moved:
That this House urge the government to respond to the demands of Canadians for decisive spending cuts and no net tax-increases to eliminate the deficit and to produce a smaller federal government.
Mr. Speaker, as one of Reform's co-critics for finance, I have the honour to lead today's debate of this resolution. I will discuss its importance by drawing on my background as an economist and a long time teacher of international finance courses.
A number of my colleagues later in the day will expand on the theme in the light of their roles as Reform critics of different ministries. All of our remarks reflect consultations with constit-
uents through personal and town hall meetings, electronic media consultations and the return of questionnaires.
As a preliminary, let me note that Reformers do not enjoy our role as advocates for spending cuts and a smaller government. The government's involvement in the affairs of Canadians is so pervasive that few of us, our families or friends will escape the effects of such cuts.
As a professor, I am personally concerned about their effects on higher education, my own future and that of my friends and colleagues. We all dislike it when changes in government policies force us to alter our habits and way of life. Reformers therefore appreciate very much the personal difficulties which these cuts will bring. We know these difficulties will seem puny in relation to those that will be forced upon Canadians if we do not get our fiscal house in order on our own terms.
Consider what may happen to the exchange rate, interest rates and Canada's foreign position if the forthcoming Liberal budget does not satisfy both Canadian and foreign investors. Investors sell Canadian government bonds and move their money into some other governments' bonds, be they American, German or Japanese. Such sales depress bond prices and increase interest rates, sending the Canadian dollar on a downward slide.
How far will these adverse developments go? No one knows. There is no doubt that at some interest rate high enough and exchange rate low enough, investors will once more purchase Canadian bonds and dollars and the slide will be halted.
It is often said that rationality or real economic values take a back seat to investors' mass hysteria during such speculative bubbles. Falling values create expectations of further falls. Investors rush to liquidate their holdings before they are worth even less. Some hope to buy them back once the bottom has been hit, expecting quick profits. Others are made to move their money into foreign assets which increase in value at the same time that Canadian asset values fall.
At some point a new class of speculators enters the fray. They hold no Canadian assets but sell Canadian dollars short at today's price in the expectation that they can deliver it a few days later at an even lower price.
Some domestic investors will borrow Canadian dollars and buy foreign currencies. The hot money ready to enter such speculation is so large that no country in the world, certainly not Canada, can stop the slide once it has gathered enough momentum.
Many can understand what goes on during such speculative bubbles. They are likely to have been caught in the fever of buying real estate, gold or similar investments in the past. They will remember how profitable it can be to participate in the exciting events and how difficult it is to resist the herd instinct.
We need only to look at the recent experience of Mexico during the last few months to appreciate what can happen to Canada. The Mexican peso depreciated by over 50 per cent against the U.S. and Canadian dollars before stability was restored and a slow recovery started. Interest rates went sky high.
Canadians had a foretaste of possible developments in the middle of January when a small speculative bubble hit the Canadian dollar. The interest and exchange rates moved by extraordinary amounts in a very short time.
In the case of both countries the dramatic interest and exchange rate changes were halted by the interventions of governments. They bought bonds and currency that were being dumped by investors. They used at first the dollar and gold reserves in the accounts of their own central banks. They then drew on credit with private banks, foreign central banks and international organizations that have been negotiated before. They then went, hat in hand, to arrange new lines of credit, asking other central banks to help them by buying their national currencies.
The Government of Mexico went down very far on this road of using ever more costly sources of intervention. It ended up arranging for huge direct loans and standby credits from foreign governments and international organizations.
The cost of such borrowing is now quite transparent and not just monetary. The U.S. Congress debated loan conditions and came very close to requiring Mexico to adopt very stringent policies.
The important thing is that such loan conditions would have represented an almost unprecedented interference in the domestic economic, social and foreign aid policies of an independent nation state. In the end, President Clinton avoided the imposition of such extreme conditions by the use of administrative devices which bypassed Congress.
It is not clear that Congress will let presidents use these devices in the future. The American people and their elected representatives are in a foul mood when it comes to bailing out foreign governments which have what they consider to be inappropriate social and economic policies.
Reformers are not willing to gamble on any of these eventualities. Our first objective as a country must be to never be placed in a predicament like that experienced by Mexico. We want to retain Canada's sovereignty over its economic and social policies.
