Social Spending ,Taxes, and the Debt
Andrew Coyne

For a prime minister first elected on the promise of The Just Society, Pierre Trudeau's legacy in the field of social policy is surprisingly modest. The ninefold increase in federal spending he oversaw between 1968 and 1984 might be expected to have purchased some comparable advance in social justice. Yet the social policy achievements of the four governments he led can only be described as piecemeal.
The major pillars of the Canadian welfare state, after all, were already in place before Trudeau became Prime Minister: unemployment insurance (1940), family allowances (1944), Old Age Security (1952), the Canada Pension Plan (1965) and Guaranteed Income Supplement (1966) for seniors, the Canada Assistance Plan (1966), and of course, medicare (1967). The Trudeau years were marked more by incremental adjustments to existing programs -- increasing GIS payments, say, or loosening unemployment insurance rules -- than by any major new departures in social policy. While the 1978 refundable child tax credit was a noteworthy innovation, it fell far short of the guaranteed annual income that was the real objective of social reformers of the day. By the end of the second Trudeau government, the opportunity of a more ambitious social agenda was lost, swallowed whole by provincial obstructionism, economic instability, and, more than anything else, by the federal government's own mounting fiscal crisis.
Net federal debt in fiscal 1968, just before Trudeau became Prime Minister, was about $18-billion, or 26 per cent of gross domestic product; by his final year in office, it had ballooned to $206-billion -- at 46 per cent of GDP, nearly twice as large relative to the economy. In an age in which we have grown used to debt-to-GDP ratios in the 75 per cent range, those numbers may have lost their power to shock. It was the Conservatives who took power in 1984, many recall, who, in the nine years that followed, ran the debt up to more than $500 billion. But the truth is that the relentless rise in the debt that has all but consumed federal politics for the past decade or more was set in motion during the Trudeau years. By the last days of the ancien regime, its momentum was unstoppable.
In the two decades after the end of the Second World War, the government of Canada ran a deficit on its operating account -- that is, spent more on programs than it collected in revenues -- precisely four times. Ottawa began the period with a very large debt, most of it incurred to finance the war effort. But by running operating surpluses in most years, postwar governments offset some or all of the cost of interest on the debt: if the government did not always manage to record an overall surplus on its books, the deficit was never very large. By 1965, federal finances were in as robust shape as they had ever been. Interest payments, as a share of revenue -- a crucial measure of fiscal health -- stood at just 11 per cent.
In the first half of the Trudeau era, roughly corresponding with the first two governments, the Liberals kept much to this tradition. Though spending increased at an extraordinarily rapid pace in those years, so did revenues. The government ran small operating surpluses from 1968-69 through 1974-75, enough to ensure the overall budget deficit, including interest charges, never exceeded 2 per cent of GDP, although only in Trudeau's first full year in power, 1969-70, was the budget actually in balance. With the economy growing strongly, the debt-to-GDP ratio continued to fall, reaching a post-war low of 18 per cent in fiscal 1975. The entire accumulated federal debt at the end of that year, at $27-billion, was less than the government's annual budget.
After that, everything changed. The years from fiscal 1976 to fiscal 1985 were, fiscally speaking, a lost decade: ten straight years in which the government ran not only an overall deficit, but an operating deficit. The overall deficit throughout this later phase never fell below 3 per cent of GDP; it averaged 5.6 per cent. In that calamitous final year of Liberal rule, 1984-85, total spending exceeded revenues by more than 50 per cent. The deficit that year, at $38.5-billion, was equal to nearly 9 per cent of GDP, a record in peacetime. Interest payments alone were now enough to consume nearly one-third of every revenue dollar. With interest costs compounding at a rate of 13 per cent per year, and the debt doubling every three or four years, that ratio could only grow.
No wonder the Liberals' successors had such trouble bringing the debt to heel. Summing across the nine years of Conservative government, the federal government actually spent about $14-billion less on programs than it collected in revenues. Every dollar of the $300-billion added to the debt during the Tory years was interest on the debt the Liberals left behind.

What explains this performance? Was the system already implicitly overloaded by the social innovations of the Pearson era, whose unaffordability was only revealed once the rapid economic growth of the 1950s and 1960s had begun to fade? Or was it the Trudeau governments's own reckless spending that left federal finances so exposed to the risk of a downturn? Or, as some have argued, is the explanation to be found in some other cause, whether in the ruinously high interest rates that arrived towards the end of the 1970s, or in the continuing erosion of the federal revenue base throughout the decade?
