by Christopher C. Goodfellow
August 7 1998

The substance of this article was published in the Review Section of the
Montreal Gazette on Saturday August 15, 1998 under the title "Too Heavy a Burden"

These words uttered at the start of the annual Couchiching Conference to soothe the nerves of frayed Canadians as the dollar falls through 66 cents along with platitudes that the government is not indifferent to the devaluation do little to restore my confidence in the fiscal management of the country. We have been headed towards this currency crisis for 30 years ever since our governments adopted an attitude that you could use deficit financing to borrow and spend without any accountability and increase the level of government participation in the economy without any limits or repercussions. The facts argue otherwise.

I have previously written several articles about Canada's financial plight and our choices for policy reform. Last year, I again re-iterated my belief that Paul Martin's "beau risque" of raising taxes to an extortionate levels to balance the budget would not work without a substantial and meaningful cut in the overall participation of government in our economy. The core problem remains the same as I pointed out in Canada's Choices in 1993. The private sector simply cannot support a public sector of the size we have in Canada - "the capacity of our economy is now out of balance with the governmental overheads that have been placed upon it" (Canada's Choices 1993). Overall government participation in the economy still exceeds 50% of GDP and the demands placed on the private sector for tax revenues to support this huge maw of government simply cannot be sustained.

What is happening to our dollar? Simply this: the international market is discounting the dollar in response to a recognition that Canada cannot continue without some basic policy reforms to re-balance the public/private sector. Anyone could balance the budget by increasing taxes short term which is exactly what Martin has done along with his provincial counterparts who have mastered the art of indirect taxation in a thousand ways as well. This "beau risque", as I termed it, has been a failure as the fundamental issue still has not been dealt with and the hope that eventually the economy would generate revenues and grow us out of our troubles won't work without substantial tax reductions and encouragement to the private sector to make Canada a more attractive place to invest and do business. We are all carrying a larger debt - federal, provincial and municipal than ever - and the prospect now of interest rates being forced up by market forces will bring the deficit roaring back as an increasing percentage of revenues are devoted to servicing this huge debt and government revenues decline with a recession.

The fact is Canada is bankrupt and the international market is saying so now with this latest collapse of the dollar which I suspect will only continue with increasing momentum now towards the 50 cent level. How low can it go? Perhaps lower than you or I can imagine. Mexico's peso was 12 to the dollar in 1982 and over 3,000 to the dollar by 1989. Canada's currency could easily follow the same path as financial assets in Canada become increasingly unattractive to foreign investors on whom we have become so dependent through borrowing recognize our plight. The U.S. economy is strong and interest rates are headed higher. We, in Canada, cannot increase interest rates without collapsing the already fragile economy. When Paul Martin refers to the strength of our economy it is an economy that has been totally dependent on exports and exports driven by a cheap dollar. You cannot devalue your way to prosperity. A country that adopts this policy simply must keep devaluing and cannot return to prosperity without adopting basic policy changes as well. This is exactly the misguided policy Mexico followed through the 1980's but it did not escape the eventual crisis. Furthermore, it is preposterous for the finance minister to say the economy is strong when you have an effective 15% unemployment rate or higher throughout the nation when our southern neighbour is running a 5% or lower rate.

In 1993, I called for a Declaration of a National Econoimic Emergency (DNEE) with an immediate devaluation and substantial policy changes to reduce government participation rates in the economy to bring the government's share of GDP to 30-35% so that the private sector could support it with a reasonable level of taxation. I warned of the dangers of a slow sliding devaluation and inaction. It is exactly what we have had and we are now facing an even bigger crisis - the danger of the elimination and destruction of our middle class through extortionate taxation to maintain the current faltering system. It is only natural for thinking Canadians to abandon the currency as everyone who has any savings can see the eventual ruination of our dollar by continuing along the present path. If our middle class no longer has sufficient disposable income to drive a consumer economy our standard of living will collapse. Private spending and investment after all is the fuel that drives the economy from which all other revenues are derived.

Let's first look at what cannot be done. The Bank of Canada cannot raise interest rates alone to defend the dollar as some are calling for. Small increases in rates will only bait the speculators even more and it will threaten to slow the domestic economy. I would venture that market forces will eventually take over and force rates much, much higher and guess what? The dollar will still not recover...exactly what I said in 1993...we will have the worst of both worlds - a weak dollar and high rates...and a massive inflation which I do not believe we can now avoid in any way. Inflation after all is a tax in disguise on all of us as our currency collapses. As people perceive this coming inflation, they will only drive the currency lower unless they perceive a meaningful change in policy direction.

What can be done. We need visible and resolute policy change. A DNEE is still in order and whatever form it takes, it must include the following:

1) A commitment to reduce to government participation to 30% or GDP within 5 years.
2) A devaluation of the dollar to a level at which speculators will no longer attack it but from which it can be unquestionably defended with with these new policies.
3) A revision of the GST and all sales taxes to make consumption attractive and generate domesting spending.
4) An immediate and dramatic tax cut both on income and the elimination of all capital gains (the reasons remain the same as explained in Canada's Choices).
5) All grants, loans and subsidies to private business should be cut immediately and replaced by broad and transparent tax incentives.
6) Implement modifications of RRSP investment criteria to encourage local construction and leverage.
7) Implement an accumulated debt reduction plan - ADRP.
8) Implement a Canada Works Program for essential infrastructure (not swimming pools and arenas).
9) An immediate and massive reduction in the civil service salaries and pensions.

All of these ideas have been expanded in Canada's Choices and elsewhere. We simply need to get to the core of the problem and stop dancing around the edges. The private sector cannot support the level of public expenditure in Canada. I doubt now we will get through this without great pain as the devalued dollar will eventually work its way into a difficult inflation that cannot now be avoided. All governments have been living off the fat of the land and a borrowed cheque book for 30 years and it simply cannot continue forever. The international community is telling us so by selling our dollar and everyone recognizes this now and just wants to dump his/her Canadian dollars - I suspect a lot of Canadians have also abandoned the currency as well - as their faith in one finance minister after another who have spun story after story as to how they had matters "under control" are now recognized peddlars of a brand of economic sophistry that won't work.

I remain convinced that the pervasive depressed attitude of Canadians towards their economic prospects and governments can be turned around in 48 hours with meaningful and determined policy changes to build a sustainable economy and government on a new foundation. We are in a deepening crisis and a DNEE with the changes I have outlined here and elsewhere is required. I call upon the Prime Minister to act. You have no choice now.