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The Honourable Paul Martin, P.C., M.P.
Minister of Finance
February 27, 1995


Mr. Speaker, there are times in the progress of a people when
fundamental challenges must be faced, fundamental choices made ñ
a new course charted.

For Canada, this is one of those times.

Our resolve, our values, our very way of life as Canadians are
being tested.

The choice is clear.

We can take the path too well-trodden of minimal change, of
least resistance, of leadership lost. Or we can set out on a new
road of fundamental reform, of renewal of hope restored.

Today, we have made our choice. Today, we take action.


This is a window of extraordinary opportunity. Thanks to the hard
work of millions upon millions of Canadians, our economy is now
stronger than it has been for years.

Last year, economic growth in Canada was the highest of any G-
7 country. We are projected to lead again this year.

In the past year, 433,000 jobs have been created. Although
unemployment is still far too high, the rate has fallen by almost
2 full percentage points.

Canadaís exports have never been higher.

As a result, our balance of payments has improved

Productivity has surged. Our cost competitiveness is at its
highest level in more than 40 years.

Business confidence is greater today than at any time since

Canada remains one of the lowest inflation countries in the
world. Canadians want to keep it that way, and so does this
government. The targets that we set with the Bank of Canada will
make sure that happens.

These statistics tell a story of an economy in bloom an
economy of growth and new jobs.


However, there are two clouds that loom over our countryís

One is the uncertainty that some would create over the future
of Quebec. Let there be no doubt that challenge will be met.
Quebecers do not want Canada, their country, torn apart.

The second cloud is the debt and deficit. Dealing with that
challenge is our purpose today.

This government came into office because it believes that the
nationís priority must be jobs and growth. And it is because of
that, not in spite of that, that we must act now to restore the
nationís finances to health.

As the Prime Minister has said: "The time to reduce deficits
is when the economy is growing. So now is the time."

Not to act now to put our fiscal house in order would be to
abandon the purposes for which our Party exists and this
government stands -- competence, compassion, reform and hope.

The debt and deficit are not inventions of ideology. They are
facts of arithmetic. The quicksand of compound interest is real.

The last thing Canadians need is another lecture on the
dangers of the deficit.

The only thing Canadians want is clear action.


And therefore, let me go directly to the bottom-line of this

Last year, in our first budget, we laid out a firm course of

We said we would reduce the deficit in this fiscal year, 1994-
95, to no more than $39.7 billion. We now estimate that the
underlying deficit for the current fiscal year will be about
$35.3 billion, or $4.4 billion below our target.

We will still be well under the target, even after booking
certain one-time charges related to some of the major reforms
contained in this budget.

There are three principal reasons we will be able to do better
than our target in 1994-95.

The first is Canadaís strong economic growth which offset the
increase in interest rates.

The second is that when interest rates began to rise last
Spring, we reacted immediately by slamming the door shut on new
spending initiatives.

This, together with reductions in unemployment insurance,
enabled us to keep program spending $1.9 billion below our
expectations last February.

Finally, the third reason we have done better than projected
is that our overall economic assumptions were prudent. This means
that, despite the unexpected rise in interest rates, we did not
need to touch the contingency reserve we put in place.

Looking ahead, we pledged in our last budget that the deficit
in 1995-96 would not exceed $32.7 billion and would be reduced to
3 per cent of GDP now estimated to be $24.3 billion by 1996-97.

It is now evident, and has been for some time, that unless we
take further direct action, those deficit targets will not be

This is because todayís interest rates are much higher than
anyone thought they would be, and because of the sheer size of
our debt, those interest rate increases translate into billions
of dollars of new charges for us.

And so today, based on prudent economic assumptions and with
very sizeable contingency reserves in place, we believe that
unless direct action is taken now, we could face shortfalls of
$5.0 billion from our deficit target in 1995-96 and
$10.6 billion the year after.

We have said from the beginning that we would meet our
targets come what may. Therefore, those gaps must be closed.
With this budget, we are closing them.

- We will hit our deficit target for 1995-96. We will hit our
target for 1996-97. And of equal importance, the downward track
established by the actions taken in this budget will continue in
the years thereafter.

- Taking the next two fiscal years together, this budget delivers
cumulative savings of $15.6 billion, with spending cuts
accounting for $13.4 billion, more than 85 per cent of the total.

- Going beyond, to 1997-98, the reforms we are introducing today
will continue to pay-off, with further savings totalling
$13.3 billion, of which spending reductions amount to
$11.9 billion.

- That means that over the next three fiscal years, this budget
will deliver cumulative savings of $29 billion, of which
$25.3 billion are expenditure cuts. This is by far the largest
set of actions in any Canadian budget since demobilisation after
the Second World War .

- Over the next three years, the actions in this budget deliver
almost seven dollars of spending cuts for every one dollar of new
tax revenue.

These measures will have a very significant impact on the
level of government spending in the future.

- By 1996-97, we will have reduced program spending from
$120 billion in 1993-94 to under $108 billion.

- Relative to the size of our economy, program spending will be
lower in 1996-97 than at any time since 1951.

- The budgets of government departments are being reduced
dramatically, in several cases halved over the next three years.

The impact of these measures on the fiscal health of this
country will be significant and substantial.

- By 1996-97, our financial requirements which is the amount of
new money we will have to borrow on financial markets will be
down to $13.7 billion or 1.7 per cent of GDP. Using financial
requirements as a gauge which is the key indicator of fiscal
position in other countries the Government of Canada is
projected to do better than what is projected for the national
governments of the U.S., of Germany, of Japan indeed we are
likely to do better than every other G-7 country.

