by Paul Martin
We didn’t retreat far. The meeting was held in the Pearson Building on Sussex Drive, from which we could see the Ottawa River coursing between the Parliament Buildings on the south bank and many of the large departmental buildings on the north. In my presentation there, I laid out the critical situation that confronted us as a government. I explained that rising interest rates were already throwing off the projections contained in the 1994 budget. We were okay for the moment, I said, because of the large contingency reserve. But the 1995 budget would have to be historic in scale: cutting at the “four pillars” and setting structures in place to make sure we did not slide back. There was plenty of grumbling, as might be imagined. Some questioned the accuracy of the Finance Department’s economic projections — understandably, given the woeful history of these projections under the Tories. But no one questioned the 3 per cent deficit target laid out in the Red Book. In other words, my mandate had been reaffirmed — in principle, at least.
Truth be told, one day David Dodge came to me and said, “Here are the cuts we’re going to make in Finance, twenty per cent if we are to hit our target.”
“Whoa!” I said. “We can’t cut Finance that much. We’re a special case. We have no programs. We’re at the heart of this process.”
Then, in his gravelly voice, David reminded me what this exercise was all about: everyone had to put something in the collection plate. We made the cuts.
Many of my colleagues hoped that a committee of their peers would sympathize with them; they did not understand the degree to which the process had won unlikely allies such as Brian Tobin. The rule at the program review committee was that if a minister did not identify the cuts necessary to reach the target, the committee would do it for him. John Manley’s case turned out to be crucial for the success of the process. His department, Industry, and its extensive subsidies to business, had been slated for a 35 per cent cut. My feeling was that if we were going to cut transfers to the provinces for areas such as health care, we could not possibly continue subsidizing businesses to the degree that the Department of Industry had been doing. Ralph Goodale, meanwhile, who was at Agriculture, was being asked to eliminate the Crow rate subsidizing grain transportation, which was seen almost as a right of citizenship by Western farmers.
Nonetheless, John Manley decided to go around the process and appeal directly to Jean Chrétien. But the prime minister cut him dead, telling him to deal with the committee. When John failed to propose a way to reach his department’s target, the committee went through the department expenditures itself and came up with a 60 per cent cut that, as you can imagine, had a powerful effect on other ministers.
There was only one minister canny enough to stymie the process. Herb Gray, Solicitor General at the time, was the most experienced man in government. He had a kind of reverse charisma that had turned him into a press and parliamentary favourite during his time as interim leader after John Turner stepped down. We all held him in high regard for his enormous discretion and accumulated political wisdom. Herb struck on a unique approach with regard to the Canadian Security Intelligence Service (CSIS), which was within his ministry. It was simply too secret to have its budget revealed to the program review committee, he explained. We wanted him to share his plans for cuts notwithstanding the need for secrecy, because we did not want him to put us on the spot later by offering up something outrageous to deflect us. But Herb continued to put us off at every turn, always pleading secrecy. In the end, we never truly found out whether CSIS reached its target — or if it did, how it was done. Because a relatively small amount was involved — his was not a big-spending department — we signed off on it.
I remember walking into a Finance Department meeting and saying, “I guess Herb and CSIS have won. We’d better tell them.”
Karl Littler looked up at the ceiling as if to indicate a listening device and wisecracked, “You probably already have!”
As I mentioned, one major hiccup in the process arose from the fact that, believe it or not, there was no single set of government books and, therefore, no single set of numbers. Finance had its numbers; Treasury Board had its numbers; and the departments had their own. As a result, even after ministers did detail how they were going to meet the percentage cuts we had imposed, we realized that in many cases the cuts they were proposing failed to meet the percentage according to our calculations at Finance. There were probably no meetings more painful during this year than the ones in which I told ministers who had turned themselves and their departments inside out to meet their targets that they had to give just a little more.
Throughout the fall, ministers continued to go to the prime minister on individual issues. Often there was a compelling case to be made. This led to a series of very difficult meetings between me and the prime minister. In part, this was because he simply did not subscribe to my view that overcoming the deficit was crucial to Canada’s future success. Like his adviser Eddie Goldenberg, his inclination was to think that the deficit was a political problem to be managed, and no more. The prime minister’s view was that the Red Book target of getting the deficit down to 3 per cent of GDP — his suggestion — was a worthy goal. But unlike me, he did not regard it as the foundation for whatever else we might want to do as a government. He even got into a long argument with Don Drummond one day in which he insisted that a few simple accounting changes (along the U.S. model) would go a long way to reducing the deficit number. The problem was, from my perspective, that the markets would see that as a shell game and that it would do nothing to restore our credibility: just the opposite.
