It never occurred to me that we would again be in a budget debate in the House of Commons, after a year in which we had one of the most rapid increases in prices in the history of Canada, still trying to get the government to recognize that not all inflation comes from abroad, that we do have domestic inflation and that it is indeed a pervasive, significant, almost destructive force in Canada at the present time. The report of the Department of Finance which was tabled before the budget shows that with respect to the OECD figures which the government likes to quote, using a price deflator which the report indicates is the best measure of inflation, only one other industrialized country in the world, Japan, had more inflation last year than Canada. I certainly hope that the Prime Minister and the Minister of Finance (Mr. Turner) will not be wandering around the country saying we have had a great record in this respect. We have had a terrible record. The statistics in the government's own report, at page 31, show without doubt that the rate of increase in inflation in Canada in 1973 was higher than in England, higher than in the United States, higher than in France, and that the only country which had a higher rate was Japan, which had its problem with oil.
I used to try to figure out why the cost of living increase was about the same in the United States and Canada. I would call my friends in the United States and ask how much of their inflation came from oil price changes. They would tell me it was 22 per cent to 24 per cent. Mr. Speaker, we did not have to cope with that problem in this country. It is clear that we have inflation throughout the entire economy. It is a mistake to suggest to the Canadian people that we cannot do anything about inflation. For
some time the Economic Council of Canada has said that our goal should be to have an inflation rate not more than that of our trading partners. I have never accepted that. It is an absolute surrender to accept that sort of proposition. But the fact now is that our inflation rate is much higher than that of our trading partners.
However, the real issue is not what our inflation rate is compared with Japan, the United States or Great Britain: the real issue is what inflation is doing to hundreds of thousands of Canadians right now. They are seeing their savings destroyed because of the amount of inflation, 10 per cent this year, 10 per cent last year, and no one yet knows how much it will be this year. Hundreds of thousands of people are finding it hard to live on fixed incomes when faced with the rapid rises in the cost of living. The escalation in social security payments does not begin to compensate for increased price levels. Since last July the average hourly increase in wages has been less than the rate of increase in prices. For the first time in recent Canadian history, the average Canadian workman is falling behind because of inflation.
The Minister of Finance likes to talk about disposable income. Of course he knows it includes profits, dividends and other things. Real income is what concerns the man who is working and it is being wiped out by what is happening in our economy at the present time. The Prime Minister likes to say he is worried about what might happen to the low-income group because of some type of incomes policy. Yet he is presiding over a government that has allowed a massive redistribution of income against low-income groups because of inflation. This is a situation that is really intolerable.
Not only are individuals being badly hurt, but we are reaching a stage in this country where many of our institutions, many of the things that are fundamental for the well-being of the country are beginning to break down and be destroyed. Has there ever been a time before when industries such as the steel industry have had to open up their collective bargaining agreements in the middle of a contract to pay their employees more because inflation was so great? What will become of general collective bargaining agreements if this continues? Have we ever been in a situation in this country where the government has had to pay a bonus to people to get them to buy Canada Savings Bonds? At traditional interest rates the government has not been able to sell these bonds.
We are in a situation in which one of the most important institutions in the country, the whole institution for the channelling of savings into the investment market, is gone. Today in the stock market, price earnings ratios are as attractive, if you can imagine it, in terms of investment as at any time since the thirties, yet nobody is buying common stocks. Why? It is because no one has any faith that the government can get inflation controlled.
Clearly, we cannot ask people to pay ll'A per cent for housing loans and 14 or 15 per cent for consumer loans. Yet last night the Minister of Finance brought down a budget which, in its basic policy prescriptions, in its basic approach to inflation is precisely the same as the budget brought down a year ago; and that budget is one of the
The Budget-Mr. Gillies
massive failures in economic policy implementation in Canadian history. It was a budget that failed in any way to halt the increase in inflation in the last year.
The minister is correct when he says that the solution to inflation has to be an increase in supply. Everyone realizes that is the critical problem, although we sometimes forget that prices are set by supply and demand and excessive demand in an economy can create problems as well as can shortage of supply. But even here the logic is somewhat mixed. The minister says that our inflation all comes from abroad and we will solve it by increasing domestic supply in Canada. I do not believe we can increase our domestic supply sufficiently, Mr. Speaker, to solve the inflation problems of the world, and I am sure the minister would agree.