- Perhaps most importantly, in that same year, the debt will no
longer be growing faster than our economy. The debt-to-GDP ratio
will have begun to decline. That is the key to fiscal
sustainability. And that is why we seek not only to attack the
deficit. We are also committed to putting Canadaís debt ratio on
a permanent downward track.

We face an historic challenge. This is an historic response.


Let me be absolutely clear about the course we are on.

We have always said that meeting our target was the least we
could do not the best we would do.

The proof is in the pudding. That is why it is so important
that this year we will have beaten our deficit target by a
substantial amount.

Looking ahead, building on the advice of the Finance Committee
of this House, we have deliberately chosen economic assumptions
that are once again more cautious than those of most private
sector forecasters.

And once again, we are backing up our economic assumptions
with substantial contingency reserves $2.5 billion in 1995-96
and $3.0 billion the year after.

What that means is that even if interest rates go up next year
by almost one and a half percentage points more than our already
cautious assumption, our fiscal position will be fully protected.

But this means something else as well and this is very
important. If we donít need our contingency reserve, it will not
be spent. It will go to reducing our deficit further. That is
what happened in 1994-95. And because of our prudent economic
assumptions, one should not be surprised if it happens in 1995-96
and 1996-97 as well.

These prudent economic assumptions may well bring additional
benefits. If interest rates and income growth conform to the
average private sector forecast, the deficit in 1996-97 could be
brought down below $19 billion in fact, some $5.5 billion less
than this budget projects. If that happens, financial
requirements would fall to about $8 billion in 1996-97 or about
1 per cent of GDP. And the debt-to-GDP ratio would fall from its
current level of 73.2 per cent to less than 72 per cent proving
our firm intent to keep that ratio on a continued downward

But our commitment and our course do not stop there.

We have always said that our 3-per-cent interim target was a
station on the way, not our ultimate destination. Interim means

Canadians want more than temporary fiscal remission. They want
full fiscal health. It is absolutely essential that once we meet
our interim target we do not stall.

We will continue to set firm, short-term deficit
goals rolling two-year targets, until the deficit is erased.

Short-term targets are the surest way to get to zero.

They are the most effective spending control anyone could
impose on governments. They keep our feet to the fire. They make
it impossible to postpone needed action. And they prevent
fanciful, foolish forecasts the escapism of wishful targets.

This government wants Canadians to be able to judge it not on
its rhetoric, but on its results; not on more promises made, but
on real progress secured.


The targets we set are crucial. But how we get to our targets is
every bit as important.

Because the fact is that if we are to ensure durable fiscal
progress, building towards budget balance -- that can only happen
if we redesign the very role and structure of government itself.

If we secure that reform, it will continue to pay off to live
on -- in 1997-98 and every year thereafter.

This budget secures that reform irrevocably. Indeed, as far
as we are concerned, it is this reform in the structure of
government spending in the very redefinition of government
itself that is the main achievement of this budget.

After extensive review, this budget overhauls not only how
government works but what government does.

We are acting on a new vision of the role of government in the
economy. In many cases that means smaller government. In all
cases it means smarter government.

We are dramatically reducing subsidies to business.

We are changing our support systems for agriculture.

We will be putting government activities on a commercial basis
wherever that is practical and productive.

We will be overhauling the unemployment insurance system as
part of our social security reform putting the emphasis on
active help to get Canadians back to work.

And we are also reforming the system of transfers to the
provinces putting it on a basis that is more in line with the
actual responsibilities of the two levels of government.

In creating this budget, no activity of government has gone
unexamined. Nothing less than a complete rethink has been
required top to bottom. And that is what we have done.


Canadians want their governments to spend money and secure
savings in ways that make sense, that reflect their values. To do
that, it is essential that our effort be guided by clear

First, we believe it is crucial that government get its own
house in order. Our budget must focus on cutting spending not
raising taxes.

Second, we have priorities as a country that mirror our needs
as a people. These priorities should be reflected in the way
government defines its role. Blind cuts are bad cuts. Canadians
need a budget designed to promote growth and jobs.

The third principle is frugality. Governments donít have
money. They are given money money from the pockets of Canadians
from coast to coast to coast. And so, governments must behave as
if every dollar counts. Because every dollar does.

And finally, we must never ever lose sight of the need to be
fair. Fair among our regions and fair among individual Canadians.

This budget respects and reflects those principles.


If our purpose is to get the economy right and it is then the
best thing we can do is to get government right and this budget

We need to redesign the role of the government in the economy
to fit the size of our pocketbook and the priorities of our

What is that role?

It is to provide a framework for the private sector to create
jobs -- through responsible policies on inflation, on taxation,
regulation, trade, and the labour market.

It is to see an aggressive trade strategy as central to
Canadaís industrial strategy. And it is initiatives, such as the
Prime Ministerís, in Asia and Latin America, that will create
opportunity for thousands of Canadians here at home.

Itís to ensure that the nationís finances are healthy. It is
to do what only government can do best and leave the rest for
those who can do better whether business, labour, or the
voluntary sector.

Last fall, reflecting those priorities, we put forward A New
Framework for Economic Policy to guide what the government would
do and what we would not do in the future.

This budget puts our framework into action.

It does so after the top-to-bottom review of all departmental
programs and activities launched in our last budget. That effort
was led by the Minister Responsible for Public Service Renewal.

As a result of that review, and a focus on key national
priorities, we will be able to reduce departmental spending
dramatically over the next three years while maintaining the
services that are truly needed by Canadians.

For example, between this fiscal year and 1997-98, annual
spending will go down by:

- $1.6 billion at Defence;

- almost $550 million for international assistance;

- $1.4 billion at Transport;

- more than $600 million at Natural Resources;

- almost $900 million at Human Resources Development;

- over $200 million at Fisheries;

- almost $900 million in the Industry portfolio;

- more than $550 million at the Regional Agencies; and

- nearly $450 million at Agriculture.

