Hell or High Water

by Paul Martin

  The other incident involved David Dodge, whose temper was similar to my own. I was, especially in the early days, frustrated at what I saw as the rigidities in some parts of the department. I certainly did not like the fact that on their watch the country had piled up deficits that were invariably larger than their own projections. Although I appreciated that they had read the Red Book, I did not think that it should be treated like holy writ, which was their inclination at first. One day, on an issue I now forget, I told David that I didn’t need him to quote the Red Book at me, and then I used words that graphically conveyed my opinion that he was way off base. He came barrelling right back at me and we had a huge battle.

  After that, even relatively junior officials realized that they could take me or David on over issues they felt passionately about, and that their views would be taken seriously, and as a result, the CMOs became very productive exercises in policy making. They were similar in many ways to the meetings I had once chaired as an executive at Power Corporation and Canada Steamship Lines, but here they dealt with some of the most crucial issues facing our nation. Many of the participants have since said that these meetings were among the most intellectually stimulating hours and days of their lives. They certainly were for me, as we worked through everything from the fine points of tax policy to federal-provincial transfers, and occasionally how many angels actually do dance on the head of a pin.

  After a debate had unfolded at a CMO, David Dodge would regroup with his officials while I usually met with Terrie. Later Terrie, David Herle, Elly, and I would also meet to discuss where we’d go from here. Finally David Dodge and I might meet. What was truly interesting in all this, however, is that while there were often strong views all round, the disagreements rarely broke down along political-departmental lines. There was a true intellectual melting pot.

  The people who attended the CMOs soon learned that they might hear from me at any time. At first, it caused a bit of a surprise in the department when I wandered down to someone’s office and started talking about whatever issue I was turning over in my mind, but the department got used to it. Because I am not someone who needs a lot of sleep at night, I also had the habit of phoning people at what they considered ungodly hours. This would hardly come as a shock to those I had worked with over the years, but it did to many of the Finance officials who hadn’t known me before. I have no doubt these calls inconvenienced some people — even discombobulated a few at first. But I later found that they also became fodder for cocktail party conversation. Some people didn’t mind telling their friends that we sometimes chatted at hours when most people were in bed. In later years, I was sometimes criticized for my decision-making process. That’s fair game, but let me just say that, after thirty years of trying, it was this process that eliminated the deficit over the course of just four budgets.

  David Dodge, as he proved many times when we worked together and subsequently in his career, is one of the great public servants of our era. He was absolutely committed to the ideals of the public service. His work ethic matched anyone’s, while his intellect and institutional memory brought a perspective that proved fundamental to our success again and again. He was also a skilful manager of bureaucratic politics. On the fundamental issue of the deficit, the department and I forged a common view very quickly. In the early going, the leaders of the department may have been inclined to regard the deficit with more urgency than I did, though they had despaired of any politician ever dealing with it. Then our roles reversed, as I became seized with the immediate threat the deficit posed to the country and made it clear I was not backing away from this fight.

  When we began, the initial problem we had to deal with was the consistent use of projections understating the deficit. For example, one of the first pieces of news I received as minister was that the deficit in the current fiscal year, originally projected at $32 billion, was going to come in at closer to $36 billion. Then, within a matter of days, the number rose to the $40 billion to $42 billion range. It was clear to me from the start that we needed a break from the past. I was determined to make sure we never again understated the deficit, and in fact I said that I believed overoptimistic projections were simply used as a cover for not dealing with the underlying issues that caused the deficits in the first place.

  In late November, my speech at the Université de Montréal gave the public a stark look at the balance sheet that we had inherited from the Conservatives. We had already revealed that the 1992–93 deficit would come in higher than the previous government had projected. Because every time I asked, the number would go up, I predicted, over the objections of the department, that the deficit for the 1993–94 fiscal year then nearing its end would likely fall in the $44 billion to $46 billion range. That was higher than the department was predicting internally at the time and, to be fair, higher than the final result, which was $42 billion. But given the continual escalation in the deficit estimate as time went on, who was to know what it would end up being! I made the public commitment, however, that this was never going to happen again. In the future, I said, we would use the average of private sector economic forecasts and work those numbers through our fiscal models when producing our budget projections, rather than having the Department of Finance do all this internally as in the past. This was what many other countries did, but it was embarrassing to the department — although it sent the strongest possible message to the public and the bureaucracy that things were about to change.

  We also challenged those who challenged us, particularly business groups, who had long been committed to aggressive deficit-cutting. I would usually begin with a presentation in which I described the various departments of government, explaining what they did and how much they spent, and would then open up the discussion. We had one such encounter with the Business Council on National Issues (BCNI) at the Rideau Club in Ottawa. I had been a BCNI member and had (and have) great respect for the quality of work that underlies their positions on public policy. But somewhat mischievously, I asked the CEOs present to tell me what spending they themselves proposed to cut, knowing that like many others, they would feel that was a job for someone else, which of course was their immediate reaction.

