Dissenting Opinion of the Bloc Québécois
Finance Committee Report
THE 1997 BUDGET AND BEYOND: FINISH THE JOB
1. INTRODUCTION
The title of the Finance Committee' Liberal majority report - « Finish the job » - is disturbing to us, to say the least. For if one regards the way in which the job has been done up until now, with unprecedented cuts to health, social assistance and higher education, with an unemployment rate still above 10%, and with a shortage of 925,000 jobs than what it would take to return to the job-market situation existing in 1989, if the government intends to « finish the job », the indications are that it is completely insensitive to the real problems facing Quebecers and Canadians.
While the federal government gives the impression that it is controlling its deficit, subduing inflation and lowering interest rates with its reforms and its cuts, increasingly it is pushing unemployed people onto social assistance and it is forcing the provinces to make the most difficult choices in its place. On the face of it, the government seems to be doing a good job, but for millions of Canadians, it has completely failed in the task of bringing them dignity through employment. Do the Liberals need to be reminded that they were elected on the slogan « Jobs, jobs, jobs! »?
Section 2 of our dissenting opinion brings up certain Liberal realisations that the Finance Committee's report forgot to mention and also presents the Bloc Québécois' position on monetary policy. Section 3 lists the majority report's proposals which we do not endorse. Finally, Section 4 presents our main recommendations for the next federal budget.
2. LIBERAL PERFORMANCE AND MONETARY POLICY
Liberals reduced transfer payments and raised taxes
It is written in the Liberal majority report that: « On the choice between spending cuts and tax increases, the Committee has endorsed the principle that deficit reduction should come primarily from expenditure reductions rather than tax increases. » Now, in reality, what is it really?
From 1993-94 to 1997-98, according to the latest predictions from the Finance Department, the Liberal government will have lowered the federal deficit by $25 billion (going from $42.0 billion to $17.0 billion). To get there, the federal government would have to increase its revenue base by $23.1 billion and reduce its spending by $14.4 billion, but servicing the debt will have cost it $9.5 billion more. What is more, the Finance Minister has foreseen a contingency fund of $3 billion for 1997-98. Consequently, the affirmation that the deficit reduction is above all the result of reduced spending is completely false.
In regards to individual income tax, which brought in $8.8 billion more for the State coffers between the third quarter of 1993 and the second quarter of 1996, we are talking about a rise in the tax base of 17.1%, while the increase in total personal income was only 7.4% for the same period. As much as the Finance Minister says that he has not increased the tax rate, the fact remains: taxpayers are paying a lot more in taxes in 1996 than they paid in 1993.
A closer analysis of government program spending, using the breakdown of spending found in the budget plans, reveals that the 14.4 billion spending reduction realised from 1993-94 to 1997-98 is explained as such: the 600 million in cuts to the principal transfers to individuals, 6.8 billion to the principal transfers to other levels of government, 4.7 billion to subsidies and other transfers, and a meagre 2.3 billion to all other government spending.
This signifies that 84% of the Liberal government's spending reductions have been achieved through transfers and third-party subsidies, and only 16% of reductions have come from cuts to federal departments and crown corporations. Moreover, at least 47.2% of federal spending cuts have come from principal transfers to other levels of government, particularly the provinces. These cuts to transfer payments have especially effected Québec which, according to Mr. Landry, would have had a balanced budget today if not for the passing off of the deficit by the federal government.
That is why the report's title worries us. Does « finish the job » signify a further increase in taxpayers' burden and more cuts to provincial transfers? The Liberal report does eliminate these possibilities.
Monetary policy is anti-employment
The Liberal majority refuses to take back the minor change to the monetary policy proposed by the economist Pierre Fortin. However, the Liberal report reads: « The tight squeeze of Canadian monetary policy deepened the 1991 recession. This tightening had two other consequences: it eventually led to the low-inflation environment that now prevails, but also the high unemployment and high debt servicing costs that now prevail as a result of the high interest rates associated with the policy. »
Given that the government had recognised the direct link between high interest rates and a hike in unemployment, and that it says that it is concerned with the present job market situation, we had expected that the Liberal report's recommendations would advocate maintaining inflation at 2-4% rather than 1-3%. The reason is simple: in the event of an economic and employment recovery accompanied by an inflation rate climbing above 2%, the Bank of Canada would be obliged to increase the interest rate in order to prevent inflation from exceeding the 3% ceiling. And even if the economy is not running at full speed, the monetary policy would plunge us into recession, as it did in 1994 when the prime rate more than doubled in 12 months.