In short, overall departmental spending will be cut by almost
19 per cent in just three years.

And let me emphasize, these are not the phoney cuts we saw so
often in the past measures that pretended to define a slower
rate of increase in spending as actual cuts. These are real cuts
in real dollars.

In the last recession, every household, every business, every
volunteer group in the country was forced to face up to hard
choices and real change. But the Government of Canada did not. In
this budget, we are bringing governmentís size and structure into
line with what we can afford.

Today, Canadians want government to get its own act together
first. These spending reductions prove that we are.

As a result of the cut-back and reform of programs, the public
service will be reduced by some 45,000 positions, of which 20,000
will be eliminated by the summer of next year.

Because so many of those affected have given so many years of
valuable service to Canadians, we are committed to downsizing the
public service as fairly as possible through accelerated

The government will provide early departure and early
retirement incentives.

Those who decide not to take advantage of these options will
be provided a reasonable period during which to be placed
elsewhere in the public service. However, in the departments most
affected by these reductions, that period will not be indefinite.
The President of the Treasury Board has already indicated that
people will no longer be paid for not working and the Workforce
Adjustment Directive will be amended accordingly.

In some departments the scope for savings has been less than
others. That reflects the governmentís commitment to protect the
most vulnerable and ensure public safety.

For example, we are responding to Canadiansí concern about
public safety in their communities by strengthening gun control
and largely maintaining existing levels of support for law
enforcement, the justice system and correctional services.

As a second example, the Minister of Immigration and
Citizenship has made clear our commitment to a fair,
affordable and well-enforced immigration policy.

As part of that, he will take steps to reduce the cost of
immigration to Canadian taxpayers and provinces. A form of
financial guarantee will be developed to ensure that sponsors of
immigrants meet their sponsorship obligations.

In addition, beginning immediately, a $975 fee will be charged
to all adults applying to immigrate to Canada. The fee will be
returned if the application is not accepted. To ensure equitable
access, loans will be made available to immigrants and refugees
who require assistance in paying the fee.

Further detail on this and on what follows will be found in
the budget documents, and that will be supplemented in the days
and weeks ahead by each of my colleagues.

Business Subsidies and Support

We have talked about specific reductions in specific
departments and strategic efforts in those departments to focus
on priority national needs.

But many of those specific measures share a common foundation
and philosophy.

For example, across government, we are taking major action in
this budget to substantially reduce subsidies to business.

These subsidies do not create long-lasting jobs. Nobody has
made that case more strongly than business itself. And the world
over, the conclusion is the same.

In this budget, total spending on business subsidies will
decline from $3.8 billion in this fiscal year to $1.5 billion
by 1997-98. That is a reduction of 60 per cent in three years.

Remaining industrial assistance will be targeted on the key
engines of economic growth trade development, science and
technology and small- and medium-sized business.

Transportation and direct agricultural production subsidies
are being eliminated or substantially reduced.

This is historic change. Decades ago, even into the last
century, those subsidies were put in place to respond to Canadaís
transportation and agricultural needs then existing.

As time has passed, those needs have changed, but the subsidy
structure has not.

For years, governments have known the need for change but
have hesitated to act. We cannot postpone action any longer.

To that end, subsidies under the Western Grain Transportation
Act are being eliminated effective in 1995-96, resulting in
savings of $2.6 billion over the next five years.

This subsidy evolved from the Crow Rate established in 1897.
It has played a pivotal role in the development of the prairie
economy, but in more recent years it has come to restrict the
ability of prairie farmers and industry to adapt and compete.

The elimination of this subsidy will encourage crop
diversification, the development of value-added production and a
more efficient and effective transportation system, while also
being consistent with our international trade obligations.

To facilitate this change:

- we will make a one-time payment of $1.6 billion to prairie farm
land owners, to be provided for in this fiscal year, 1994-95;

- we will invest a further $300 million over several years to
facilitate a more efficient grain handling and transportation
system; and

- we will provide new credit guarantees to help Canadian farmers
sell to non-sovereign buyers abroad.

Next, the Atlantic freight subsidies (ARFAA/MFRA) are also
being eliminated, effective in the upcoming fiscal year. This
will result in savings of $500 million over the next five years

Elimination of this subsidy will contribute to a better
transportation system. To help ensure this, the government will
set up a five-year, $326 million transportation adjustment
program that, among other things, will help modernize the highway
system in Atlantic Canada and Eastern Quebec.

We are committed to ensuring that our farmers are able to
compete on a level playing field with their competitors abroad.
We are committed to the fair stabilization of farm income, as we
are to meeting the interests of Canadian consumers. All of this,
however, must be done within the context of Canadaís financial

Therefore, this budget takes the following measures:

- Consistent with the recent decision of federal and provincial
ministers of agriculture, a core national "whole farm"
stabilization program will be developed, together with crop
insurance and province-specific programs. The costs of these
initiatives will be shared between the federal government, the
provinces and farmers themselves. This will replace current
programs based on individual agricultural commodities. It will
therefore encourage innovation and diversification, as well as
resulting in a 30-per-cent reduction in federal contributions to
agricultural safety nets.

- Next, the subsidy paid to industrial milk producers will be
reduced by 15 per cent in 1995-96 and by a further 15 per cent
the following year. The future of this program will be reviewed,
in consultation with industry and the provinces.

- Finally, the Feed-Freight Assistance subsidies are being
discontinued and the Livestock Feed Bureau will be wound up. A
portion of the resulting savings will be redirected on a
transitional basis to help adjustment in the livestock industry.