Let's take the last question first. How much of the Liberals' legacy of debt should be accounted to increases in expenditures, and how much to a decline in federal revenues? Was it a case of too much spending, or too little taxes?
To answer these questions, we first need a dependable yardstick against which to measure movements in spending and revenues over the years. It is interesting, even amazing to note that program spending, over the entire 17-year period, rose at an average rate of 13.3 per cent per year. But it is not quite meaningful. Without knowing how fast prices increased in the same period, we cannot even say whether these figures represent real (i.e. adjusting for the puchasing power of the dollar) increases or decreases, let alone whether the rate of growth of either was appropriate. Mere dollar figures, in short, are not sufficient; significance is measured in relative, not absolute terms. But relative to what?
One popular measure expresses both spending and revenues as a share of GDP. [See chart 1.] From 15 per cent of GDP in fiscal 1968, program spending rose like a shot to nearly 20 per cent in fiscal 1976. But from there it declined for several years, to 17 per cent of GDP by 1980-81 -- precisely the period in which Liberal profligacy is supposed to have reached its peak. Revenues, meanwhile, followed much the same pattern, rising from 16 per cent of GDP in 1968 to more than 19 per cent in 1975, before falling away to barely 15 per cent of GDP by fiscal 1980. On this reading, then, it seems plausible to put the blame on revenues for the buildup in debt of the late 1970s. Had the federal government merely maintained its revenue take at 1975 levels, it would not have run such large deficits -- indeed, it would probably have been in surplus, at least until the 1981 recession hit.
There are problems with this approach, however. The GDP yardstick implies that fiscal policy is a simple function of the resources the government has at its disposal. That's all right when it comes to taxes. When we want to know how big the tax burden is, we put it in terms of how much of our income the government has taken, not how much revenues it has raised. Left unchanged, taxes would take about the same bite out of GDP from year to year; revenues would rise more or less in line with economic growth. Only when revenues rise or fall as a share of GDP do we say there has been a discrete shift in tax policy.
But it is quite misleading to measure spending in the same way. By this logic, spending may be said to have been "cut," no matter how how fast it has grown -- just so long as the economy grew a little bit faster. A government would be said to have made no change in policy if it merely raised spending in line with GDP, year after year. But this is plainly false. The link between revenues and economic growth may be an automatic one, but no such rule applies to spending. The only reason it would rise at such a pace is if the government decided to raise it: that is, by a series of deliberate policy changes.
As a measure of public spending, then, share-of-GDP comes with a bias to big government. The implication is that spending should always rise, not because it needs to, but because it can: the revenue dividend from economic growth should automatically accrue to government, rather than to the taxpayer. A better yardstick would measure spending relative to the purposes for which it is intended. If, for example, the purchasing power of the dollar declines, or if the population that consumes government services grows, then a constant level of spending in current dollar terms would mean the government could provide fewer goods and services to each person. The steady-state policy would rather maintain a constant level of real per capita spending: Any additional spending beyond what was required to keep pace with increases in prices and population would be considered a discretionary increase, while anything less than that would be a cut.
Recasting federal spending and revenues in real per capita terms provides a clearer picture of what really happened in the Trudeau years. To be sure, the first two Trudeau governments again mark the period of maximum acceleration in spending. The total of $18-billion that the federal government spent on all programs in fiscal 1968, inflated into 1996 dollars, works out to about $2300 per person. [See chart 2.] By 1976, just eight years later, real per capita spending had rocketed to nearly $4000, an average annual increase of 7 per cent -- on top of inflation, on top of population growth. Contrary to what the GDP yardstick might have suggested, however, spending never really declined from that plateau. There was only one year of serious restraint, 1979-80, when real per capita spending fell by 5 per cent -- but even that left it higher than in any year before 1976. From that sub-alpine base, spending was ready to begin the assault on Mount Recession. At its all-time peak, in 1985, the federal government was spending more than twice as many real dollars on each citizen, some $4750, as it was in 1968.
