perio
d. The solution harked back to the seventies, when Trudeau broke his 1974 election promise and imposed wage and price controls on the country. But the choices now seemed very limited.
Two economists on the left, Clarence Barber and John McCallum (a future Liberal minister), set out the government’s dilemma in a 1982 study written just before the June budget: “There is no simple solution to this general problem. On the one hand, Canada lacks the institutions and the underlying social consensus that have helped to contain inflation in Japan and certain European countries. On the other hand, the Canadian economy seems to be less flexible, more regulated, and less competitive than the American economy, and this may be one reason why inflation appears to be less downwardly mobile in Canada than in the United States.” In their view, Canada, unlike many European countries, did not have the voluntary consensus, the close collaboration among labour, business, and government, that limited inflation’s gains. Conversely, the United States had a more flexible market, which also acted to limit inflation. The result was a need for wage and price controls in Canada. For Trudeau, the European option was the best—a view he increasingly expressed throughout the eighties and nineties—but Canada was not Europe. Pragmatically, he chose controls.44