Other transfers amounted to 13 per cent of spending. National defence accounted for 7 per cent and Crown corporations almost 6 per cent of all government spending. That left about $12 billion for all other government departments and agencies, about 11 per cent of the total. The pool of $12 billion is what Canadians thought could be trimmed to resolve a $40-billion deficit. Those who thought that cutting out the waste and inefficiency in government operations would eliminate the deficit had limited insight into the nature of government spending.
The Conservative plan to reduce the deficit had three elements. First, a growing economy would produce higher revenues. Second, program spending would be limited to increases at or below the rate of inflation. Third, selected spending cuts would be made in low- priority areas. Taken together, these three elements would slowly strengthen government finances without causing any great shock to the economy. The plan was incremental, and not exciting.
Holding spending increases to the rate of inflation might not seem particularly ambitious, but it would be a Herculean achievement given what had transpired in the previous two decades. From 1968 to 1984—the Trudeau years—the average increase in program spending was 13.1 per cent per year. In the early and mid-1970s, the average increase was more than 17 per cent per year. The record year was 1974–75. It was just after the NDP propped up the Trudeau’s minority Liberal government that program spending increased by a whopping 27.9 per cent. Out-of-control spending and persistent deficits took their toll on government finances. During the Trudeau era, Canada’s national debt increased tenfold, from $19.2 to $194.4 billion.
During Wilson’s first year as finance minister, program spending decreased by $800 million, or 1 full percentage point. The reduction was modest but nonetheless earth-shattering: the brakes on spending had clearly been applied. In the first four years of Conservative administration, program spending increased on average 3.8 per cent, one-third the level of the increases of the previous administration. Relative to the size of the economy, program spending in Mulroney’s first term declined from 18.5 per cent of GDP (gross domestic product) to 15.7 per cent. Had government spending maintained the same share of the economy during Mulroney’s first term, the size of the deficit would have been at least $17 billion higher than was ultimately recorded.
Spending control is only one side of the deficit equation, although this was clearly the side that most Canadians wanted the government to pursue. Nonetheless, government revenues increased during Mulroney’s first term by some $33 billion, rising from 15.7 per cent to 16.9 per cent of GDP. Economic growth was the primary reason for higher revenues, although the government also imposed “temporary” surtaxes and the de-indexation of various tax elements to help bring the deficit down.
All this left Canadians confused. Revenues were rising, the government talked about being tough on spending, but the country was still plagued with huge deficits. The problem, which most Canadians did not understand, was the debt.
To help understand the burden of debt, it is worth looking at what happened to government operations from the 1960s to the 1990s, excluding interest on the accumulated debt. For most of the 1960s, the government had healthy operating surpluses, with revenues exceeding program spending by more than $5 billion. In the 1970s, the federal government spent $16.3 billion more on programs than it received in revenues. This meant that for an entire decade there was no residual revenue to pay the interest on the debt. In other words, Canada borrowed every cent needed to pay the interest on the debt. In the early 1980s, before Mulroney came to power, operating deficits totalled $36.9 billion. In 1984–85, the operating deficit was $12.2 billion. By the end of Mulroney’s first term, that operating deficit had been converted to an annual surplus of $7.6 billion, a turnaround of $19.8 billion.
Despite remarkable improvements in the operating position, the deficit by the end of Mulroney’s first term remained stubbornly high, at $27.9 billion. The big financial problem was the debt. The government tried to claim some success, citing that relative to the size of the economy, the deficit had shrunk almost in half, from 8.3 per cent to 4.6 per cent of GDP. Yet it was easy for opponents of the government to ridicule any boast of progress, as the overall debt load during this period had risen from $194 billion to $314 billion, an increase of 62 per cent. Relative to the size of the economy, the debt rose in each year of Mulroney’s first term, from 43.2 per cent of GDP in 1984–85 to 51.3 per cent in 1998–89.
Relatively high interest rates, designed to combat inflation, exacerbated the problem of the debt. The average interest rate on Canada’s outstanding debt during Mulroney’s first term was 11.6 per cent. Compare that with the rate for 2004–05, which was
6.8 per cent, a difference of almost 5 per cent. Such a difference on a $314-billion debt in 1988–89 would have produced a dramatically different bottom line. But the government and the people wanted a balanced budget, and not even the most optimistic forecaster could predict a balanced budget over the short or medium term.
The Mulroney government deserves substantial credit for making significant progress in turning the finances of the nation around. It took control of government spending, limiting increases to below the rate of growth of the economy. It brought in more money from a growing economy and from selected tax measures. It turned a $12.2- billion operating deficit into a $7.6-billion operating surplus. Had the Mulroney government, throughout its first term in office, maintained the previous Liberal government’s relative level of spending and taxation, the deficit would have been more than $60 billion. Because of the debts in place when Mulroney took office, the best it could accomplish at the end of its first term was to reduce the deficit to $29 billion. Canadians, and western Canadians in particular, were not impressed. It was hard for Mulroney to explain to even the most sophisticated observers that such a deficit was an accomplishment.
Certainly Preston Manning was sophisticated, and he understood government finances. But Mulroney’s accomplishments were of little consequence to Manning. Future deputy prime minister Don Mazankowski could see that: “Manning was always organizing something.” From his writings and activities, one could conclude that Manning was inclined to be unimpressed with Mulroney even before he was sworn in as prime minister. Some might go so far as to say Manning wanted Mulroney to fail. If Mulroney and his massive majority could not deliver the sort of government demanded by western Canadians, suggested Manning, then maybe the country needed an alternative. His alternative.
Most westerners could readily list their disappointments with the Mulroney government’s first term: patronage abuses, political scandal, perceived slowness in responding to western grievances about the National Energy Program, and even the government’s general sensitivities towards Quebec. The much-hated deficit was enough to make western blood boil. But even these issues, taken together, were not enough for westerners to turn on the new Conservative government so early in its mandate. There was not yet enough of the groundswell Manning was looking for to launch a new political movement. But that did not mean Manning was not trying.
At a meeting on October 17, 1986, Manning made the case to some senior oil industry executives “for a new federal political movement dedicated to reforms that would make the West an equal partner in Confederation.” It was a speech Manning had been delivering in his mind and in public for the past twenty years. Manning expressed his view that the West would produce something new provided it had the leadership and funds to do the job. Not everyone was convinced. Manning remembers, “One of the people in there was a pollster, David Elton, who at that time was head of the Canada West Foundation. I used him as a pollster in some of my consulting work, and he was intimately familiar with polling data, particularly in Western Canada. David was sympathetic to what I was saying but said, ‘Look, my heart is with you but my head will tell you that there is absolutely no proof in the polling data that there is a market for a new political party of any kind in Western Canada.’” While there was agreement at the meeting that a gathering of like-minded westerners would be a good start for a new political movement, they realized they still needed a spark to fan the flames of discontent. That spark came not more than two weeks later, ironically on Halloween.
On October 31, 1986, the Mulroney government announced that a maintenance contract for Canada’s CF-18 fighter jets was being awarded to Canadair of Montreal, Quebec. This award overruled the recommendation made by a panel assembled to evaluate competitive bids. The panel had determined