by Paul Martin
This issue really hit home for me, quite literally, at the insistence of my close friend Brian Aune. Shortly after the 1995 budget, he organized a meeting at my home of some of Canada’s leading medical researchers, including Dr. David Mulder of McGill University, where they explained to me the degree to which Canada’s best and brightest were leaving the country.
Paul Davenport of the University of Western Ontario and his fellow presidents from the major research universities also made this urgent point with me at a meeting in Ottawa. Something had to be done.
My view was there was simply no reason why the universities of Toronto or Montreal or any one of our major universities should not take their place alongside Harvard or Cambridge, to be counted among the great universities of the world, or that smaller institutions such as the University of Waterloo, for example, should not be recognized alongside M.I.T for their international-class excellence in research and technology.
One of our concerns was to make sure that however we spent the money, it would not create continuing pressures on the budget year after year. The idea behind the CFI was to make a one-off contribution (which could be topped up from time to time, as circumstances permitted) to an arms’-length foundation that would fund state-of-the-art laboratories, equipment, and research. Furthermore, because it would be a foundation whose existence went beyond a single budget cycle, important research would be insulated from the vagaries of year-to-year budget pressures. You can’t cut research spending in one year, increase it the next year, and cut it back again the third year, and hope to build an effective research and development (R&D) program. This approach, which we used again in later budgets to establish other foundations, came under attack by the Auditor General, who argued that the money they received put them beyond parliamentary scrutiny — a criticism I entirely rejected. Parliament voted the money. The foundations are totally transparent in their spending and are always ready to meet with parliamentary committees to discuss what they are doing.
As we began to think about creating the Foundation for Innovation, there were some concerns about provincial reaction. Ottawa had long played the dominant role in funding research and development, but because our plan was to work directly with universities, which are in provincial jurisdiction, I understood we might have an issue. For that reason, I called up Jim Dinning, who was then Alberta’s treasurer, and said that I would like to see Ottawa come into the field with some big money. I told him that it would be helpful to me at the federal level if he raised a little ruckus in public and demanded to know why the federal government didn’t get off its backside and do something. He said, “I think that’s a great idea. We have a similar program in the works, and if you were to move on this, it would make a perfect match.” I also spoke to Ernie Eves, the finance minister in Ontario at the time, in a similar vein, and he had much the same attitude. Crucially, when I approached the Quebec universities, I was able to win their support as well, ensuring that the foundation would not be greeted as an intrusion into Quebec’s jurisdiction. The CFI was announced just before the 1997 budget; it received $800 million initially and has continued to grow since then. It was the beginning of what proved to be a highly successful series of initiatives over the next decade that reversed Canada’s brain-drain and began to restore our potential as an R&D leader in the world.
One of the truly exciting aspects of being minister of finance at this time was that I was able to fund the ideas of those with brilliant insights.
This happened when world-renowned medical researcher Dr. Henry Friesen came to see me for twenty minutes and stayed most of the afternoon. Dr. Friesen was the head of the Medical Research Council of Canada. His idea was to transform the council into the Canadian Institutes of Health Research, a network of thirteen member institutes that specialize in issues ranging from cancer research, aging, and infectious diseases all the way to genetics, nutrition, and Aboriginal people’s health. What made it really innovative — and caused us to back it — was that it was a true network, yet was built on the individual strengths of each institution.
Working together they were able to shape a national health research agenda for Canada, turning knowledge into action, commercializing new technologies, and improving the health of Canadians and our country’s economy at the same time. Since its beginning, the CIHR has more than doubled the number of researchers it supports, to more than eleven thousand, and it continues to make great progress.
That being said, the politics of reinvesting in education turned out to be more complicated the more ambitious we became. There was a perpetual tug of war between the universities and colleges on the one hand and students on the other about where any new money for higher education should go. Naturally, the educational institutions wanted bricks-and-mortar and operational funding and research grants, while the students wanted direct financial aid.
These were years in which students faced increasingly high tuition fees in many provinces, as well as more and more demanding educational requirements for the best jobs. Student debt was skyrocketing. The federal government had long been in the business of providing student loans, which complemented the student bursary programs that existed in many provinces. There was big take-up on federal student loans but also a high rate of default, and many complaints from former students in the early years of their careers who felt hobbled by their debts. I had a lot of sympathy for the students. David Brodie, in my office, not long out of university himself, became their biggest champion in the Department of Finance. The most logical way to address their problems would have been to relate the repayment of loans to income after graduation. To put it simply: a newly graduated doctor who went to Africa to work with the poor would not be expected to pay back her loan as quickly as a classmate who quickly established a lucrative practice in downtown Toronto. Unfortunately, many student groups fiercely opposed this kind of reform, and while Lloyd Axworthy floated the idea as part of his social security review, their opposition killed it. In the end, we did negotiate at length with the provinces and enhanced our student loan program with greater funding, but we never made the more fundamental changes that would have made the most sense.