  On another occasion, I met with the heads of the major banks and their chief economists. They started off saying flatly that what the government needed to do was cut public spending by 20 per cent. When we added up their specific suggestions, though, it came to less than 2 per cent. Then they insisted they’d have another crack and came up with a magnificent 4 per cent. The fact was that few of those demanding Draconian cuts in public spending had ever thought through the pain that these cuts would cause to vulnerable people — the poor, the unemployed — and few of them when faced with the need to do so were truly prepared to come to grips with the implications of their own rhetoric.

  An important goal for me was to throw open the process of budget consultation. Although there are valid reasons behind the tradition of budget secrecy, particularly when it comes to tax changes, an excessive emphasis on secrecy in the past meant that some ideas were never adequately aired before they became hard government policy and unacceptable mistakes were made. We started our consultations with a televised meeting with economists from think-tanks, business, and labour (where, as I mentioned in the last chapter, the participants ganged up to support Crow). Then, at Elly Alboim’s suggestion, we organized a series of four televised public consultations in the various regions of the country. The idea was to have a frank discussion of the issues facing the country and to push people with opposing views to consider the trade-offs necessary to get ourselves back on an even keel fiscally and economically. This was essential to getting the public onside for what eventually had to be done.

  This also set a precedent that we built on as we set up the process for the second budget. In this case we decided that the House of Commons finance committee, which was chaired at the time by Jim Peterson, should become the prime consultation vehicle. Under Jim’s lead
ership, the committee abandoned the traditional approach to pre-budget consultations, which consisted of inviting a series of interest groups, each in sequence, to declaim their irreconcilable demands. Instead, the committee arranged to hear testimony from diverse groups seated side by side — an industrial organization and a trade union, for example — which forced them to engage in a conversation about the trade-offs necessary to confront our fiscal problems. This process was crucial in establishing the building blocks of success for the second budget, when there were more complex issues to chew on.

  In the short period that we had to come up with our budget, we didn’t have time ourselves for delicate craftsmanship. We focused on a relatively small number of big-ticket items at the same time as we tried to squeeze a little out of each department. The Unemployment Insurance system had been sick for a long time, and we knew we had to lay out a plan for that. Defence was an area where we believed we could find savings. We also knew we had to keep a freeze on public sector salaries, because to do anything else would blow the attempt to restrain spending. Strong resistance to our plans came from Ottawa-area MPs, who were afraid of the potential impact of the freeze.

  Then I got a phone call from David Dodge and Don Drummond. “We’ve got real trouble,” they told me. “The caucus is getting to the prime minister.”

  When I went to see the prime minister to lay out my plans, it was obvious that he did not see the need for attacking the deficit as aggressively as I was preparing to do. For obvious reasons neither cabinet nor caucus was happy about starting life as a government with budget cuts and the promise of more to come.

  Jean Chrétien was concerned that this budget was going to end the government’s honeymoon — a day no prime minister wants to hasten. The truth is that if there is not some tension between the prime minister and the finance minister, one of them is probably not doing his or her job. But among Jean Chrétien’s strengths were the lessons he had learned in his many years as a minister. One of those lessons, which became central to our relationship, was derived from Trudeau’s decision in 1978 to announce a dramatic package of expenditure cuts in a televised statement to the nation without even informing his finance minister: Jean Chrétien. To his credit, the prime minister was determined not to undermine me the way he had been undermined, and so after arguing with my logic and assumptions — the first of many such confrontations — he swallowed his reservations and backed the thrust of the budget we were preparing.

  What remained was “the speech.” David Dodge has since reminded me of his bafflement when I first arrived at Finance and asked to see the draft of the budget. What on earth is he talking about? he wondered. To him, the budget was the charts and graphs showing government revenues, the tables outlining spending and projections for economic growth. My, how economists love their charts. He only later realized that what I was asking for was a first draft of the budget speech I would eventually deliver to the House of Commons. I wanted to work from the start on the speech, which from the department’s perspective was something of a secondary document. But from where I sat, the speech was of the essence, because it was the document that would unify all the measures we would implement in a compelling and persuasive way.

  Anyone who has worked closely with me will tell you that preparing a speech can be a long process, replete with dozens of drafts, as I flesh out my thinking in the course of creating the text. Scott Clark, who eventually succeeded David Dodge as deputy minister, suggested we hire a speechwriter named Larry Hagen, who had formerly worked for Joe Clark. Understanding the importance I placed on the speech, Scott arranged for Larry to attend the CMOs so that he would fully understand the logic behind the decisions we were making. Larry was a very hard worker with a beautiful prose style. He had a tiny office, filled with cigarette smoke. (Yes, a lot has changed!) He beavered away at draft after draft, and he cared passionately about every word. We had wonderful disputes over language and the emotional impact it would have. Larry was also eloquent about the social impacts of the budget cuts on the vulnerable, and brought that sensitivity to the table. He was an important member of the team that prepared most of my budgets through the 1990s, until he died prematurely of a heart attack. That shocked us all, and we missed him greatly as a colleague and as a wonderful human being.