We believe that the central bank's present target condemns the Canadian economy to perform below its potential, for the economic costs of maintaining inflation very near zero are enormous. And it has yet to be proven that the benefits of a zero-inflation are greater than the costs of the fight required to attain such a result. One only has to look to the U.S. to be convinced: the Americans seem to have some-what accepted an inflation rate fluctuating slightly around 3%, and moreover, their unemployment rate is barely 5%, being half of Canada's!
Furthermore, the central bank's mandate is very clear: « (...) it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment... » (Excerpt from the Act respecting the Bank of Canada; authors' emphasis)
The central bank openly chose to not concern itself with inflation. The monetary policy must respect the central bank's mandate and not be focused solely on the control of price levels. The Bloc Québécois is not asking that the Bank of Canada totally relinquish its control over inflation, but rather that it pick a target which allows for more tolerable unemployment rate, in this way better respecting the mandate that has been entrusted to this institution.
As we are pushing the government to take firm action to stimulate job creation, neither must the monetary policy wipe out the efforts made by budgetary and fiscal policy. It is a question of coherence and no where in the Liberal majority report do we find concern for this.
3. UNACCEPTABLE LIBERAL PROPOSALS
The Bloc Québécois is not in disagreement with all of the Liberal majority report's suggestions.
However, a certain number of the Liberal majority's proposals are, in our opinion, totally or partially unacceptable. Firstly, while the Bloc Québécois endorses the move to eliminate the deficit and to rationalise the federal government's public finances, we disapprove of the government's way of reaching its ends.
Right goal, but wrong way of reaching it
We have already denounced the fact that most of the budgetary effort is a result of an increase in tax bases (greater than the rise in income within the economy), and not as a result of cuts to government spending. We have also denounced the fact that the government reduced its program spending to 84% by slashing transfer payments to others, but only 16% of spending decreases come from its crown corporations, from Defence and from other department spending for the administration of federal programs. We do not wish to insinuate that none of these transfers cuts were justified (for example, the subsidies to large, profitable business), but the government does not have the right to pretend that it made the necessary clean-up "in its yard", as the Liberal report nonetheless lets on.
Fight child poverty by cutting social transfers?
The majority report specifies that aid for children living in poverty should be the government's key priority. We are in complete agreement with this principle. However, by considerably reducing the Canadian social transfer, the federal government is accentuating the problem of poverty amongst children. Which causes us to repeat the fact that this government, which wishes to give the impression that it is properly managing public finances, is implementing choices that are not consistent with employment and equity objectives which it pretends to be targeting at the same time.
What is more, "scandalous" is the word which best describes the way in which the Liberals are withdrawing from funding social programs, programs for which the Liberals nevertheless continue to edict national standards. It is morally unacceptable that after having set up cost-sharing programs with the provinces, the federal government withdraws from their funding, henceforth leaving the provinces to manage alone with the financial and political problems that this irresponsible act inevitably brings about.
The Liberal report pushes audacity to the point of confirming that after all, the programs covered by the Canadian social transfer are clearly of provincial responsibility. So why has the federal government intervened at the most basic level in these programs? And why does it continue to dictate the standards to be followed? Certainly, the Liberal report proposes that the central government henceforth decide standards in cooperation with the provinces. Which means that the federal government has promised a $11 billion floor for Canadian social transfer payments, for the sole reason of guarding a right of inspection in the development of programs within provincial jurisdiction.
The UI fund surplus
It is difficult to go on without mentioning the use of surplus accumulated in the unemployment insurance fund for deficit-reducing ends. The Liberal dominated Committee is attempting to have this odious tax on jobs accepted by playing up the need for government to create a "cushion" in order to face the next recession. But if this is the case, where is the special fund in which surplus monies accumulate? Where is the 5 billion dollars in annual surplus which the federal government collects, year after year?
The answer is simple: the Finance Minister is using it to mop up his deficit. And during the next recession, he will have to borrow on the markets and make larger deficits or once again raise the program's premiums in order to compensate for the fund's deficit. The government is artificially reducing its deficit by about $5 billion a year, for the UI fund's surplus cannot be both in the form of a « cushion » to prepare for the next recession, and at the same time be in the government's consolidated fund to reduce the federal deficit.