As for revenues, here, too, there was a marked decline after 1975 -- but 1975 was an exceptional year, when federal revenues were inflated to record levels by the oil boom. There was no prospect of maintaining revenues at such a level. Neither was there any need. A falling tax share in a growing economy can still mean higher revenues overall. Even at their 1980 low point, real per capita federal revenues were still higher than they were in any year before 1975, the last year the operating budget balanced. Which means they would have been more than adequate to pay for program spending, had spending remained at pre-1975 levels. There was no revenue shortage, in short. Program spending, remember, had already grown nearly 50 per cent in real per capita terms from 1968 to 1974. Had it then stabilized at what was then an all-time record of around $3400 per person (in constant 1996 dollars) -- about where it is today, as it happens -- revenues would have exceeded spending in every single year since then. [See chart 3.]
That the government was unable to exercise even this mild discipline makes the contribution of later events to the debt more or less moot. Without the string of operating deficits that drove the debt skyward in the late 1970s, the high interest rates that arrived at the end of the decade would not have had such explosive impact. Even if we assume rates would have been no different in the presence of such restraint than in its absence, a constant real per capita spending policy would have been enough to ensure the overall deficit never exceeded $4-billion in any year. Add another 10 per cent to spending to account for the recession, and the deficit would still be less than $8-billion at its peak. The total debt accumulated by 1985 under this scenario would have been less than $50-billion -- a quarter of its actual level. The recent history of Canada would be very different.
From this review of the data it is possible to draw a few preliminary conclusions. The initial social spending buildup, up to about 1972 or even 1974, was probably sustainable at historic levels of taxation -- provided there was no letup in economic growth. But it left the early Trudeau governments precious little margin for error. The 1974-75 recession pushed spending to new heights, which even the most robust revenue stream could not have supported. There was some effort to rein in spending in subsequent years, but not nearly enough; and certainly not enough to accommodate the simultaneous relative decline in revenues. The resulting run of operating deficits could not have been more ill-timed, coinciding with the onset of double-digit inflation and even higher interest rates. By the time the second recession hit, the ship of state was already listing badly. It only took a year of flat revenues to tear a hole right through it.

Why did spending increase so rapidly? A noteworthy early development, as the then Auditor General, Maxwell Henderson complained some years later, was the abolition of the officer of the Comptroller of the Treasury. Until the late 1960s every expenditure of public funds in all departments of government had to pass through a pre-audit by the Comptroller. In its place, it was decided to allow the departments to pre-audit themselves. The result of this experiment, according to Henderson ,was nothing less than "disastrous," and opened the way to the vast expansion in administrative costs that followed.
If the welfare state was largely the work of its predecessors, the Trudeau government gave us the pervasive state. The Trudeau years were marked by a massive expansion in the number and scope of activities within the government's purview. Gordon Osbaldeston, former clerk of the Privy Council, counts a total of 114 agencies, boards and commissions the Trudeau government created in its time in office. It established seven whole new government departments, and twice as many ministries of state. The federal cabinet, which numbered 20 members in 1950, grew to 39 by the time of the last Trudeau ministry. The federal civil service expanded from just over 200,000 employees in 1968 to 244,000 in 1985. Wages and benefits, which had once tracked neatly with private sector norms, escalated markedly after the mid-1960s. By the early 1970s, total compensation for the average federal employee exceeded that of his private sector counterpart by more then 20 per cent.
As much as the government's own spending might have increased, however, it could not compare to the growth in transfers to the provinces, notably for health care, post-secondary education, and social assistance. The Pearson government had established these as shared-cost programs on a 50-50 basis with the provinces. But while the federal government footed half of the costs, it was the provinces who decided how much to spend. In effect, Ottawa had surrendered control of a large section of its budget to another level of government, for whom the delights of spending 50 cent dollars proved irresistible. It seems clear that no one in federal circles had any idea of what they were letting themselves in for: in 1966 the Pearson cabinet reckoned the combined federal-provincial cost of medicare at about $80-million. (The cost today is closer to [$60]-billion.)