In my view, we also had to do something to help parents and families save for the increasing costs of post-secondary education. One proposal that became highly contentious inside the department was a major enhancement to the Registered Education Savings Plan (RESP). Unlike the Registered Retirement Savings Plan (RRSP) on which it had been loosely modelled, the existing RESP was not generous enough to encourage much take-up by the public. In fact, for that reason alone there was some sentiment in the department for winding it down. Terrie had different ideas. She believed strongly that if we were going to make education a priority, we needed to give ordinary Canadians a stake in our plan. As important as it might be to build labs for researchers and give loans to students to go to university, many middleclass Canadians felt terrible anxieties about their ability to save for their kids’ university education. For them, education had often been the key to making their way in the world, and they wanted the same for their children. But the idea of an enhanced RESP was strongly resisted by “tax purists” in the department who generally did not like the tax system to be used as an instrument of social policy. I gave the lead on the file to Don Drummond, one of the most principled and imaginative public servants with whom I have ever worked, and someone who shared the department’s negative view of the RESP. It is a tribute to his professionalism and that of the department that despite the fact they resisted the RESP idea on tax policy grounds, once I had made the decision they committed themselves to developing the best mechanism they could. Don had extensive conversations with financial advisers to understand what kind of incentives would be most attractive to encourage parents and grandparents to save for education.
In the end, we announced a greatly enriched RESP, in which the amount that could be put away for each child would be raised, the rules would be made more flexible, and Ottawa wou
ld contribute a grant to a child’s RESP equalling 20 per cent of the contributions made by parents and grandparents. The program has been a tremendous success — and I’ve just made the first year’s contribution for my grandson, Ethan, and am about to make the first contribution to his new baby brother, Liam.
At 6:00 a.m. on January 23, 1998, the phone at my bedside rang. It was Jim Peterson, by this time the minister responsible for financial institutions. I admit I had trouble processing what he had to say, and not just because I had been roused from my sleep. He told me that he had just got word that the Bank of Montreal and Royal Bank were going to announce plans to merge later in the day. This couldn’t be right, I thought. The banks all knew that we had a review of financial institutions underway, led by Saskatchewan lawyer Harold Mackay, which was going to report within a matter of months. I quickly showered and shaved and headed into work.
Within half an hour of arriving at the Finance offices at Laurier Esplanade, I took the call from John Cleghorn, CEO of the Royal Bank. Cleghorn was and is a friend of mine. He has made a great contribution to Canadian life, as a business leader and in areas of public concern such as education, conservation, and the military. But this was not a chat among friends. It was true, he told me: the banks were about to announce their merger plans.
I was furious.
These two banks were trying to make an end-run around an orderly process of considering changes to the banking system that was well underway. By refusing to wait for the Mackay report, and the government’s decision about its recommendations, they were catching their competitors who had respected the process flat-footed. It was clear to me that they had decided they were going to have trouble convincing Ottawa of the need for mergers, and hoped that if they presented their plans as a fait accompli, they could win the public debate.
Well, that was not how it was going to be.
I had a fiduciary responsibility, as I saw it, not to allow those banks that had respected the process to be taken advantage of by those who didn’t. Moreover, if the government flinched now, there was going to be a wild scramble as the other banks tried to find partners. (Indeed, it wasn’t long before the TD Bank and Canadian Imperial Bank of Commerce [CIBC] announced their merger plans.) Even Scott Clark, who was generally a supporter of bank mergers as a matter of policy, shared my belief that we had to state publicly without delay that we would make the decision about the future shape of the banking system according to the process we had established and not be stampeded by the banks. Before the morning was out, I gave a press conference making it clear that I was not happy, and that whatever was going to happen, it was not going to happen on anyone’s timetable but the government’s.
The policy decision was by no means a simple one. The banks were facing intense international competition at a time when U.S. and foreign banks were growing enormously in size. Arguably, the Canadian banks needed to bulk up to defend themselves at home as well as to take advantage of opportunities abroad. They also needed to have huge resources to service the gigantic transnational companies that were increasingly dominating global industry and commerce. Politically, there was considerable support for this view among some elements in the Liberal caucus, particularly from the Toronto area. They rightly regarded the banking sector as one of the engines of prosperity in their region, and saw the mergers as a necessity to move Toronto into the big leagues internationally. Their fear was that without mergers Toronto would become no more than a regional banking backwater, servicing some of Canada’s needs but not much more.