Financial support to business should only be provided if there
is no alternative and a valid national need clearly exists.

That is why we have made a clear public commitment that new
funding for mega projects will not take place.

In the last year, I have had numerous requests for the funding
of such projects cross my desk and every one of those has been
turned down.

In addition, with this budget, we are eliminating the Public
Utilities Income Tax Transfer Act (PUITTA). It can no longer be
justified in todayís fiscal circumstances.

We will support, as appropriate, however, Canadian companies
that are up against foreign competitors who are aggressively
backed by their governments.

Small Business and the Regional Agencies

Furthermore, because small businesses are the primary creators of
new jobs in this country, removing barriers to their success is a
core priority for the government, as is providing practical
assistance for them to survive and grow.

Last year, we announced that we would review the
$500,000 lifetime capital gains exemption for farmers and small

As a result of the review, we have concluded that the
exemption remains a valuable measure. Today, we are announcing
that no changes to it are being made.

We see our Regional Agencies as playing an important role in
the creation of opportunity and long-lasting jobs.

However, we do not believe that handouts are the way to do it.
Therefore, consistent with our new policy to sharply reduce
business subsidies, assistance to firms will be provided
primarily through repayable loans on terms tailored to foster
genuine opportunity.

This government is determined that small businesses will have
access to the financing they need to continue being our number
one creator of jobs.

While some progress has been made, there continue to be large
gaps in the system.

We believe that Canadaís banks have a special obligation to
help close those gaps.

That is why, between now and the fall, we will be working with
the banks to hammer out meaningful performance benchmarks for
small business financing. Progress during the following year will
be monitored against those benchmarks.

Science and Technology

It is ideas today that will generate the products and the jobs of

That is why science and technology will become a predominant
focus for our business support.

In the future, our science and technology efforts will be
concentrated more strategically on activities that foster
innovation, rapid commercialization and value-added production.

We are therefore particularly encouraged by the efforts of
federally supported bodies to form new partnerships to create new
products than can succeed in new markets, creating jobs. As only
one example, the Medical Research Council has mounted a promising
initiative to bring outstanding academic science together with
private sector capital. The goal is to create high growth
Canadian companies at the leading edge of medical and other

Thatís the kind of imagination we will encourage in order to
stretch governmentís science dollars farther and more

Commercialization and Privatization

The government is committed to privatizing and commercializing
government operations wherever that is feasible and appropriate.

This is a matter of common sense.

Our view is straightforward. If government doesnít need to run
something, it shouldnít. And in the future, it wonít.

We have already sold our shares in Cameco a uranium company
owned jointly by the Governments of Canada and Saskatchewan.

Today, we are announcing that the Minister of Transport will
initiate steps this year to sell CN.

When market conditions are favourable, the government will
sell its remaining 70-per-cent interest in Petro-Canada.

We will commercialize the Air Navigation System, a step that
will save taxpayers money, allow that system to be fully
modernized and eventually reduce costs to carriers.

We will examine divesting all or parts of the Canada
Communication Group.

Let me be clear. Our effort to identify viable candidates for
privatization or commercialization does not end with these
announcements. That effort will continue.

Let me just say one thing before leaving Program Review, and
that is, we have accomplished much, but getting government right
does not end with this budget. For the essence of good government
is, in fact, permanent ongoing program review. And that is our


Bringing better focus to government and better quality services
for Canadians should not be something that has to wait for

We would not have to reduce spending as much as we do if that
spending was under better control in the first place.

Canadians make ends meet by watching their dollars every day.
Itís time government did the same.

The government has just introduced a new and much tighter
system to manage its spending. This will mean better government.

With the Expenditure Management System in place, new programs
will no longer be funded out of general policy reserves.
Departments will have to find the money for their new initiatives
from existing budgets.

Furthermore, for the first time, departments will have to
prepare business plans for three years forward. Those plans will
be subject to Parliamentary and therefore public scrutiny. That
transparency and that accountability will mark a major departure
from the past.

Our action to increase management effectiveness does not
stop there.

Our approach to interest group funding will change. Some
groups will continue to be funded as is. For others in a position
to secure financial support from outside government, we will move
towards a system based on the provision of matching funds.
For still other groups, while they undoubtedly serve a worthy
purpose, continued funding will not be possible due to our
financial situation.

Individual ministers are being asked to alter their funding
approach accordingly. They will be held accountable for their
decisions and those decisions will be reviewed annually.


There is no more important task than to do everything we can to
help Canadians get jobs, keep jobs or find better jobs.

But the fact is that the existing structure of programs does
not do that nearly well enough.

That is why the Minister of Human Resources Development will
be announcing the details of a new Human Resources Investment
Fund. Many of the Departmentís existing programs that foster
employability will be combined under the umbrella of that new

A sharper focus on priorities, together with more efficient,
streamlined services will yield substantial permanent savings.

We must also continue to improve the unemployment insurance
program, building on the substantial reforms introduced in last
yearís budget.

As the Minister of Human Resources Development has emphasized
so often, we need to move away from passive support away from
dependence towards active assistance towards independence.

In essence, a key job for unemployment insurance in the future
must be to help Canadians stay off unemployment insurance.

Later this year, the Minister of Human Resources Development
intends to table legislation that will build on the best elements
of unemployment insurance to create a fundamentally reformed
program that addresses the needs of todayís workers.

It is Canadaís workers and Canadaís businesses that pay for
unemployment insurance. The unemployment insurance program of the
future must be one that they can afford.

Canadaís strong economic performance and the unemployment
insurance reform which the government intends to have in place
no later than July 1, 1996 will reduce the overall size of the
unemployment insurance program by a minimum of 10 per cent.