From 1967 through 1975, figures from the national accounts show federal transfers to provincial and local governments increasing by 10.8 per cent per year, after inflation -- more than two-and-a-half times the rate of growth in ordinary departmental spending. Alarmed, Ottawa began negotiations with the provinces to limit its contributions, resulting in the 1977 Established Programs Financing Arrangement, governing transfers for health and higher education (it was left to the Conservatives, some years later, to impose similar limits on social assistance, the infamous "cap on CAP."). Henceforth, the federal government would make a fixed per capita contribution to these programs, indexed to the rate of growth in the economy. This restored some predictability to federal finances, and slowed real growth in federal-provincial transfers over the next decade to less than a third its previous rate.
But there was a cost. Not only were the transfers converted to block grants, removing the conditions that had previously been attached, but Ottawa was also prevailed upon to cede more tax "room" to the provinces as part of the deal. Though some limits were placed on the cash component of EPF in later years, the transferred tax points increased in value along with economic growth: a Department of Finance study put the total cost to the federal treasury between 1978 and 1985 at nearly $38-billion, or more than 8 per cent of federal revenues. And there were more goodies. The terms of the equalization program were expanded over the years, broadening the definition of a "have-not" province and embracing many more provincial revenue sources in calculations of revenues to be equalized. The provinces were also compensated for revenues lost as a result of tax reforms introduced in the 1971. By 1984-85, the value of all federal grants, transfers, equalization payments and tax points ceded to the provinces totalled $26-billion, equal to one-quarter of all federal spending in that year.
This was, to be sure, in a long tradition of federal concessions to the provinces. Indeed, one of the more striking trends of the Trudeau years, contrary to the myth of centralization and conflict, was the almost continual backpedalling in the face of provincial demands for more money, more power, or best of all more of both. The practise of transferring tax room had begun in 1957, with the relaxation of the wartime tax "rental" agreements under which Ottawa had taken over the income tax field from the provinces. The Pearson government had ceded further tax room to provinces (read: Quebec) that wished to "opt out" of shared-cost social programs. But it was in the early 1970s that a pivotal change was made. Where before the provinces had been "abated" a share of federal income taxes -- a practice that, at least in theory, set a ceiling on the total tax bite -- provincial taxes were now simply added on top, as a sort of surchage on the federal tax. With no limit remaining on the combined tax load, the way was prepared for the rapid expansion of provincial taxes that followed. In 1967, the provinces controlled 40 per cent of total government revenues; by 1984 their share had risen to more than 52 per cent.


Transfers to persons increased almost as fast as transfers to governments -- 7 per cent per year, after inflation, over the entire 17-year period. One event in particular stands out here: the 1971 reforms to unemployment insurance, brainchild of employment and immigration minister Bryce Mackasey. No single measure is more redolent of the era: benefits were increased from 40 per cent of earnings to two-thirds; as little as eight weeks of work was required to be eligible for benefits, which could be paid out for as much as 51 weeks. The program, until then self-financing, was topped up with a great dollop of subsidy out of general revenue, to pay for extended benefits in regions of high unemployment. The Mackasey reforms are credited with adding as much as two percentage points to the base rate of non-cyclical unemployment. Needless to say, they also substantially raised the cost of the program. From less than $700-million in 1970, UI benefits paid out soared to nearly $1.9-billion in 1972; to $3.8-billion in 1977; to more than $10-billion in 1985. Governments have been slowly pruning the UI program of the Mackasey excesses ever since, but the system of regionally extended benefits remains to this day.
There was more where that came from. The age of eligibility for old age security was progressively reduced from age 70 to age 65. Pensions and family allowances were indexed, then raised further beyond inflation. Even as the deficit mounted to previously unthinkable levels in the late 1970s and early 1980s, the guaranteed income supplement for seniors was increased not once but three times. Yet in the one area of social policy where Trudeau's advisers most hoped to make gains, social assistance, they were stymied, unable to proceed without provincial cooperation. The 1973 social policy review, known as the Orange Paper, had recommended the creation of a guaranteed annual income for all Canadians, a perennial Liberal goal, to be financed jointly between the federal government and the provinces. The provinces at first seemed interested, then balked, fearing -- prophetically, as it turned out -- that Ottawa could not be counted on to maintain its share of funding for the program, with the economy turning sour and unemployment on the rise.