But the statements of the banks caused some head scratching among officials at Finance, as well as many in the business community. To them it seemed unrealistic of the banks to talk, as they did in their merger announcements, about “going global.” If they had spoken about first becoming major North American institutions, that would have been more realistic — at least in the medium term. Their public statements left many observers with the uncomfortable feeling that the banks had an abstract notion of adapting to globalization but had not really thought through what their role might be. Moreover, there was a real danger that the mergers would reduce the banks’ interest in going global as they created a less competitive environment here at home. These were business decisions, however, arguably outside of my remit.
But what was clearly my responsibility was the important question of competition here at home. This was not a problem in Toronto, Montreal, or Vancouver. There would always be competition there. But in smaller centres and in specific industries, it was an issue. If you were a small or medium-sized business in Toronto, you could get financing locally. But try being an entrepreneur in Moose Jaw or Renfrew. What was the chance that these mergers would occur without a substantial reduction in the number of bank branches, and of bank interest in Canada’s smaller centres?
Furthermore, I also had to consider the implications for the banking sector as a whole. If four of the six biggest banks merged, there would be enormous pressure on the two remaining banks to find a partner. The probable outcome would be that one of the merged big banks would gobble them up and we would be left with two large banks. What would happen then if one of them got into trouble, as has happened with even larger banks abroad? Fortunately, the Canadian banks have been much better managed than many of their large international competitors. Nonetheless, the consequences of a major banking crisis in such a reduced field would obviously be much worse, and the potential that the government would end up holding the bag as a result much more serious.
It was well-established practice every year that Gordon Thiessen and I would meet with the bank CEOs for a freewheeling discussion. In the aftermath of the bank merger announcements — and my quick reaction — however, there was a very different tone to our annual meeting. Peter Godsoe of the Bank of Nova Scotia had already spoken publicly against the trend to mergers, and he wasn’t shy about saying the same thing to all of us behind closed doors. Soon the meeting became a shouting match between the bank heads, with Terrie, Scott Clark, Gordon, and me looking on, fascinated. At one point, Matthew Barrett, head of the Bank of Montreal, pleaded in vain with his colleagues that the industry shouldn’t be parading its differences in front of the minister of finance. I remarked dryly that they shouldn’t desist on my account.
The debate about the mergers continued for nearly a year behind closed doors and in public as we waited for various pieces to fall into place: the Mackay task force report as well as those from the Competition Bureau and the Office of the Superintendent of Financial Institutions. In December 1998, I announced my decision: the mergers would not be allowed. My position was that mergers might be contemplated, but not if it endangered the stability of the financial system or if it occurred at the expense of competition. I made it clear that it is not enough to have a few bank branches scattered around the country. Somebody in Moose Jaw who wants a loan has to be able to get one, and on a level playing field with someone in Toronto. It is worth mentioning that in the aftermath of the decision not to allow the mergers, instead of closing branches, the large banks began selling them to smaller competitors. This trend — along with the potential entry of new players in the banking sector permitted by changes in the Bank Act and more expansionist credit unions — may allow for the development of a more competitive banking system better able to meet the needs of consumers and allows the big banks some of the flexibility they wanted.
Among the many MPs I was close to in my Finance years, one of the most extraordinary was Shaughnessy Cohen. It wasn’t just her name that was remarkable. She was a smart, hilarious, indefatigable parliamentarian and always the life of the party. She first sought the Liberal Party nomination in Windsor-St. Clair in 1988. This was the successor riding to my father’s Essex East. Dad made it a practice not to get involved in nomination fights but on this occasion showed enough body language for folks to understand that he actually supported Shaughnessy’s opponent. And then something out of the ordinary happened. My mother, who had never taken
a public position on a political matter contrary to Dad’s, became an open supporter of Shaughnessy. Shaughnessy won the nomination that year but lost the election.
After that, Shaughnessy developed a close friendship with my mother. She would drop by the house, and the two of them would sit in the kitchen and chat. My father would be in the library, pretending to read but straining to hear whatever chat — political or just social — was passing between them. At Shaughnessy’s instigation, I am sure, they would raise their voices just enough to tantalize my father at the start of a story, then deliberately drop them low at a crucial juncture, with the well-aimed intention of driving him nuts.
After she won her seat in 1993, Shaughnessy made as big an impression around the Parliament Buildings as she had in our kitchen. I often had to pass by Shaughnessy and her circle of caucus friends in the government lobby on my way to taking my seat in the House of Commons, and if there was something she wanted from me as minister, she had no compunction about stopping me in my tracks in a loud voice and then cross-examining me about the total inadequacy of the Department of Finance on whatever issue she happened to be concerned about that day.
In December 1998, Shaughnessy collapsed in the House of Commons with what proved to be a ruptured aneurysm. That evening, a group of us sat vigil at the hospital, but it was only a matter of time. A few days later, I delivered the eulogy at Shaughnessy’s funeral in Windsor, which was attended by almost as many Opposition MPs as Liberals — a tribute to her infectious warmth. I said that she was now up in heaven, arguing politics with my father.