In the middle of January Canada came very close to the point where we too had to go hat in hand to foreign lenders. As some put it, we came very close to hitting the wall. An economist who watched the tickers flashing interest rates and exchange rates
dropping by the minute suggested to me that the situation was saved this time by massive intervention of the G-7 central banks. He is worried that we may not be so lucky the next time or that we can escape really burdensome loan conditions.
The next time may well be in the wake of the upcoming budget, not immediately but when some other event upsets investors. That may be a few days, weeks or even months later.
Investors will look for four major policies in the budget. The finance minister had better not goof.
First, investors will look for tax increases. Individual Canadians oppose tax increases because they feel overtaxed and want a smaller government for understandable personal reasons. Investors would interpret tax increases as a signal that the government does not have the courage to make the spending cuts needed to eliminate the deficit.
Higher taxes mean eventually a bigger government, one which during the last 30 years has grown but has not solved and instead has increased the problems of slow economic growth, increased poverty and unemployment, the breakup of families and which to boot, has created frighteningly large and persistent deficits. It is big government which has created among Canadians the pervasive sense that their and their children's lives are getting worse, not better.
Second, investors will look for cuts to social spending. Social spending programs broadly defined use about $70 billion or 60 per cent of the federal program spending of $120 billion. The current deficit of $38 billion cannot possibly be eliminated through cuts in non-social spending even in the face of rapid growth in revenue during the current boom without a threat to essential efficiency increasing government services.
Past governments have lacked the courage to tackle social spending. That is why the fiscal situation has deteriorated to the present cliffhanger. I predict very confidently that if the upcoming budget does not contain hard-nosed cuts to social spending, investors will be very unhappy. They will point with some justification to a lost opportunity since most Canadians are ready for such cuts.
In addition, it is now official. The OECD noted in a recent report that Canada's social programs are an outstanding example of excessive generosity.
Third, investors will look for a plan for the complete elimination of the deficit during the current economic boom. The Liberal red book target of $25 billion two years from now has been criticized roundly by many experts. It implies an increase in the federal debt by $100 billion or 20 per cent of the $500 billion during the first years of Liberal rule.
Like the Conservatives during the 1980s, the Liberals will find that the debt will cease to grow as a percentage of national income during the upswing if they achieve their deficit target. But this is a hollow victory because the cause of the debt will resume the moment the economy slows down again as inevitably it will.
Predictions are that this may well happen before the end of the present election cycle. Few expect decisive spending cuts during the last two years before the next election. Therefore, one of the crucial aspects of the budget that investors will study is whether and by how much spending cuts go beyond the $25 billion deficit target in two years.
They will also look for further plans for deficit reduction beyond the last fiscal year covered in the budget. Will the Minister of Finance have the backing of cabinet and the Prime Minister to plan for further cuts in the future?
Fourth, I believe that investors will look to the budget for one other important subject. They will look for evidence that the government has accepted certain radically different ideas about the causes of unemployment which have moved out of conservative think tanks and are now discussed freely by the Auditor General, the OECD and many academics.
According to these ideas Canada's high and persistent unemployment rates are caused to a considerable degree by the generous social programs themselves. The unfortunate but unavoidable reality is that Canada once had the choice of having high unemployment rates and generous UIC and welfare benefits as a matter of deliberate public preference. That choice has disappeared with the debt, deficit and slow growth of the last decade.
These are harsh messages for a Liberal government to accept, which on these matters is caught in its own rhetoric. Investors are watching to see if the Liberals can live up to their reputation as the ultimate non-dogmatic pragmatists.
Let me close by suggesting that Reformers have listened to the public and to investors. Our own alternative budget will reflect what we have heard. It will outline steps we would be prepared to take in order to address the four issues crucial for investor confidence and most thoughtful Canadians.
My colleagues speaking after me will elaborate on some of these matters without revealing too much about our specific recommendations. We invite the Liberals to present a budget which will take the news out of the policies on these matters we will propose very soon.
After this gloom and doom, a few words of hope. Once Canadians have gone through three years and deal with the necessary deliberate and thoughtful spending cuts, there is a light at the end of the tunnel.
Such cuts will restore investor and consumer confidence. The economic boom will be fueled and expanded. Economic growth will return to the high levels we have not seen since the pervasive government intrusion of the last three decades.
In a few short years after the budget is balanced there is a prospect of tax reduction, a smaller debt, or both. Mild, short run pain will not only avoid catastrophic pain in the intermediate term, it will also bring large and important gains in what in retrospect will seem like a very short time of sacrifice.
We hope the Liberals will hear this message, not because we want to be right, but because it is right for Canada.