Falling oil prices hurt Canada's efforts to wring out its deficit. Social programs like `baby bonuses' resist cutting
Canada's deficit is going higher, and the finance minister blames the falling price of oil. The federal government deficit will rise to $32 billion (Canadian), up from the $29.5 billion forecast earlier this year, Finance Minister Michael Wilson has announced.
Mr. Wilson himself is a former businessman -- he was an executive vice-president of Dominion Securities before entering politics in 1979 -- and he once railed against government spending and the mounting federal deficit. Now he has to defend the government's sums.
``I want to make it clear,'' he reassured his audience after telling them the deficit was up, ``that a slower decline in the deficit this year -- in the face of extraordinary economic events -- does not throw us off our track or lessen our commitment.''
An explanation of that confusing sentence: ``Slower decline,'' a seemingly Orwellian phrase, means that even at $32 billion, the budget deficit is down from the year before. The ``extraordinary economic event'' was the falling price of oil. Canada is a major oil producer, and falling oil prices mean lower government revenues.
The Finance Department, which designs the budget under guidance from the minister of finance, had predicted in February that world oil prices would average $22.50 a barrel this year. At that time oil was already at $15 and falling fast. But the budget planners had already made their prediction, and real world events did not change their thinking or the forecast for a lower deficit.
Now, in its late September forecast, the Finance Department foresees an average price of oil of $14.21 this year.
Business leaders criticized Finance Minister Wilson for not cutting spending to reduce the deficit. ``To say that, out of $89 billion, he can't find anything is going to hurt his credibility,'' said James Bennett, vice-president of the Canadian Federation of Independent Business.
The $89 billion refers to total government spending for this fiscal year. Although the deficit has risen, the spending estimates have remained the same. So have interest payments. Ottawa has to shell out $27.4 billion in fiscal 1986-87 just to cover interest on the deficit.
Wilson reacted sharply to business criticism. ``We have shown from our performance in 1985-86 that we know how to cut spending. We did a better job in cutting spending than they did in the United States and than any government in Canada since the Second World War.''
The federal government has cut spending, reducing programs in government and selling off state-owned corporations, almost all of which were a drain on Canada's finances. But there has been one area the government has been loath to touch: social programs, such as unemployment insurance, baby bonuses, and pensions for the elderly.
Prime Minister Brian Mulroney's Conservative government has already tried to cut back on the ``universality'' of social programs. Right now baby bonuses of about $30 a month per child go out to every parent in Canada, including the middle classes and the rich, who don't need the money.
It's a similar story with pensions. When Wilson tried to cut back on the indexing of pensions to inflation -- he wanted to reduce it to 3 percent rather than follow the inflation rate -- there was such an outcry that the government withdrew it.
And while business complains of overspending, the provincial governments call for more cash under ``equalization payments,'' a system that sees the federal government taking some $5.5 billion from the rich provinces, such as Ontario, and giving to the poorer ones, such as Newfoundland. The island province of half a million people gets a yearly handout from Ottawa of $668 million, more than half its provincial budget.
There is a lot of ``I told you so'' about the $2.5 billion increase in the budget deficit. Peter Martin, the chief economist at McLeod Young Weir, a Toronto brokerage, predicted in February that the government had a Pollyana-like view of oil prices and that it would doom Wilson's efforts to further reduce the deficit.
Mr. Martin says that ``$32 billion was the exact figure we had picked. Wilson put the best face on a rough situation.''
While the government has been hurt by falling oil prices, it has benefited from falling interest rates. If interest rates were to rise, Canada's interest burden on its debt would also rise. Since Ottawa has little, if any, control over oil prices or interest rates, the choice would be to cut spending, raise taxes, or face a higher deficit. The choice is ultimately a political one.