And this overall reform, combined with improvements in the
administration of the unemployment insurance program, will secure
savings for taxpayers of $700 million in 1996-97.

Improved employment conditions are rapidly eliminating the
deficit in the Unemployment Insurance Account which had reached
almost $6 billion in 1993. With no increase in premium rates, the
surplus in the Account will be allowed to rise above $5 billion
through to the end of 1996.

This surplus will be maintained and used as a buffer to
mitigate unemployment insurance premium rate increases during
periods of slowing economic growth.

The result of these measures will be an unemployment insurance
program that does much better at investing in people, and will
lead to lower, more stable unemployment insurance premium rates
that will encourage the creation of jobs.


We will never secure the sort of structural change that we need
without reforming the system of major transfers to the provinces.

This budget sets out some key parameters, but let me be clear,
as we go forward, we are committed to a co-operative approach.

That is why, to provide predictability, we said in last yearís
budget that we would not change the system of major transfers
before 1996-97. That is a commitment this budget maintains.

It is also why in March of last year, as one of the first acts
of this government, we renewed the equalization program for five
years. Equalization is a central pillar of Canadian federalism.
It ensures that Canadians in our less well-off provinces receive
public services comparable to those available elsewhere.

Therefore, we are not changing the existing Equalization

However, some changes in other transfers are needed changes
that will address two fundamental requirements. The first is a
system of transfers that is more effective in meeting
contemporary needs. The second is a system that is financially

Concerning the first requirement, we believe that the
restrictions attached by the federal government to transfer
payments in areas of clear provincial responsibility should be

At present, transfers under the Canada Assistance Plan come
with a lot of unnecessary strings attached. They limit the
flexibility of the provinces to innovate. They increase
administrative costs. In short, the cost-sharing approach of the
past no longer helps the provinces, who have clear responsibility
to design and deliver social assistance programs, to do so in a
way that is as effective as possible and in tune with local

So we are prepared to address those issues by funding CAP in a
similar way as we fund the existing EPF transfers for health and
post-secondary education.

As a result, the core rationale for the present segregation of
the three transfers into separate categories disappears.
Therefore, we are combining all three into a single consolidated
block transfer, beginning in 1996-97 which will now be referred
to as the Canada Social Transfer.

Provinces will now be able to design more innovative social
programs programs that respond to the needs of people today
rather than to inflexible rules.

However, flexibility does not mean a free-for-all.

There are national goals and principles we believe must still
apply, and which the vast majority of Canadians support. Our goal
must be to combine greater flexibility with continued fidelity to
those principles.

The conditions of the Canada Health Act will be maintained.
Universality, comprehensiveness, accessibility, portability, and
public administration.

For this government, those are fundamental.

In addition, we will maintain the existing principle that
provinces must provide social assistance to applicants without
minimum residency requirements.

Furthermore, the Minister of Human Resources Development will
be inviting all provincial governments to work together on
developing, through mutual consent, a set of shared principles
and objectives that could underlie the new Canada Social

This reform deals with the requirement for a better
functioning system of transfers. But equally, we need a system
that can be financially sustained.

Our major transfers to the provinces currently amount to
$37 billion in cash and tax points. The cash portion alone
represents about 21 per cent of our total program spending.

Addressing our fiscal challenge simply does not allow us to
leave that spending untouched. We must establish the fiscal
parameters of a new system.

However, as a matter of fairness and balance, we believe that
the provinces should not be expected to bear more of the fiscal
burden than we are prepared to impose on ourselves.

This budget meets that test.

As we have said, no changes in major transfers are being made
for next year 1995-96 even though we are taking substantial
action that year to reduce our own spending.

For the following year, the new Canada Social Transfer will be
$26.9 billion cash and tax points combined. This will be about
$2.5 billion less than the projected transfer would be under the
present system.

This means that the total of all major federal transfers to
the provinces in 1996-97 will be 4.4 per cent lower than they are
today. That compares favourably with the reduction in spending in
our own backyard that is, everything except transfers to the
provinces which will be down 7.3 per cent by that same year.

In 1997-98, the Canada Social Transfer will be
$25.1 billion or about $4.5 billion less than what would have
been transferred under the existing system. To keep that in
perspective such a reduction in transfers would equal about
3 per cent of aggregate provincial revenues.

Pending development of a permanent formula in consultation
with the provinces, the Canada Social Transfer in 1996-97 will be
allocated among provinces in the same proportion as each province
will be receiving in 1995-96 under the current system.

To ensure that everyone shares in fiscal restraint, it will
also be necessary to subject territorial financing to new limits.
Entitlements for each territory in 1995-96 will be frozen at 1994-
95 levels and the following year, the expenditure base in the
formula will be reduced by 5 per cent for each territory.

We believe these measures respond to the need for a more
affordable and effective system of transfers.

But our challenge and our commitment do not end here.

With this budget, we are saying yes to the provincesí desire
to sit down for a bottom-up review of the financing of both
levels of government.

If there are ideas to make the fiscal side of federalism more
efficient, letís hear them. And if there are ways to make this
federation function better, then by all means letís do it.


One of the greatest reforms ever introduced by a Canadian
government has been the provision of decent support for elderly
Canadians who have given and continue to give so much to their
families and to their country.

In recent weeks and months, there is probably no Member of
this House who has not received letters or had conversations with
elderly Canadians who are worried that the protection their
country has provided them will be eaten away.

Because of that, this government is absolutely committed to
providing a fair and sustainable system of protection for
Canadaís seniors.

There are two pillars of the public pension system. One is the
Canada and the Quebec Pension Plans. The other is Old Age
Security and the Guaranteed Income Supplement.

