‘WE’RE STILL IN A STRUCTURAL DEFICIT,’ SAYS FORMER PM MARTIN

The Hill Times / April. 8, 2103. By Daniel Leon Rodriguez.

Former Liberal prime minister and finance minister Paul Martin reflects on the Liberals’ financial legacy and Conservatives’ missteps managing the economy.

Former Liberal prime minister and finance minister Paul Martin, who represented LaSalleÉmard, Que., from 1988 to 2008, talks about the keys of the financial success of the former Liberal government, how the current Conservative federal government is dealing with the deficit, and balancing the budget, and about the future of the Liberal Party.

What do you see today as your legacy as former Liberal Prime Minister Jean Chrétien’s finance minister?

“Well, first of all, it’s a mistake to talk about my legacy. Whatever it is, it is the legacy of the Liberal government and, most importantly, of the Canadian people. It was the support and sacrifices of Canadians that led to our success in dealing with a number of issues that were quickly approaching a dangerous tipping point.

“Some of these were wellknown such as the loss of confidence in the Canada Pension Plan, which had a greater unfunded liability than the national debt. Together, with the provinces, we restored the Canada Pension Plan ensuring its security for generations to come. Canada now has the most actuarially sound national pension plan of any major country. Other measures involved strengthening policy such as the regulations governing Canada’s financial institutions.

“We did this while other countries were cutting their capital ratios and generally weakening their financial sector regulations. We also prevented the push for the bank mergers. Of course, the issue that is probably the most mentioned today was the restoration to health of Canada’s balance sheet; that is to say the elimination of the deficit, the paying down of the national debt, putting Canada’s debt to GDP ratio on a steady downward track and recording thereafter a lengthy series of budget surpluses in order to provide the country with the margin to manoeuvre that would be required during the inevitable economic crisis that the future would hold.

“As Ralph Goodale recently said, ‘By the end of our term, we had transformed 27 consecutive years in deficit into 10 straight surplus budgets, lower debt, lower taxes, low and stable interest rates, annual economic growth of three per cent or better, the bestever federal transfers to provinces, and the 3.5 million net new jobs.’ ”

In 1993 when you were named Finance minister, Canada had a deficit of $53.8billion adjusted to today’s inflation and transformed it into seven continuous years of budget surpluses from 1997 to 2007. What were the keys of this financial success?

“There were many keys. The most important was that we reached out to the Canadian people. We met with them in church basements and in televised meetings constantly over the 18month period leading up to the 1995 budget. In these consultations, we spoke to them about what had to be done. We made it very clear that we had some very tough decisions to make and that the only way in which we were going to protect our social programs was if we reduced government spending.

“In short, the key was that we were very open, and transparent. We didn’t try to hide what we were doing. We knew that if we wanted Canadians to support us, we had to have an open debate and that was by far the single biggest reason why the people did support us.

“The second thing we did was to recognize that we weren’t going to have two kicks at the can. We told Canadians that we were going to deal with the deficit and that the ’95 budget would address it. We knew that we couldn’t come back time and time again with the same message. That is one of the mistakes the Europeans have made: promising to deal with the deficit and not delivering on their promise to do so. This is how governments lose their credibility as people may be willing to make sacrifices, but not in vain.

“We also knew we had to act quickly. At that time, 36 cents from every tax dollar was going to debt service. My biggest fear was that a financial crisis would hit, and our interest rates would be driven through the roof, ultimately destroying our chances at dealing with the deficit. “I knew that a financial crisis would occur eventually. Why? Because ever since the end of World War II they have occurred somewhere on a somewhat regular basis. And sure enough, two months before the ’95 budget, the Mexican Peso Crisis occurred, driving our interest rates up.

“Thankfully, we were prepared and while our interest rates hiked they did not go through the roof as much as they might have, and began to come down after the ’95 budget.

“The Asian crisis two years later was much more serious and had we not addressed the deficit when we did, clearly we would have been in the kind of difficulty we are now seeing in Italy and Spain, for instance.”

Talking about today’s global financial crisis, you said in your interview in 2008 with Allan Gregg that you went through five financial crises. However, you were able to keep a good financial record. Do you think the current government is using the global economical crisis as an excuse on how it is managing the debt and deficit or is it incompetent?

