Wednesday, November 29, 2006

Setting the Record Straight

Perfect economic storm sunk Rae ship of state

Jordan Grant
Special to The Windsor Star

Wednesday, November 29, 2006

A continuing sideshow of the federal Liberal leadership race has been the spectacle of Bob Rae being boxed about the ears over his economic record as premier of Ontario. But a little history please.

In 1989-91 a "perfect storm" of federal initiatives under Conservative prime minister Brian Mulroney swept across the land:

- The Canada-U.S. Free Trade Agreement set off a half-decade-long major restructuring of Canadian business.

- The introduction of the GST triggered a seven per cent inflationary surge.

- The Bank of Canada launched a single-minded quest for zero inflation, raising the prime interest rate to an eight-year high of 14.75 per cent. The four per cent spread over U.S. rates pushed the loonie up almost 30 per cent to a five-year high.

This high interest rate-high dollar combination just as the border opened up spelled disaster for Canadian industry. Our manufacturing plants could no longer compete with U.S. producers that quickly scaled-up to become the North American suppliers of everything from appliances to toothpaste.

Job losses from this industrial restructuring were foreseen -- in 1988 Mulroney promised "the finest adjustment and retraining programs that exist anywhere." Instead, the federal government cut billions in unemployment benefits and social and regional programs targeted by the U.S. as unfair trading practices.

The Ontario government would soon be faced with swelling welfare rolls and hard choices. Then-premier David Peterson saw the bad news coming, and called an early election. To everyone's surprise, Bob Rae landed in the hot seat in September 1990.

By the time Rae took office, both the federal and provincial deficits were soaring. In its first budget, the NDP government attempted to cushion the recession by raising welfare rates and fast-tracking capital projects such as Highway 407 and subway expansion.


This added $2 billion to an inherited $8-billion structural deficit. But within a year Rae realized that a provincial government alone had no hope of countering such powerful economic forces.

Rae's government had taken office with an agenda to narrow disparities and improve ordinary people's lives. But with revenues collapsing, it had to focus on measures that would not strain provincial coffers: enhanced environmental standards; labour legislation that, despite initial controversy, contributed to a period of sustained labour peace and improved productivity; a forward-thinking new Planning Act; streamlining Ontario Hydro; and helping to save and restructure critical companies such as Algoma Steel and the Bombardier aircraft plant.

It's remarkable that the government accomplished as much as it did when "every cabinet meeting was dominated by the agenda of even more spending reviews and cuts."

Rae worked to win the confidence of the business community. He discarded some policy proposals (such as public auto insurance) and reached out to understand the business perspective. The government introduced a "market-led" industrial policy focused on enhancing the competitive fundamentals -- education and training, infrastructure, sectoral networking, export promotion, R&D and innovation.

"I was trying to move the party closer to the centre, to accept the market as a fact of life and to understand the need to work out a lasting understanding with business."

This lost Rae the support of some NDPers and was part of a philosophical journey that would eventually lead him to the Liberal party.

With the deficit still ballooning, the premier realized that more drastic spending restraint was needed. Most provincial spending ultimately goes to pay the almost one million people who deliver public services. Rae was faced with equally unpalatable alternatives: let the deficit grow even further and/or raise taxes significantly; or chop services and drastically cut the size of the public payroll.

To his credit, Rae devised a middle strategy termed the "Social Contract." Rather than devastate the lives of tens of thousands of families and drastically impair public services through layoffs, he asked everyone in the public sector to share the burden. Setting out a requirement to save $2 billion a year, he gave all public sector employers and unions an opportunity to find their own means of achieving their share of the savings. The guidelines were: Maintain services, minimize job losses, no general wage increases and protect the income of all employees earning less than $30,000.


Private sector unions had shown a creative flexibility during restructuring negotiations to keep their employers afloat, trading off lower wages or working hours for job security and future benefits. Disappointingly, many of the public sector unions dug in their heels and rejected the Social Contract on principle. For those who couldn't reach agreement, the government imposed up to 12 days a year off without pay (popularly known as "Rae Days").

The Social Contract was a typically Canadian and Liberal-type of creative compromise, but further distanced Rae from the NDP's political base. He regrets that he didn't do more to persuade others of "the necessity and logic and fairness of what we needed to do." From this experience and later mediating many difficult disputes he says, "I have learned the need to listen, to show respect, to accommodate, and to persuade."

Over the next couple of years through attrition and early retirement, the public service shrank substantially and program spending dropped. With a Liberal government in Ottawa shifting monetary policy to support broader economic objectives, the Ontario economy was well on the road to recovery. By 1994 it was leading the country in new investment and economic growth.

But Canadians were still angry about the damage wrought by the recession. They expressed it any way they could -- defeating the Charlottetown accord, turfing not just the NDP in Ontario but the Liberals in Quebec and punishing most other provincial governments. Notably, while Rae's NDP was reduced to 17 seats, Mulroney's Tories lost all their Ontario seats.

Rae has responded to jibes about his economic record with restraint and dignity. Let the facts speak for themselves -- they throw a bigger punch than the hooks and jabs of his detractors.

Jordan Grant is president of Seaton Group and in the 1990s as chairman of the Bank of Canada for Canadians Coalition, provided macro-economic advice to the Chretien/Martin government.


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