Our meetings were bruising ones. “I disagree with you,” he would tell me the five or six times we met privately to discuss the developing budget plan. He acknowledged that we had made a political commitment to the 3 per cent target, but if we missed it by a year or two, he thought people would understand. Through all of this, I never threatened to resign. But there’s no doubt that that possibility lurked behind our difficult negotiations. Still, in every instance, until almost the end (and we’ll get to that later), I ultimately won the point with the prime minister. But in every instance it ground away at our relationship. In future years, although the issues were less difficult, we kept our contact through the budget process to a minimum.
Every battle we won — and ultimately the one battle we lost — whether at the level of the prime minister and me, our staffs, or the department and the Privy Council Office (PCO), resulted in emotional scars and a growing distance between us. Meanwhile, the relationship between the PCO and Finance was so bad that the clerk of the Privy Council, Jocelyn Bourgon, worked up her own set of economic and fiscal numbers that were different from Finance’s. This caused terrible confusion when the prime minister and I met one on one, since we did not even start with a common factual base. Eventually, I had to arrange for a meeting of Jocelyn, Eddie, Terrie, David Dodge, and me to sort this out. We insisted that while the PCO had the right to brief against us with the prime minister, we all needed to work from the Finance numbers if we were going to have a rational debate. The clerk accepted this result, but as the prime minister’s main adviser she continued to oppose our plans ferociously.
We only won the battles we did because the prime minister decided to allow me to charge ahead, despite his many reservations and those of the people around him. It was Jean Chrétien’s absolute resolve to back me up as finance minister that enabled us to accomplish what we did. I am proud of our accomplishments together, which were the product of a partnership. But his support did not mean that he shared my feelings of urgency about the fiscal crisis; nor did it mean that the strain didn’t tell, and tell deeply on both sides.
By December 1994, we had won a lot of battles at the ministerial level and higher and were getting the coming 1995 budget into reasonable shape. But there was growing resistance from ministers, more and more of them being prepared to go around me to the prime minister. Finally I went to see him and laid out my concerns. We met just before cabinet
in what proved to be a stormy session between the two of us. I strongly reiterated what I had said many times before, that we absolutely needed to show the country we were willing to cut close to home if we were going to expect sacrifices of others.
The prime minister said that he did not agree with my targets.
I replied, “Prime Minister — I’m not backing off.” He did not reply, but he did indicate his displeasure. At that point we had to break to go to cabinet.
I was determined to push ahead but obviously wondered what would happen when all this eventually hit the proverbial fan, which it did much sooner than I expected. Perhaps fifteen minutes into the meeting, one of my cabinet colleagues made an open appeal to the prime minister, saying that he and other ministers were being asked by me to do impossible things. Around the table it was obvious that other ministers were getting ready to join the parade.
I was about to react when Jean Chrétien jumped in: “Let me say just one thing before this goes any further. There’s no need for any of you to come and see me, and there’s no need to debate this here. I support the minister of finance.” Bang! End of discussion.
CHAPTER ELEVEN
The Big Budget II
Getting the prime minister on board was one thing. Convincing the public of the need to undertake these cuts, and convincing the markets that we were serious about doing so, was something quite different. After the 1994 budget, David Dodge recruited Peter Daniel, a former CBC reporter and senior official at Foreign Affairs, to head up the department’s communications team. Peter made one stipulation before accepting the job, which was that he be part of the budget preparation meetings. As it happened, that was precisely the way we wanted to organize our communications effort. In the following years, Peter would be enormously helpful in coordinating our approach to communications with the public and with the markets. It was he who brought Elly Alboim and David Herle more deeply into the budget-planning process. They wove together the many elements of an effective communications plan, being careful to translate our policy ideas into language that Canadians could understand and support. One of our objectives was to build on our experience during the 1994 budget process of consulting and communicating extensively before budget day. We were going to have a lot more to communicate in the 1995 budget, but we also had a whole year to prepare.
Part of our preparation involved an expanded role for Members of Parliament. Informally, I met with most of the caucus, one on one or in small groups, to discuss our budget preparations during the course of 1994. Furthermore, we decided that Jim Peterson’s parliamentary finance committee should play the major role in public consultations instead of the Department of Finance. This embodied my view that the role of MPs should be expanded — something I elaborated on when I became party leader and eventually prime minister. Playing this consultative role on the budget, the finance committee also offered me the venue for a major statement in the fall of each year, beginning in 1994, outlining where we were, how we saw the economy, and where we were headed. The first of these statements, in 1994, was as crucial as any public appearance I ever made in my years as finance minister. It was where I made the case to Canadians for what I was doing and what I intended to do.
For some time, I had been using a phrase in our internal discussions that we had to convince the public and the markets that we were going to meet our targets “come hell or high water.” By the time we began to prepare my remarks for the economic and fiscal update before the committee, the phrase had lost its impact for me. I took some convincing that it would still sound fresh to those hearing it for the first time. But as I began working on my two-day presentation with the help of Peter, Elly, David Herle, and Larry Hagen, the phrase became the core of the message. Indeed, looking back at my time in business and politics, it pretty well sums up the way I came at a lot of things.