Canadian seniors deserve to know that those public pensions
will be there for them. That in turn requires reform to ensure
that the pension system is sustainable in the long term.

Concerning the CPP, the most recent actuarial report was
released last week and it leaves no doubt that we will have to
take steps to ensure that that plan continues to be sustainable.
This we shall do when we sit down this Fall with the provinces to
review the CPP.

Let me turn now to the second pillar OAS and the GIS.
Together these represent an annual expenditure of more than
$20 billion and that expenditure is growing. Clearly, it is
necessary to make these pensions sustainable as well.

To ensure that our approach to the public pension system is
comprehensive, the Minister of Human Resources Development and I
will be releasing, later this year, a paper on the changes
required in both pillars of the public pension system to ensure
its affordability.

The focus will be on fairness and sustainability.

Consultations will take place once the paper is released.

It is our intention that the reforms be legislated to take
effect in 1997.

In the meantime, we are announcing today a change in the
method of payment of OAS to high-income seniors who are subject
to the so-called "clawback" rules.

Currently, full payments are made throughout the year and the
clawback occurs when tax returns are filed.

Beginning July 1996, monthly OAS payments will be calculated
and paid with the clawback amount subtracted, based on the prior
yearís tax return. This will yield one-time savings of about
$300 million.

Finally, to ensure fairness, we will be requiring Canadians
who are non-residents of this country to file a statement of
their world-wide income in order to be able to continue to
receive OAS benefits.


Let me turn now to the question of revenues, and let me begin
with something that is manifestly clear to all of us.

There is not one, solitary Canadian who likes taxes. And
certainly, they are far higher than any of us would like them to

But the issue of taxes is more than a matter of rates. It is a
question of equity.

As we speak, millions of Canadians pay their fair share of
tax and do so on time. But there are those who donít.

Collecting Whatís Owed

On a priority basis, the Minister of National Revenue will be
taking the following measures to step up his departmentís efforts
with regard to taxes that are owed.

- Teams of specialists with beefed-up resources will be put in
place to audit large corporations.

- The governmentís ability to go to court to obtain information
to ensure compliance with the tax law will be strengthened.

- After consultation, new rules will be established to ensure
compliance with the tax law in the construction industry, where
the underground economy thrives; and

- The interest rate charged on over-due taxes will be increased
by 2 percentage points.

Improving Tax Fairness

Next, we are announcing steps today to make the tax system
more fair.

- The tax deferral advantages for investment income earned by
private holding companies will be taken away. That advantage
is unjust.

- The current film incentive will be changed. Rather than being a
tax shelter for high-income investors, a new refundable credit
will be provided directly to producers of Canadian films.

- Those who earn business or professional income have a tax
advantage over many other Canadians. Because of special rules
that allow them to select their own year-end for tax purposes,
those individuals are given an ongoing tax deferral. That
advantage is being eliminated.

As other Canadians now do, they will have to report their
income as of the end of the calendar year. This measure could
result in a very large, one-time tax increase for many of these
taxpayers. Therefore, in order to be fair, we are allowing this
amount to be spread out over a 10-year period in order to ease
the adjustment.

We are concerned that the rules regarding the resource
allowance for the mining and petroleum industries are not working
as originally intended. We will be meeting with the provinces and
the industry on possible improvements to, or replacement of, this

The system of R&D tax incentives, like all tax expenditures,
need to be monitored continually and modified as necessary to
ensure effectiveness and integrity.

We will be evaluating the entire program to ensure its
effectiveness in encouraging R&D in Canada. In particular, we
will accelerate our review of the rules relating to information
technology to ensure they are up-to-date.

While this review is underway, no bank or other financial
institution will be eligible for the scientific research and
experimental development tax incentives related to information

Concern has been expressed about tax advantages that may exist
as a result of the establishment of trusts, trusts which largely
benefit high-income Canadians.

Therefore, for foreign trusts and indeed for taxpayers who
invest in foreign holdings generally we are introducing more
stringent reporting requirements.

These new requirements will provide Revenue Canada with
additional information regarding offshore investments to ensure
that Canadian individuals and corporations pay the appropriate
tax on income earned in these foreign holdings.

Second, this budget eliminates all tax advantages that flow
from the establishment of family trusts. That involves
eliminating the potentially unfair income-splitting advantages
that exist. And we are repealing the previous governmentís
amendment that allowed deferral of the 21-year rule.

Providing tax assistance to encourage Canadians to save is an
essential part of our retirement income security system. We are
not prepared to compromise the integrity or the purpose of that

But equally, we must ensure that the benefits of tax
assistance are shared fairly in these times of restraint, while
also adhering to the key principles and purpose of pension

One of those principles is that tax assistance should be
provided for contributions to registered savings plans based on
earnings up to two-and-a-half times the average wage, and no

Therefore, we will be reducing the upper limit on deductible
RRSP contributions to $13,500 for 1996 and 1997. That limit will
then be allowed to progressively increase to $15,500 by 1999.

Corresponding changes will be made to registered "money-
purchase" pension plans.

And the maximum pension limit for registered "defined benefit"
plans will be frozen at its current level through 1998.

We are also introducing measures to improve the overall
fairness of this system by tightening some existing provisions.

For example, beginning in 1996, the "overcontribution
allowance" for RRSPs will be reduced from its current $8,000
to $2,000.

Our effort to ensure an effective and fair system of taxation
does not begin or end with this budget.

We closed loopholes in our last budget. We did not wait until
this budget to close others.

In December, we closed down abusive tax shelters as soon as
they were identified, and we changed the way the Alternative
Minimum Tax is calculated to ensure that high-income individuals
cannot avoid a minimum level of tax.

