Prime Minister Brian Mulroney said today he will curtail government spending and hike personal income and sales taxes today in an effort to gain control over Canada's runaway public debt and shore up confidence in its declining dollar.
Mulroney handed Canadians his tough prescription for economic health in a budget that all-but-automatically becomes law under Canada's parliamentary system.
At the same time, the budget presented by the Mulroney government included a major restructuring of the corporate tax system that will effectively reduce the share of taxes paid by businesses. The changes included a three-year phase-out of the investment tax credit, except for investments in the poor provinces on Canada's Atlantic coast and spending for research and development.
Although budget documents and speeches here were replete with rhetoric about the importance of private enterprise that sounded like that of the Reagan administration, the differences were profound. Not only did Mulroney raise taxes but he also curbed spending on defense. And he left Canada's far more generous medical and social welfare system virtually intact.
The budget had been anxiously awaited by the Canadian business establishment and international currency traders who strongly pressured Mulroney to take action to rein in Canada's debt, which has been growing at a rate of more than 20 percent a year. Paying interest on the debt has been the largest- and fastest-growing component of the Canadian budget.
Earlier this month, the Bank of Canada was forced to sharply increase its prime lending rate after the Canadian dollar fell to the record-low trading price of just above 70 cents to the U.S. dollar. Finance Minister Michael Wilson, who blamed speculators for the fall, predicted that pressure on the Canadian dollar will be relieved by the budget and interest rates will begin to drop to their previous levels.
If rates do not fall, continued high interest costs virtually will wipe out benefits of the other measures the government has taken to cut back the deficits.
U.S. bankers and financial analysts Wednesday reacted positively to the budget introduced by Wilson, United Press International reported.
["The minister has hit the basic objective of what financial markets were looking for," said Peter Restler, an analyst with Shearson Lehman Brothers Inc. "He brought down a budget with a deficit number below $30 billion (Canadian)."]
The budget deficit is about $34 billion Canadian. Businessmen and bankers had insisted that Mulroney and Wilson bring it below $30 billion and lobbied for $28 billion. Yesterday's proposal came in at $29.5 billion. About 70 percent of savings came from previously announced cuts in special government subsidies for the Canadian oil and gas industry, an ongoing program to reduce the size of the federal work force and other restraints on government agency spending.
Most of the rest of the deficit reduction plan comes from the government's decision to effectively double on July 1 the graduated personal income surtax Mulroney imposed last year. Lower-middle income families, who had previously been exempted from the surtax, will have to pay.
The government, which has a 200-vote majority in parliament, raised sales and excise taxes on alcohol and cigarettes, which already were far more heavily taxed than in the United States, and increased the federal manufacturer's sales tax from 7 percent to 8 percent.
The basic federal corporate tax rate was reduced from 36 percent to 33 percent by the budget and the 5 percent surtax on businesses Mulroney imposed last year is to be lowered to 3 percent next January.
Wilson said corporate rates were being lowered to stimulate economic growth and job creation. The Canadian economy grew faster than the U.S. economy last year, but the Canadian unemployment rate has remained at 9.8 percent.
Although the investment tax credit, which virtually had been identical to the U.S. system, will be phased out, businesses will retain their far more generous depreciation schedules that allow them to deduct the total cost of capital investment over a two-year period.
But the Mulroney government altered or eliminated several other special tax breaks for Canadian businesses, including the immediate abolition of the "inventory tax allowance" which allowed firms to deduct 3 percent of opening inventory from taxable income.