I had several challenges in making my presentation. I had to prepare the public for what was going to be a very tough budget. I also needed to reassure the markets that not only were we on the right course, but we were picking up speed. The communications team developed a graphic presentation using PowerPoint, which at the time was a relative novelty, that grabbed remarkable attention, especially with the television media.
On the first day, I laid out the history of our economic and fiscal difficulties, showing the depth of the problems we faced and their long-term structural nature. On the second day, I laid out the rudiments of our plan. I explained how cutting the deficit would help lower interest rates, creating a self-reinforcing positive cycle. And I made the commitment to meet the 3 per cent deficit target “come hell or high water.”
I absolutely believed that we would meet that target when I said it. But in the months to come it sometimes seemed like it would be a near-run thing.
While the review of government programs was being played out at least partially in public, because of leaks by the various bureaucratic and political players, we were working more quietly on the issue of transfers to the provinces. One obstacle we had was the mixture of transfers, all operating under different rules.
Our idea was to lump all of these transfers into a single consolidated fund that would be smaller than the sum of all the transfers that preceded it. At first, we called this the Consolidated Federal Transfer, a fairly bureaucratic name. Then, because it dealt in theory mostly with social spending, it was called the Canada Social Transfer. At the last minute, after the budget had already been printed in fact, Sheila Copps, who was deputy prime minister, and Diane Marleau, who was the health minister, insisted that it be renamed the Canada Health and Social Transfer (CHST). We designed the CHST in part as a cost-cutting exercise; however, the cuts were not immediate but phased in over time to give the provinces an opportunity to adjust. To make the cuts easier to absorb, the CHST gave the provinces considerably more flexibility in how they spent the federal transfers, with the important condition that they live up to the Canada Health Act. As it turned out, the provinces tended to hit hardest at welfare and post-secondary education when they made their own cuts. Eventually, we would address each of these areas, through the national child benefit and the Education Budget of 1998. I know that these changes produced real hardship for individuals, as well as for some of our most important institutions. But without these changes the hardships would have been much greater later on.
By November, the budget was in pretty good shape when we were sideswiped — just as I had feared we might be — by an event outside of our control. Without warning, an international financial crisis struck, beginning in one country but leaving others such as Canada with weak balance sheets as collateral damage. This was the peso crisis of December 1994, which was provoked by a lack of transparency by the Mexican authorities. The Mexican government had increased spending ahead of its presidential election earlier in the year. Political violence, including the assassination of the leading presidential candidate, led foreign investors to start pulling money out of the country. The outgoing president was reluctant to devalue the peso, and in the early going, the degree to which this was draining Mexico’s foreign currency reserves was not obvious to the outside world. When the realization hit, there was a massive run on the peso, followed by a dramatic devaluation. That created a further exodus of foreign capital.
The collapse of the Mexican economy was only averted by an international rescue package developed in significant part by Robert Rubin, the U.S. treasury secretary. Bob and I were in frequent contact through this crisis. He needed allies. The Europeans were reluctant to see international institutions such as the International Monetary Fund (IMF) get involved because they felt that the United States had blocked assistance to Europe in previous crises. In the end, the United States gave loan guarantees and conducted currency swaps worth $20 billion (all figures here in U.S. dollars). The IMF offered a credit arrangement of almost $18 billion. The Bank for International Settlements contributed a line of credit worth $10 billion. And the Bank of Canada pitched in with currency s
waps worth approximately a billion dollars.
Naturally, the peso crisis spooked international investors, who began looking around for other vulnerable countries with unresolved fiscal problems, and we were near the top of the list. It didn’t help that in January 1995, the Wall Street Journal published an editorial that said Canada had become an “honorary member of the Third World” because of our debt. The resulting pressures on the dollar meant that the Bank of Canada had no choice but to increase interest rates in response, and this threw all of our budget projections out of whack. As it happened, news of the 100-basis point (or 1 per cent) rise in interest rates reached me just as I was about to begin a presentation to cabinet. I explained to my appalled colleagues that the rise meant that if we were going to hit our targets, we needed even more dramatic cuts than we had already imposed. I also informed them that a team of IMF officials had recently visited the department (as they periodically did) and had argued that our commitment to cutting the deficit was still not adequate — something that further bolstered my case. Most ministers had already “given at the office,” and more than they felt they could, but they were going to have to give again. Now the human resources department and the Unemployment Insurance system — which had been partially spared by Lloyd Axworthy’s social security review, which wasn’t due to report for another year — were also going to have to swallow huge cuts.
This was very tough medicine. But it proved the logic behind jettisoning the “hockey stick approach” in favour of strict short-term targets. This meant we could not use an unexpected event to defer tough decisions. This is precisely what “come hell or high water” meant.