  But Larry wasn’t there for the first budget, so in the days before I gave the speech in February, I went over it scores of times, alone or with Terrie and others, tinkering with the text and with my delivery. I also tried to go over it with Sheila, who quickly demurred. She pleaded budget secrecy, but later admitted that she knew she’d have to watch me give it in the House of Commons for close to an hour, and felt no human being should have to go through that twice.

  And then came the day. Everyone is familiar with the tradition of finance ministers wearing new shoes on budget day, though it is a tradition honoured more in the breach than in the observance, and I did it only once as finance minister. Jean Chrétien, however, remembered a more obscure tradition, which was to replace the glass of water on my House of Commons desk with a glass of gin, which I discovered when I took my first big swig a few minutes into the speech. Some have said my delivery improved marvellously after that.

  “The days of the government simply nibbling at the edges are over,” I told the House of Commons. “The practice of endless process without product is gone. Our task is to put an end to drift. We need a new architecture for government and for the economy.”

  I pledged to get the deficit below $40 billion in the coming year and below $33 billion the year after that. I made it very clear that with the short period we had had in office, this budget was only just the beginning. It was important to say that as a government, we were serious about our Red Book commitments to create jobs, with an infrastructure program and support for apprenticeships. But I also said we were going to have a good hard look at all government programs, including the transfers to the provinces that made up such a large portion of our expenditures.

  Initially, the public and editorial reaction to the budget was quite positive. I was not surprised by this. Officials in the department were telling me that our budget was tougher than all but one of Michael Wilson’s, and I knew one litmus test for us was going to be whether we were more fiscally responsible than the Conservatives had been. But unlike my subsequent budgets, this one was not a success with the markets, whatever the public thought of it. Pete de Vries, who was the master of the numbers at the Department of Finance, and who in the years to come played a crucial role in fashioning every one of my budgets, found himself on a plane to Toronto the next morning filled with Bay Street analysts who were returning home after budget day and was shocked by their surly mood.

  Part of the reason for this mood was undoubtedly my decision to set relatively modest deficit-reduction targets. This was deliberate. I thought the only way to restore confidence in the budgetary process was to ensure that the department would never again over-promise. I always understood that we would take a short-term hit for this, but believed it would pay off in the longer term.

  I had planned a major national tour to sell the budget, and one of the early stops was at the Globe and Mail for a meeting with the editorial board. On the way there in the cab, David Dodge, expecting a bit of a fight, repeatedly reminded Terrie and me of the importance of keeping our cool. One member of the Globe’s editorial board, Andrew Coyne, came at us pretty hard, partly because we had included in our budget cuts changes to Unemployment Insurance that the Tories had promised but never implemented. We responded that these were the rules of the game — we had to reflect what we were doing at that moment, no more and no less. At another point he demanded to know what I knew about running a business. This baffled me. If he had asked me what I knew about government I might have understood, but this question was really infuriating. Still, I kept my cool, remembering David’s advice. Then there was a sudden eruption from David himself, who at that point did everything but jump up and throttle the folks acro
ss the table. I thought Terrie was going to hug him.

  What shocked me, though, was not what I confronted in Toronto — whether on Front Street (where the Globe is located) or a few blocks away on Bay Street. What shocked me was the international reaction. After I completed my Canadian selling tour, I headed out to the world’s financial capitals — New York, London, and Tokyo — where most of the holders of Canadian bonds were. We had cut pretty deep, I thought, especially given that the Canadian economy had not yet recovered from the recession, as the American economy had. We had done a lot in just a few months to prove our fiscal bona fides, and done it at some political risk. I thought we had done enough to win some credibility in their eyes and earn some breathing room. Instead, these foreign investors paid no attention to the budget’s details, only the bottom line, and so they viewed me as just another one in a long line of Canadian finance ministers who showed up every year, promising to clean up Canada’s act and never delivering. With that kind of attitude in the capital markets it was evident that at the slightest sign of difficulty there would be upward pressure on our interest rates. And that would make the difficult task of moving toward a balanced budget all but impossible. What if another U.S. recession intervened before we had even started to recover from our own? The moment of truth might be even closer than we had thought.

  CHAPTER TEN

  The Big Budget I

  The bond market was hardly new to me. At Power Corporation and later at Canada Steamship Lines, I had enough dealings in the world’s financial capitals to know how important credibility was. When you go to the market or to a lender and say, “We want to buy three ships, costing $200 million, and need to borrow $150 million,” getting the money at a reasonable cost depends on your credibility. Now, there I was, Canada’s minister of finance, back tapping the capital markets, and instead of being believed and trusted — which was the reaction I was accustomed to — I was being greeted with a skeptical shake of the head. Just another Canadian finance minister who was going to pay a premium for being a serial disappointment.