Consistent with the recommendations of the Commons Committee
on Social Security Review, we strongly support the notion that a
Committee of this House regularly evaluate the whole question of
tax expenditures.

Finally, we want to make absolutely clear our ongoing
commitment to tax reform.

If we must constantly scrutinize government spending as we
must then let it be clear we must also constantly scrutinize the
fairness and effectiveness of the tax system.

Corporate and Excise Taxes

Despite the size of the savings we must secure, this budget
focuses almost entirely on reducing the spending of government,
not increasing taxes for Canadians.

That being said, spending cuts themselves get us very near to
our targets. But there is a small gap we must close.

Therefore, we have found it necessary to do four things.

First, the existing Large Corporations Tax will be increased
by 12.5 per cent effective immediately in order that big
companies contribute more to help bring the deficit down.

Second, we are raising the existing corporate surtax from 3 to
4 per cent.

Third, effective midnight tonight, the federal excise tax on
gasoline will be increased 1.5 cents per litre raising $500
million annually. This will restore total revenues from all
federal excise taxes to about their 1993-94 level.

And finally, we are announcing today a temporary tax on the
capital of large deposit-taking institutions, including the
banks. That tax will be in effect until October 31, 1996, and
will raise about $100 million.

Taken together, the revenue measures in this budget are far
over-shadowed by the size of the spending cuts we have made. As
we have said, those cuts constitute more than 85 per cent of the
substantial savings secured in this budget over the next
two years. For every one dollar raised in new tax revenue over
the next three years, there are almost seven dollars in spending

Furthermore, in this budget, like last yearís, we are not
increasing personal income tax rates one iota.


This budget sets this country on a sure course of fiscal
responsibility and government renewal.

Our reductions in government expenditure are unprecedented in
modern Canadian history.

We have ensured that our targets will be met. Even more
importantly, we have taken the steps required to go beyond those
targets in the years ahead.

Our reform of the role of government offers the prospect of
much more effective government at substantially lower cost.

And we believe that has all been accomplished in a way that is
fair and balanced.

We have accomplished a great deal this year.

But our task is not over and our efforts will not cease.

There will be new targets to set.

Those who believe that the government will inevitably let up
in its efforts to cut costs as the next election approaches
simply do not understand the conviction of the Canadian people
that a deteriorating national balance sheet is no longer

Constant renewal is what this country is all about. Indeed, it
is the essential ingredient of a dynamic federalism.

The inter-play between the federal government and the
provinces has led to remarkable innovation and experimentation.

But as we act to reform government and restore responsibility
to our finances, there are those who would argue that this
country, this federation, cannot change that Canada is about the
status quo.

That is nonsense. Canadian federalism has never been about the
status quo. So much of what we value as a country is the result
of Canadians working together so that our country can evolve to
meet new needs.

None of us is here to defend the status quo. We are here to
change it. And with this budget we are.

Providing new fiscal leadership. Reducing overlap and
duplication. Giving the provinces greater freedom to design and
deliver services.

These changes respond to positive pressures for change from
across the country. They mark a recognition on the part of us all
that in this tough, competitive world, despite the differences we
have, we all have so much to gain by working
together productively, rather than standing
apart destructively.

We do believe in Federalism because it appeals both to our
hearts and our common sense. We do believe in Federalism because
it emphasizes what unites us, not what divides us.

This budget faces difficult choices for all Canadians. But
this year, in Quebec, some of us are also being asked to choose
a country.

To choose to remain proud partners in a large, reforming
country. Or to become something else smaller and alone.

To embrace real change and improvement, or to join those who
pretend that the road to a better future lies through fracture.

The separatist view has always been the same its own status
quo. Ignoring reform that has happened. Denying reform when it is
occurring. Refusing reform when it is offered.

That is not our position. By definition, Canadian federalism
is change always improving, always progressing and today, with
this budget, reaching ahead to a new phase of renewal.

It is customary at this time, when closing the presentation of
a governmentís budget to claim that the measures being taken have
solved every problem, responded to every expectation, addressed
every need.

That is something we will not say today.

Because the fact is that there is so much more that we would
like to be able to do for the millions of Canadians who care
little about the world of dividends and derivatives and simply
worry about making ends meet.

That being said, if we believed that dealing with the deficit
would do nothing to protect what we value -- or offer hope to
ordinary Canadians we would not be acting now, because it is
they who suffer when government must focus its precious resources
on satisfying lenders abroad rather than real needs at home.

For all of us who care for the social fabric of this country,
who seek a better future for our children, who are committed to
the protection of our seniors and the independence of Canada, the
state of the nationís finances simply has to be addressed.

The choice is ours. We can either dwell on our
imperfections or work together towards real improvement.

We can leave the field to those who have given up on
Canada or we can demonstrate trust in ourselves.

We believe this is the year we can turn the corner and turn
the page.

It may seem like a long struggle, but the light at the end of
this tunnel is much nearer than any of us might think.

Canadians can have confidence now in a country that has put
the era of band-aid budgets behind it.

Canadians can have confidence now that their social programs
will be there for those who need them.

Canadians can have confidence now in their country being one
of the most attractive places in the world to invest, creating

For too long, governments have known the need for reform and
renewal known the need, but not the will.

We have made our choice -- against the status quo and in favour
of a stronger country.

Let me close by quoting from another Canadian in an earlier
time, a member of a previous government who did not particularly
like Finance Ministers:

"(G)overnment must not live in the past... Every day there are
new needs to be met. If inflation is to be fought, unemployment
countered and something done, and soon, to get Canadian
prosperity back into its stride, the government must begin to
plan ahead not timidly, not tentatively but boldly,
imaginatively and courageously."