The critical problem, the reason that we are in difficulty in regard to inflation in this country today and the reason the policies put forth by this government will not work, is simply that the policy for increasing supply involves placing demand into the system. What we have now is an increase in aggregate demand, but the supply it is expected to generate will not be for some time. The problem is, how do you bridge the gap? Everyone knows that if supply improves, the inflationary situation will improve. But what happens in the meantime? That is why you need a policy for the short run.
It is foolish to deny that is the situation. Examine housing. In the city of Toronto prices are increasing 20 per cent to 30 per cent and the amount of new housing being constructed is equivalent to new family formations. There is no way you need increases of 20 per cent or 30 per cent to stimulate housing supply. Prices are escalating because of the decline of investment opportunities in other areas, and particularly with the rise in inflationary expectations people are investing in the real estate market. You cannot advance any reason why housing is rising as it is, except for inflationary speculation. Such price increases do little to generate more supply in the economy, and unless you are willing to deal with the problem of inflationary expectations now, no policy will work. This country is full of inflationary expectations today, creating one of the major problems of the economy. Why else is the price of gold at $200, if it is not for inflationary expectations?
The second thing that is equally true is that once you have inflationary expectations, all kinds of imperfections develop in the market. The basic premise under which the budget was brought down a year ago and under which the budget was brought down last night is that we have normal expectations and we have perfect competition in our markets. Neither is true, Mr. Speaker. As long as neither is true we will not be able to solve the inflationary problem in the economy unless we deal with the two things directly and completely. If we had perfect competition in the marketplace, one could easily see that rates of increases in profits would be equivalent to rates of increases in sales, times past profit margins, plus increasing costs and productivity changes. The present rate of increase in profits is an indication of the imperfections in the marketplace and of groups being able to capitalize on the basis of the situation as it exists now.
What is the government going to do about the situation? Ignore it? Something must be done to prevent non-com-
May 7, 1974
The Budget-Mr. Gillies
petitive situations from creating abnormal increases in prices which Eire not justified by any sort of competitive situation in the market. That is why we suggest an incomes policy-an incomes policy designed first to work against inflationary expectations and second to protect people from prices that result from the market because of lack of competition. You may say that there is a better way of dealing with this problem. I doubt it. I do not know what it is. But you cannot ignore the problem. If you are serious about solving the inflationary problem in this country, not by moderating demand but by increasing supply, you simply have to have policies to deal with the transitional phase, otherwise there will be as much inflation as we have already-10 per cent last year and 10 per cent this year. The tragedy in this budget is that it does not recognize this fundamental proposition.
I am sure no one in this House is more dedicated than my party to the proposition that the way in which we get maximum use of our resources is through a free competitive market operating under normal expectations. But we do not have that, Mr. Speaker. The real question is, how can we get to such a situation? I am desperately frightened that as long as we continue to have inflation at the rate we have we will be involved with 12 per cent interest rates and 15 per cent interest rates, the equity market not working and the decline of all confidence in the economy. It seems to me that we are going to be in for some difficult times that cannot and will not be solved by the temporary kind of band-aid or cosmetic-although I do not like those words-that the minister is advancing. We cannot solve the problems of poverty in Canada, the problems of housing, the problems of income redistribution and the problems of regional disparity until we do something about inflation. And, Mr. Speaker, we cannot do something about the inflation problem under the present policies being followed by this government. We must have a totally new approach if this problem is to be brought under control.
In this party we have never suggested-and I say this for the leader of the New Democratic Party (Mr. Lewis)- that there is any simple, easy solution to inflation. Of course there is not. It is a most difficult problem and it is not going to go away. But it is not going to be solved by the sort of policies that we have used in the past, because traditional policies do not work. For example it has been suggested that one of the ways to slow down the rate of inflation is to raise interest rates. But that does not now slow down inflation, at least not with the level of expectations that we have at the present time. Who would have thought that mortgages in Canada would command 12 per cent? Who would have thought that we would have a plethora of consumer lending at over 15 per cent, 18 per cent and up? Who would have thought that with interest rates at current levels for prime loans we would have as much capital investment as we have?
High interest rates today are not anti-inflationary; they are inflationary because they are looked on as a cost and are passed on in the price people pay for the products. The fact is, the traditional policy tools are not working. I would hate to try to speculate on what level you would have to put interest rates in this country to start an anti-inflationary movement. The government is caught in a trap. It is suggested that the rate of inflation can be
slowed down by slowing down the rate of increase in the money supply. But how can you slow down the rate of increase in the money supply when inventories, for example, have to be financed at very high prices and with money borrowed at very high rates of interest? We are caught in a very difficult situation, one which can only be solved, I suggest, by adopting substantially new approaches.
Subtopic: THE BUDGET