The National Revenue Commission: another move towards the centre
The committee returns to the attack by proposing the creation of a National Revenue Commission, which would play the role of sole tax-collector of all income tax and all other various taxes in Canada. From listening to the federal government, it is the provinces that are the sole source of blame for duplications. If one relies on good intentions, as expressed in the Speech from the Throne, to establish partnerships with the provinces, what that means is that a majority of provinces, desiring one sole mind-set, will isolate Québec or force it to abandon a portion of its sovereignty to government hands.
The creation of this Commission is in the same vein as the idea of a Canadian Securities Commission. The federal government is seeking to corner all taxation and financial levers in Canada in order to better dictate its own will to the provinces.
Lets equally remember that Québec already collects PST and GST on its own territory. And so, in its case, the savings from avoiding duplication have already been realised. If the federal government really hopes to eliminate overlaps, then let it allow the government that is closest to the citizen, meaning the provinces, take charge of tax collection.
Infrastructure project, take 2
The Committee is proposing a second stage to the infrastructure project. The Bloc Québécois agrees with such a project and with the Liberals' proposed parameters, providing that the provinces are in charge and can apply monies already earmarked in their budgets for this program.
The imaginary corporate tax reform
Finally, the Liberal report reminds us that the technical committee on corporate tax will not deliver its report until the end of 1997. Already this committee's impartiality has not been demonstrated, since it is made up of private-sector experts who earn their living by counselling the large corporations on the ways to pay the least possible tax.
The laxity and reluctance with which the Minister of Finance intends to reform business and individual tax systems clearly illustrates his priorities. When the Finance Minister reduced UI benefits, slashed transfers to the provinces for health, higher education and social assistance, he displayed remarkable zeal in these regards. The Bloc deplores the fact that he is not deploying the same energy when the times comes to plug the holes in the corporate tax system which is the source of « social » wastage and which is not sufficiently focused on job creation.
4. CONSEQUENTLY, WE RECOMMEND...
Give back to the provinces what was taken from them
In the Liberal report, it reads: « This year, with the fiscal year two thirds complete, it is virtually certain that the Government will better its target of $24.3 billion or 3 per cent of GDP. » Consequently, our first recommendation is to the effect that the federal government return to the provinces, by way of an increase in the Canadian social transfer, the amount making up the gap between the actual deficit and the predicted deficit. It is unjust for the government to reduce its deficit at the provinces' expense, especially when greater reductions than necessary means an actual deficit which is less than the reduction target by billions of dollars.
An immediate reform of business taxation
In the issue of revising the corporate tax system, the Liberal government is playing for time. The Bloc Québécois is asking the government to immediately implement the recommendations of its report made public last November which allows for recycling by the restructuring of twelve tax expenditures up to $3 billion in outdated, inequitable and useless corporate tax expenditures, into dynamic tax measures targeting the creation of quality jobs.
In particular, the Bloc Québécois proposes that capital gains be completely taxable, that a mechanism be set up so that taxes deferred to the future are one day actually paid, and in order that R&D credits are tied to salaries, so as to stimulate the creation of openings for young, newly-trained researchers. A good portion of the money saved could be returned to small business, for example in the form of new tax expenditures conditional upon the creation of lasting employment, or a general lightening of these job-creating businesses' tax burden.
Launch a review process for individual taxation
Individual taxation is now at its maximum level, to the point where the Liberal Committee notes in its report that the high Canadian tax rate on top-end salaries diminishes the attraction towards Canada for scientists, professionals and senior, specialised management. The Bloc Québécois believes that individual taxation can be restructured in such a way that taxpayers can get more for their money, and that removes « the brain-drain ». The Bloc asks the Finance Minister to launch, as soon as possible, an in-depth process of review for individual taxation, centred on equity and on simplifying the legislation.
Feds must clean-up their own yard
The federal government must resolutely take on the rationalisation of its own spending. Contrary to what the Liberals assert, too many expenditures still exist which are sources of wastage, inefficiency and draining of public funds. Even if the government pretends that the federal apparatus has never been better managed, the Auditor General still denounces, in report after report, the billions of dollars in bad expenditures or holes in the tax system. One only has to recall the quite recent examples of bad management of inventory, costing taxpayers $1.25 billion, or that of the repairs to a Coast Guard ship, where $30,000 was spent to move the vessel in order to save $71 on the repair bill.
Feds must stop wanting to control everything
Finally, the Bloc Québécois asks that the federal government abandon its centralising projects in areas of provincial jurisdiction, projects which increase duplication, inefficiency and overlaps. This applies to the National Revenue Commission, the National Securities Commission, as well as all national standards that the central government wishes to dictate to the provinces, even if it is less and less involved in the funding of social programs.