But no area of program spending grew more rapidly, or with fewer evident attempts to control it, than subsidies to business and other agencies and groups, including Crown corporations. From 1967 to 1975, subsidies and capital assistance combined grew by nearly 17 per cent per year, in constant dollar terms; over the entire Trudeau era, they increased five-fold. Much of this money was funnelled through the burgeoning regional development programs, administered through the new Department of Regional Economic Expansion (DREE). All sorts of spending programs were created in the name of job creation and community development; Opportunities for Youth and the Local Initiatives Program (LIP) were two of the more ambitious. There were grants for native groups, women's groups, cultural groups, indeed virtually every interest under the sun could find shelter under the Secretary of State's broad umbrella, in the name of advancing their participation in Canadian life.
Then there were the Crown corporations, whose claim on the public purse grew and grew, until by 1985 the government was spending more than $6-billion just to subsidize its own creations. The Canada Development Corporation, set up in 1971 as a holding company for the government's investments in "strategic" industries, wound up absorbing much of what passed for an aerospace industry in Canada, including such sinkholes as De Havilland (cost to the taxpayer: $400 million) and Canadair ($1.5-billion, most of it in development costs for the Challenger jet). The post office, which became Canada Post Corporation in 1981, cost the taxpayer nearly $1-billion a year in subsidies at its peak. Canadian National Railways was a constant drain on public funds, as was Via Rail, the publicly-owned passenger rail service formed in 1978. Housing subsidies, administered through the Canada Mortgage and Housing Corporation and other agencies, proved an especially lucrative source of funds for the construction industry. From next to nothing in 1968, federal expenditures on housing grew to more than $2-billion by 1985.
In later years, Petro-Canada, which opened for business in 1976 as the government's "window" on the oil industry, proved an increasingly costly fiasco. All told, the journalist Peter Foster, in Self-Serve: How Petro-CanadaPumped Canadians Dry, estimates the cost of PetroCan's adventures to the taxpayer, including the acquisitions of Atlantic Richfield, Pacific Petroleum and Petrofina, at about $14-billion. Nothing so addled government senses in the mid-to-late 1970s as oil, and the gusher of royalties that was expected to flow from the relentless rise in international oil prices. In the early days there were oil import subsidies, meant to spare Canadian business the full impact of the oil price explosion; later there were oil exploration grants, notably the Petroleum Incentive Payments introduced under the 1980 National Energy Program, intended to make Canada self-sufficient in oil. "Canadianization" of the oil patch became a top government priority in the early 1980s -- just in time for oil prices to crash. Dome Petroleum's debt-fuelled buying spree and subsequent bailout left the taxpayer on the hook for hundreds of millions of dollars.
The merits of such corporate welfare may be doubted. But at least they had some public policy rationale, however contentious. Not so for what grew to be far and away the largest single federal budget item, and the fastest growing: interest on the public debt. From $1.3-billion in 1967-68, public debt charges grew to an incredible $22.5-billion in 1984-85. Interest costs now accounted for more than one-fifth of all spending. That left less and less room for spending on social programs. Ottawa was now spending more on interest than it was on health, education, social assistance and unemployment insurance combined. Small wonder that the Trudeau team's more ambitious social policy plans were set aside.
No doubt the astronomic interest rates of the late 1970s and early 1980s contributed mightily to the rise in public debt charges. But these cannot be considered as wholly independent events. Interest rates rose as creditors strove to protect their returns from the effects of rising inflation. Double-digit inflation was in turn driven by excess money creation on the part of the Bank of Canada. And how did the Bank come to pour so much money into the economy? Through the purchase of large amounts of Canada bonds, to help the government finance its enormous deficits. The direction of causality is clear: federal deficits were more the cause of higher interest rates than the reverse.

The oddity in all this is that Trudeau actually came to power preaching fiscal restraint.The promise of a "Just Society" did not come with much in the way of concrete commitments, or none that would upset the Liberals' 1968 campaign promise to balance the budget. Trudeau himself seemed to consider his main task in the early years to be one of lowering public expectations of the welfare state, after the uncontrolled expansion of the Pearson years. "We are not promising things for everybody and we are not seeing great visions," he insisted. The Throne Speech that first year lectured Canadians on the reality that "government spending ... cannot increase faster than productivity if we wish to restrain the increase in levels of taxation."
