Canada for the Canadians
By NICHOLAS DAVENPORT
ENTERPRISING business people have a great advantage over governments, for when they get into trouble they can put their companies into liquida- tion and let their creditors sort out the loss among them- selves while they start up a fresh enterprise in another country. The new Canadian Government of Mr. Lester Pearson must have longed to appoint an official receiver for the near-bankrupt enterprise left by his Conservative predecessors. For years Canada had been behaving like a reckless improvident spendthrift, borrowing madly from the US and either pledging her raw materials, her birthright, as collateral or selling the equities. (When the last Governor of the Bank of Canada, Mr. Joseph Coyne, was tactless enough to repeat this ad nauseam he was forced into resignation.) Her net long-term liabilities to foreigners are now around $17,000 million and her net interest and dividend payments abroad exceed 5560 million (having doubled since 1931). She has to borrow even to make the interest and dividend payments. The deficit on her balance of payments reached a peak of 51,500 million in 1959 and was $848 million last year. Yet under her Conservative Government she was mad enough to keep her dollar at a premium over the American dollar (thus stifling her exports and stimulating im- ports) until the exchange crisis of 1962 forced her into devaluation. The present exchange rate is 921 per cent of the US dollar.
It was with a sigh of relief that sane business people welcomed the advent of a Liberal Prime Minister who chose as his Finance Minister so eminent a pundit as Mr. Walter Gordon, one- time chairman of the Royal Commission of 1955 on Canadian economic prospects. But the result was disastrous. Mr. Gordon's first Budget was so inept that some of his old admirers wanted to have his head examined.
The first mistake Mr. Gordon made was to seek the advice of an expert firm of industrial consultants before the Budget' was presented. (He was himself a member of a family firm of business consultants.) Imagine our Mr. Reginald Maudling calling in Messrs. Colman Prentis and Varley, not to advise on the Conservative elec- tion campaign (which will now probably follow his next Budget), but on the Budget itself! Then Mr. Gordon called in as temporary advisers three' academic types from Toronto. The result was, as you might expect, a lot of political in- expertise. For example, a 30 per cent securities tax was imposed on 'takeovers' by non-residents, which was considered so impracticable (banks being legally bound not to disclose the names of 'nominee' holdings) and so disruptive to the security markets (then badly slumping) that it had to be withdrawn within a week. Then a 11 per cent tax was put on construction materials (previously exempt from sales tax). This caused a great outcry, because it would have held up the building and modernising of homes, hospitals, schools, etc., which had been planned and pro- jected on the basis of their modest indirect sub- sidy. This tax was promptly cut back to 4 per cent. Finally came second thoughts on the divi- dend-withholding tax, which was to be increased to 20 per cent for companies which did not have 'a degree of Canadian ownership,' that is, around 25 per cent. This would have been impracticable also, for a non-resident company might offer 25 per cent of its shares to Canadians, who would either not subscribe to them fully or sell their shares, if fully subscribed, subsequently at a profit. So 11r. Gordon conceded that the higher withholding tax would not apply if no more than 75 per cent of the shares are held by a single non-resident company and its associates.'
Now Mr. Gordon had been preaching for many years that something must be done to re-establish Canadian ownership and control of the Canadian economy. It was a worthy enough aim and every Canadian supported it in principle. But the clock cannot be put back. Canadians could not have developed their vast natural resources so quickly ----too quickly as we have seen in the case of oil, which is now in over-supply throughout the world if they had not borrowed freely from foreigners or sold all or part of their equities to the Americans. .Having made such liberal use of foreign capital, they should not now complain of its presence in Canada. By and large they have now sold, mainly to the Americans, about 75 per cent of their oil and natural gas, nearly per cent of their minerals and over 50 per cent of their manufacturing industry. Of their total liabilities to foreigners, no less than 73 per cent is now held in equity form. Looking at the awkward balance of payments deficit, thiS is the best thing that could have happened, far in the event of a world trade depression or a severe fall in the world prices of raw materials dividends would be cut and the burden of the outgoing payments to foreign investors would be lessened.
The only quick way for Canadians to obtain control of their own resources is by confiscating foreign holdings, which is unthinkable. The gradual way is to use more of their own savings in buying out the equity shares held by foreigners, but this would slow down their present economic activity if pressed very far and increase their domestic unemployment. A wise Finance Minister would try first to stop the outflow of Canadian capital abroad and then to restrict the further inflow of foreign capital. But he would go slow, recognising that the past inflOw had enabled Canadians to enjoy a very high and unearned standard of living. It was surely a reflection on Mr. Gordon that when Mr. Kennedy proposed his swingeing tax on the purchase of foreign securities, which would have stopped American capital flowing into Canada, an Ottawa deputation was sent post-haste to Washington to get the President to make an exception for the purchase of Canadian securities, which he did. Ottawa could not allow the Ameri- cans to save their own dollar at the expense of the Canadian! But I am doubtful if they will be able to hold their 92-1 per cent rate for very much longer.
From past experience I know that whenever one makes a friendly criticism of Canadian finan- cial affairs one gets into hot water. If I were to protest that I really do want Canada for the Canadians. I would get angry letters from the Front de Lihdration Quebecois, who are deter- mined to. secure the withdrawal of Quebec from the Confederation. So 1 will end on a humble wish which will meet with universal sympathy-- that Mr. Lester Pearson succeeds in getting a new Finance Minister this autumn-. but not from Toronto.
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