“The mistake that the current government made was to gut the surpluses that Ralph Goodale had built up, plunging Canada into a structural deficit before the 2008 crisis hit.

“You shouldn’t go into deficit when the economy is strong. That’s when you should be reducing your debt and preparing for the tough times that cyclically lie ahead. The current government put Canada behind the eight ball by wasting the fiveyear, $100 million surplus Ralph was projecting with

the result that the margin of manoeuvre required to fund the economic stimulus programs that were needed.”

Do you still think that the Canadian government is facing a structural deficit, as you said, or the struggles of a posteconomic recession?

“We are still in a structural deficit and for the reasons I just outlined, but the Conservatives made a second mistake as well. When the recession hit and the government stimulated the economy, that was perfectly understandable, but then they should have used the period of rising unemployment and low interest rates to deal with the lamentable state of Canada’s infrastructure. They should have laid the foundation for a stronger economy but they didn’t, they just played politics.”

Do you think the government will be able to achieve its projection of getting out of the deficit by 2015?

“Based on their record, you tell me!”

Three years ago, you said the Conservative government needed a “clear exit strategy” for the deficit…

“They obviously do not have a clear exit strategy. During the last election campaign the Prime Minister and his Finance Minister differed on what their strategy was—the proof being they publicly differed on the end date. Economic confidence is important. Governments should not play politics with issues as important as this.”

If you were able to offer advice to the PM, what measures would you recommend him to create this strategy to exit the deficit?

“Listen to his Finance Minister.”

Changing the topic. Now about the faith in the Liberal Party, what do you think went wrong inside the party in this last decade?

“I’m not going to look back. I’m very confident about the future of the Liberal Party of Canada. I think this Liberal leadership race has given the party a great deal of momentum. I think they have been addressing the right issues and I feel very good about the future of the Liberal Party of Canada.”

So you would disagree with the analysts who are saying the Liberal Party doesn’t have a future in Canada?

“I don’t know a credible analyst who says that! On the extreme right, you have a Conservative government which doesn’t have a comprehensive economic plan that is failing on the deficit and that is walking away from

the basic social programs that will enable Canada to grow. There is no leadership on health, on aboriginal rights, on municipal issues, on basic research, on the rights of Parliament, on Africa, and the list goes on and on. For instance, they have so blackened Canada’s name on the environment that it has become a major economic issue for us internationally.

“On the other side, the federal New Democratic Party, simply has no answer to current economic issues. For instance, in my time they opposed the reforms which saved the Canada Pension Plan, they opposed strengthening the Office of the Superintendent of Financial Institutions, they even voted against the creation of the Financial Consumer agency of Canada.

“The strength of the Liberal Party is that it is both socially progressive and fiscally responsible and that is where the majority of Canadians are!”

So would you say that the Liberals’ biggest legacy from the 1990s was educating the public about political issues and transparency?

“Openness and transparency are essential for a government that seeks to anticipate the future, that doesn’t want to be buffeted by changing times. That was why openness was so important, when we eliminated the deficit and put the Canada Pension Plan on a sound footing. That being said, a sound balance sheet is only the beginning. The day we announced the elimination of the deficit we also brought in a major education budget followed by a series of increases in healthcare funding and created the Canadian Foundation for Innovation.

“A strong economy requires more than just a strong balance sheet, it is built on a population confident of the future. That is why, for instance, when I became Prime Minister, we continued to protect the country’s financial integrity but we focused on health and education, child care and early learning, the municipal agenda, and the Kelowna Accord.

“These are major economic issues. For instance, the Kelowna Accord dealt with education, health care, clean water, housing, economic development and accountability for Canada’s aboriginal peoples. They are the fastest growing segment of our population. You can’t turn your back on the youngest in your population and expect that your country will achieve its potential. But that is what the Conservatives are doing.”

Each percentage point of the GST would have brought in $7billion a year, which the current federal government cut by one percentage point in 2006 and by another percentage point the following year. Do you think that was the right political decision at the time?

“I suppose that depends on your definition of ‘political.’ Was it the right economic decision? No!”

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