But the means chosen for rationalizing government operations, a series of elaborate planning exercises yielding ever more complex management structures, seemed only to expand the supply of government services, while the strategy for impressing upon the public the limits of the state, providing interest groups with public funds in hopes of co-opting them into the process, instead simply stimulated the demand. After the near-defeat at the polls in 1972, widely blamed on the philosopher-king's aloof and professorial style of governing, the Liberals abandoned any pretense at rationalizing public expenditures. Whether this was the price of NDP support for his minority government, or whether it reflected the divisions and uncertainty brought on by the first oil crisis, neither Trudeau nor his ministers seemed nearly as concerned after 1972 with the state of the government's finances.
As in other respects, Trudeau the prime minister diverged markedly from Trudeau the thinker. By the time he went to Ottawa, Trudeau had largely put aside the socialist convictions of his youth. He was, it is true, something of a policy magpie, as susceptible to persuasion by a neo-classical economist like his friend Albert Breton as by the broad interventions prescribed by J. K. Galbraith. But he was never an enthusiastic proponent of higher debt for its own sake. Nor was he entirely uninterested in economics, as legend had it. The more likely explanation is that balancing the books did not strike him as a priority. The country's debts, through the 1970s, were at historically low levels, relative to GDP. There were many other pressing issues to address, the country was fracturing as never before under the combined strains of separatism and economic dislocation, and politics, as he learned after that disastrous first term, required a certain realism. Public spending, like patronage, had its uses. The cost could be counted later.
To be sure, each year's budget was marked by the usual rhetoric of restraint. "We must do all we can to restrain the growth of governmental expenditures," Finance Minister John Turner told the House of Commons in November, 1974, as he introduced a budget that would increase spending 20 per cent. "We are now seeing the solid results of our commitment to get government expenditure growth below the growth rate of GDP," his successor, Donald Macdonald, announced in March of 1977. But of course spending was still rising: 10 per cent in that year alone. It had acquired a momentum of its own, as all of those new departments and agencies sought to justify their existence. So much so that it prompted Trudeau, in another of his about-faces, to make his most celebrated venture into the field of public finance: the sudden, and unilateral, decision in August, 1978 to cut $2.5-billion out of spending -- allegedly after being scolded for his government's profligacy by German chancellor Helmut Schmidt at an economic summit. Too little, perhaps, but certainly too late.

Whatever restraint was exercised on the spending side was more than offset in later years by the steady erosion of the tax base: yet another retreat, given efforts at tax reform under Trudeau's first finance minister, Edgar Benson. A much-quoted article by two Statistics Canada researchers explained the increase in deficits after 1975 as arising "more from a shortfall of revenues than higher spending."
The most significant early measure was the 1973 indexation of the personal income tax system, adjusting both personal exemptions and tax brackets each year to keep pace with increases in the consumer price index. By and large, this was good public policy: Failure to index the system had exposed taxpayers to "bracket creep" as inflation mounted in the late 1960s and early 1970s. In effect, this allowed the government to raise taxes without seeking Parliament's authority. Yet if indexation was a praiseworthy move, it was no less costly: a Finance Department study put the revenue loss in 1979 alone at $6-billion, or about one-third of personal income tax revenues in that year.
Other tax measures introduced around the same time included the three personal income tax cuts enacted from 1973 through 1975, increases in personal and employment expense deductions, the $1000 interest income deduction, and the investment tax credit. Then there was the $1000 deduction for pension income, the radical expansion of the Registered Retirement Savings Plan program in 1972, and the Registered Home Ownership Savings Plan (RHOSP). Most important of all was the 1978 Child Tax Credit, providing parents with a basic payment of $200 per child per year. If not quite a guaranteed annual income, it had much in it that resembled its close relative, the negative income tax: the benefit was delivered through the tax system, a first in Canada, and varied with family income. This was much in keeping with the bureaucratic preference for the "building blocks" approach to income security over a full-blown GAI. Just as the Guaranteed Income Supplement added an income-tested boost to the universal Old Age Security program, the child tax credit now did the same for family allowances. (In recent years, these two-headed programs have been rationalized into, respectively, the Seniors' Benefit and Child Tax Benefit.)