Those words were spoken by my father in 1957 for his time.
That is what I believe we have done today, for ours.


Total direct impact of budget measures

3 Year[1]

1995-96 1996-97 1997-98 impact

(billions of dollars)

Expenditure reductions

Program review 3.9 5.9 7.2 16.9

Other 0.2 3.5 4.7 8.4


Total 4.1 9.3 11.9 25.3

Revenue measures

Increase fairness and

tighten tax system 0.1 0.4 0.6 1.1

Tax increases 0.9 0.9 0.8 2.6


Total 0.9 1.3 1.4 3.7


Total direct impact of

fiscal actions 5.0 10.6 13.3 29.0

Ratio of expenditure reductions/

tax revenue increases 4.4:1 7.3:1 8.3:1 6.9:1

[1] Three-year cumulative impact of deficit reductions shows the
reduction in net debt, by the end of the 1997-98 fiscal year,
arising from fiscal actions.

Numbers may not add due to rounding.

Chart: Changes in federal departmetn spending 1997-98 relative to



Summary statement of transactions:
Fiscal outlook with budget measures

1993-94 1994-95 1995-96 1996-97

(billions of dollars)

Budgetary transactions

Budgetary revenues 116.0 125.0 133.2 137.4

Program spending -120.0 -118.3 -114.0 -107.9


Operating balance -4.0 6.7 19.2 29.4

Public debt charges -38.0 -42.0 -49.5 -50.7


Underlying deficit -42.0 -35.3 -30.2 -21.3

Restructuring charges -2.6

Contingency reserve -2.5 -3.0


Deficit -42.0 -37.9 -32.7 -24.3
Non-budgetary transactions 12.2 11.9 7.8 10.6


Financial requirements -29.8 -26.0 -24.9 -13.7

(excl. foreign exchange

Net public debt 508.2 546.1 578.8 603.1
Gross domestic product 711.7 746.4 787.1 821.3
Percentage of GDP

Budgetary revenues 16.3 16.7 16.9 16.7

Program spending[1] 16.9 16.2 14.5 13.1

Public debt charges 5.3 5.6 6.3 6.2

Deficit -5.9 -5.1 -4.2 -3.0

Financial requirements -4.2 -3.5 -3.2 -1.7

Net public debt 71.4 73.2 73.5 73.4

[1] Includes restructuring charges.

Notes: (-) indicates a net requirement for funds.

(+) indicates a source of funds.

Numbers may not add due to rounding.

The revenue outlook

1993-94 1994-95 1995-96 1996-97

(billions of dollars)

Personal income tax 51.1 56.8 60.4 64.5
Corporate income tax 9.8 13.0 15.5 16.3
Unemployment insurance

premiums 18.2 18.9 19.7 18.5
Excise taxes and duties

Goods and Services Tax 15.7 16.6 17.4 18.3

Customs import duties 3.7 3.8 3.3 3.0

Other excise taxes 7.4 6.7 7.4 7.5
Other tax revenues 1.6 1.8 1.8 1.8


Total tax revenues 107.3 117.6 125.5 129.9
Non-tax revenues 8.7 7.4 7.7 7.5


Total budgetary revenues 116.0 125.0 133.2 137.4

(per cent)
Per cent of GDP

Tax revenues 15.1 15.8 15.9 15.8

Total revenues 16.3 16.7 16.9 16.7

The expenditure outlook

1993-94 1994-95 1995-96 1996-97

(billions of dollars)

A. Major transfers to persons

Elderly benefits 19.9 20.6 21.2 21.7

Unemployment insurance

benefits[1] 17.6 15.3 14.3 13.7

Veterans allowances

and pensions 1.7 1.9 1.8 1.7


Total 39.3 37.7 37.2 37.2

B. Major transfers to

other levels of


EPF/CAP/Canada social


Total entitlements (29.0) (29.4) (29.7) (26.9)

Cash transfer 16.8 17.3 16.4 12.9

Equalization 7.8 8.5 8.9 9.3

Transfers to territories 1.1 1.1 1.0 1.0

Other 1.5 0.1 - -


Total[3] 27.1 26.9 26.3 23.2

C. Subsidies and other transfers

Business 3.7 3.8 2.5 1.9

Indians and Inuit 3.3 3.7 4.0 4.2

International assistance 2.7 2.6 2.2 2.2

Science and technology 0.9 0.9 0.9 0.9

PUITTA 0.2 0.3 0.1 -

Canada Infrastructure

Works Program 0.4 0.8 0.3

Other 6.2 5.6 4.9 4.3


Total 17.0 17.3 15.4 13.8

D. Crown corporation

expenditures 5.3 4.8 4.5 4.2
E. Defence[4] 10.9 10.8 10.3 9.7
F. All other departmental

spending[4] 19.8 20.6 19.2 17.9
G. Other net operating

requirements 0.9 1.9


H. Program spending 119.3 118.3 114.0 107.9
I. Restructuring costs 0.7 2.6


K. Total program spending 120.0 120.9 114.0 107.9
L. Public debt charges 38.0 42.0 49.5 50.7


M. Budgetary expenditures 158.0 162.9 163.5 158.6

[1] Includes benefit payments only; administrative costs are
included in all other departmental spending.

[2] Through to 1995-96 includes Established Programs Financing
(EPF) and Canada Assistance Plan (CAP). For 1996-97, refers to
proposed Canada Social Transfer.

[3] Includes cash transfer component.

[4] Excludes restructuring costs in 1993-94 and 1994-95 which are
shown separately.

© 1995 Her Majesty the Queen in Right of Canada


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