Shock Therapy

Budget for a "bankrupt"

Canadians marked their country's 115th birthday last week with picnics, parades and a dazzling display of fireworks over Ottawa's Parliament Hill. But the celebration hardly reflected the times; Canada faces its worst economic slump since the 1930s. Unemployment stands at a post-Depression high of 10.2%, inflation is galloping along at 11.8%, and the prime rate is stuck at a crippling 18.25%. In an effort to check the growing sense of alarm, Finance Minister Allan MacEachen unveiled a new budget, his third in less than 18 months. But as Canadians studied his belt-tightening measures--and a projected deficit proportionately double that of the U.S.--few felt reassured. Said a Toronto stockbroker: "The government is bankrupt, literally and figuratively."

Canada's difficulties stem partly from living next door to the U.S. In his address to Parliament, MacEachen singled out the prolonged U.S. recession and high interest rates (the prime last week: 16.5%) as "the foremost international obstacles" to Canada's economic recovery." The impact of U.S. policy on Canada is indisputable, but many businessmen on both sides of the border also think that Prime Minister Pierre Elliott Trudeau's "Canadianization" program deserves some of the blame. Measures to increase Canadian ownership of the U.S.-dominated oil and gas industries to 50% by 1990 and to ensure that foreign investment projects benefit Canada have had a stultifying effect on business activity and encouraged investment capital to leave Canada. Says a Reagan Administration economist: "Canadianization hangs like a sword of Damocles over all those large companies that have traditionally operated in both countries."

In an obvious overture to disgruntled American investors, MacEachen promised that the Trudeau government would not "press the pace" of nationalization in the energy industry. He also pledged to relax the screening of foreign investors. But MacEachen had little good news for Canadians. He asked workers in public service jobs to accept a cut in wage increases, from 12.2% last year to 6% in this year's new contracts, and in effect raised taxes by limiting a provision that protected taxpayers from inflation-induced "bracket creep." The new budget did offer lower-interest loans to small businessmen and farmers and proposed an innovative plan that would tax interest earned from special term deposits only when the interest exceeded the inflation rate.

Showing little confidence in the new budget, investors drove stock values on the Toronto Exchange down 44.36 points. The Canadian dollar briefly dipped to an alltime low of 76.80 against the U.S. greenback. Union leaders representing Canada's public servants vowed to fight the new wage guidelines. When Trudeau summoned the premiers of Canada's ten provinces to Ottawa in a bid to sell them his economic plan, they responded by saying they would think about it.

Trudeau's Liberal Party is suffering along with the economy. The latest Gallup poll shows the opposition Progressive Conservatives would take 32% of the vote if an election were held now, vs. only 23% for the Liberals (three months ago, those figures were 39% vs. 34%). "People are frightened," says Michael Wilson, a Conservative Member of Parliament. "They don't understand why this government can't manage its funds better." The Tories, however, have few fresh economic ideas to offer. Trudeau does not have to call another election until early 1985, but he has been pressured by his party to do something to improve the economy--or step down. sb

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