On the corporate side, successive Finance ministers introduced ever more generous and complex tax preferences as the 1970s wore on, in a desperate and largely fruitless bid to prop up economic growth. Manufacturers, in particular, benefited from a series of measures, including accelerated depreciation, a reduction in the basic tax rate, and inventory writeoffs. In addition, the federal sales tax, which applied only to manufacturers, was reduced from 12 per cent to 9 per cent in 1978. Resource producers, though saddled with hefty export taxes and royalties under the National Energy Program, also benefited from their own investment tax credits, writeoffs and exemptions. The high-tech sector was the intended beneficiary of the Scientific Research Tax Credit, though by the time the program was suspended, its exorbitant costs -- $2.8-billion in forgone revenues, as of 1984 -- left no doubt the program had been widely abused..
All told, discretionary tax measures, personal and corporate, are estimated to have reduced federal revenues by as much as $14-billion in 1979 -- or about $2-billion more than the federal deficit in that year. In 1981, the famous "MacEachen budget" attempted to close many of these tax preferences, to the dismay of the business community. MacEachen proposed some 150 new tax measures, with a view to boosting federal revenues by $3.4-billion over two years. Perhaps the messenger lacked credibility, one year after the NEP tax grab, but the budget was a public-relations disaster, and was largely withdrawn. With that the government more or less gave up the fight against the deficit. It is not too much to say that by the early 1980s federal finances were simply out of control. Marc Lalonde, the last of Trudeau's finance ministers, abandoned even the pretense of restraint. The deficit, he said in 1984, "has provided considerable support to the welfare of individual Canadians and the promotion of economic acitivy," though he allowed that "deficits must be reduced as investment recovers and the economy expands." Easier said than done.
Trudeau himself remains remarkably unmoved by the carnage he left behind. In his Memoirs, he does not defend his governments' fiscal record, but merely notes that in the context of the performance of "the economy in general," he can look back on his legacy "without shame."

What do we conclude from all this? It would certainly be untrue to say that social spending, on its own, was responsible for the massive debts the federal government incurred during the Trudeau years. Though the social envelope, broadly defined ( transfers for health, education, old age security, family allowances, and unemployment insurance, plus federal housing and labour market programs) expanded in that time from 44 per cent of program spending to 51 per cent, even that rate of increase would not have strained federal revenues unduly. What was not possible was to finance this amount of social spending in addition to the almost-as-rapid growth in the rest of the federal budget, including internal departmental spending and subsidies to business and other groups. Had these been held constant in real per capita terms throughout this period -- that is, at 1968 levels, plus inflation and population growth -- total program spending in 1984-85 would have been about $20-billion less than it was: enough to keep the budget in balance on an operating basis. Bear in mind: that's with no less social spending, and no more revenues, than was actually the case.
This is important. It is perhaps too easy to say that transfers to the provinces should not have been allowed to grow so quickly: these were, after all, subject to multi-year federal-provincial agreements, and could not easily or quickly be altered. Similarly, increases in transfers to persons might be put down, at least in part, to demographic or economic trends. But the remainder of program spending was entirely and unambiguously within the federal government's power to control. Any increases here were purely discretionary. If the government's own spending had been more closely restrained, then program spending as a whole would not have been excessive. And, as we have seen, if spending itself had been kept on a sustainable path, neither the relative decline in revenues nor even the rise in interest rates would have had much impact.
Whatever might have been, of course, it is of no consequence to history, and could not have spared social programs from the remorseless arithmetic of compound interest. Whether or not social spending was part of the debt problem, it became of necessity part of the solution. If the deficit had to be reduced -- and it did -- and if spending cuts were required -- and they were -- it was hardly realistic to mark over one-half of the budget as off-limits. Perhaps spending in other areas, outside the social envelope, should not have been allowed to grow so quickly. But having done so, it could not be easily or quickly undone. By 1984-85, the deficit had grown to exceed spending on all other federal programs, excluding transfers: the entire government apparatus could have been shut down, everyone laid off, and still the debt would have continued to grow. To make any real progress against the deficit, social programs would have to come under the knife.
This is one of the many ironies of the Trudeau years. The federalist who believed in a strong central government left it cruelly weakened at the end, a haggard fiscal debauchee. The nationalist who wished to preserve Canada's independence left it utterly dependent on foreign capital. The social democrat who wanted to expand the welfare state instead left social programs to be eaten alive by the debt.
Canada is certainly a more Just Society than it was when Trudeau made his pledge: there is less poverty; more go on to higher education; medical insurance is universal. But, thirty years and half a trillion dollars in debt later, the promise is unfulfilled.