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Read the edited transcript of Neil Macdonald's interview with Paul Martin.

Edited transcript of interview of former Prime Minister of Canada Paul Martin by Neil Macdonald, CBC News The National, on May 27, 2010.

Neil Macdonald (NM):  Prime Minister, take me back to when you first started taking a serious look at the books as Finance Minister and realized that something had to be done, and in some ways, you had to start acting more like a Conservative than a Liberal. How bad was it? What was the most shocking thing to you?


Paul Martin (PM):  Oh, that the laws of compound interest had taken over and that was the single biggest problem. I mean, when your interest on your debt is, you know, growing faster than, in fact, your revenues, then you're obviously into a very tight bind, and that's a problem that's going to get worse and worse unless you deal with it.  At the same time, I was very worried that the United States would go back in the recession where it had been at the beginning of the 90’s, and what really scared me was the possibility of a financial crisis, because I knew that if a financial crisis hit, we would be sideswiped, and that meant our interest rates would go through the roof and the laws of compound interest would really take over.


NM: I remember you talking about the laws of compound interest at the time.  You talked about the tipping point. Tell me as succinctly as you can what the tipping point is and why it's so important?


PM:  Well, the tipping point essentially is when your interest costs are rising so fast and because your debt is so large that, effectively, no matter what it is you do to cut it, you can't get on top of the situation. We were not there but it was on the horizon.


NM:  It was within sight.  


PM:  It was within sight.


NM:  Canada was called a basket case at the time.  We were threatened with having our credit downgraded. How long down the road was the point of no return?


PM:  Well, it really depended. It could have been three, four, five years away, but if there had been a financial crisis and the interest rates had gone up and we had been sideswiped, it could have been immediate. That was my biggest fear, and in fact, we did have a financial crisis just before I presented the ‘95 Budget, and in December, it was the Mexican crisis and then our interest rates did go through the roof.  Fortunately, the ‘95 Budget came along a month and a half later and the market saw that we were very serious, and of course, by the time the Asian financial crisis occurred three years later, we had really solved the fundamental problem.


NM:  And of course Canada like most countries has to go to investors and say please buy our debt and I presume you were concerned that they would start saying we need ever greater interest in order to keep buying your debt, in order to keep lending to you.


PM:  Well, they were saying that, they had been saying that, and at the time that I became Finance Minister, of course the debt markets loved this. I would go down to New York when we had this huge debt, we were selling them all of our bonds and I would speak to "sell out" audience as they were dying to see me.  It was very interesting four years later, after we had started buying that debt back, we had eliminated the deficit, I'd get down to New York and nobody wanted to see me.


NM:  The European countries are facing something, a situation now, but Michael Wilson, your predecessor, said you can't get too far ahead of the public on these things. How hard was it to go about doing this?  Even in the parliamentary democracy, you must have faced a considerable pushback.


PM:  Well, the first thing is that roughly for 15 months we went out across the country talking to Canadians about what had to be done. Canadians understood that we had the deficit problem, what they didn't realize is how bad it was and that there were really very strong measures that were going to have to be taken to deal with it.  So we went across the country. We had, you know, televised consultations, we had round tables where business, labour, educators, health care people, all around the table basically debating on what it is we had to cut and on how much, so Canadians could see that this wasn't simply whim, that in fact there were very tough trade-offs that had to be made. So what happened essentially is that we didn't impose anything on Canadians.  We basically joined into a partnership with them, and so, at the time we did the ‘95 Budget, they were not surprised because they understood the trade-offs, they understood what had to happen and they wanted us to succeed.


NM:  Have you reflected on the fact that having the majority in the Parliamentary system confers the kind of power to do these things that most countries, most democracies, just don't have?


PM:  Well, there's no doubt that our situation was much easier.  I used to talk to the Americans about this, much easier than a Congressional system where you have such huge balances, these huge checks and balances.  But fundamentally, if you don't bring your population on side, you can't do it, and we are seeing some of that in Europe at the present time.  We spent 15 months, every day, trying to bring Canadians on side, and it worked.


NM:  Now, you mentioned in a recent speech you made about this, about how you had some of your "colleagues" going in and seeing the Prime Minister and going above your head, there were accounts at the time of you encountering resistance even within cabinet. I presume you're talking about, for example, John Manley in the "being angry about the Civil Service cuts, David Collenette being angry about Defence cuts. What kind of pushback were you getting in cabinet?


PM:  Well, it's perfectly natural that cabinet ministries are going to object when you, you know, are cutting their budget in half, which is what we did in a number of cases. We set the targets, I met with my officials, essentially David Dodge and Don Drummond and we went through department by department and picked the targets that they were going to have to achieve in order for us to achieve our targets.  But then we set up an appeal process called Program Review, and what happened was we gave Program Review our targets and said to them, you can change the individual departmental targets as long as you don't change the bottom line.  So if you give to one, you’ve got to take it away from somebody else.  And we had other cabinet ministers on both sides of the spectrum, left and right wing, within the Liberal Party, because that's what the Liberal Party is, and essentially, people had an appeal process and the end result was, in fact, there was a total cabinet buy-in in what we had to do, some unhappy ministers, but basically a buy-in.


NM:  Imposed by the Prime Minister, as well? I mean, he was behind you in all this?


PM:  I could not have done it if the Prime Minister had not supported me 100 per cent.


NM:  I read an account at the time that you took away ministry discretionary pots of money. I read an account at the time there was still some complaining about it in the cabinet and that the Prime Minister at the time said "you've heard the Finance Minister, the next person that raises a serious objection isn't going to be at this cabinet table a week or two from now".  Is that true?


PM:  Well, the basic story is true.  That conclusion was not put that way. What happened is that, obviously, cabinet members were upset, and at one point there was about to be, I think, a bit of a rebellion at cabinet, a couple of ministers raised the issue.  I was about to intervene, the Prime Minister intervened, and said, that's it, I'm supporting the cabinet, the Minister of Finance and then it was over.


NM:  What would you tell a guy like John Manley - he was a fiscal conservative in the Liberal Party, and even he was angry about what you did.  What would you tell him?  How would you explain what you were doing?


PM:  Well, essentially, I would say, you understand the deficit of all people, and you know that we have to act, and I'm acting, and we're going to act in accordance with the government's priorities, and you know, subsidies to industries are not as important, not as important as health care, not as important as research and development or education, so subsidies to industries are the ones that are going to take a hit. That's it.


NM:  You were going across the country at the time making speeches about irreducible arithmetic and the relentless nature of compound interest and how this must happen. You're telling the Canadian public this, and the Cabinet didn't understand that?


PM:  Oh no, cabinet did. I could never have done this without cabinet and I could never have done it without caucus.  But understand, it was cabinet departments who were having to take the hit.  I, as the Minister of Finance, set the targets.  I'm the one who did the selling.  But the person, the person who then had to sell their constituency was an individual cabinet minister. And I've got to say that cabinet really did...cabinet really came to the realization that we had to act and they acted unanimously and at the end there were no cabinet ministers who dissented and caucus was solidly there - every single cabinet minister, including those people like Ralph Goodale and John Manley, who took the biggest hits.


NM:  I guess that's part of the nature of these things though, every politician wants to get re-elected, that's job number one, and you have to ask yourself if ministers and politicians within your own party in as prosperous a country as Canada, with a public that had been that softened up, were rebellious about this. How does a government in Europe, with a society that has a much greater sense of entitlement and more fractured governments that want to stay in power, deal with something like that?


PM:  Well, understand, first of all, in terms of cabinet, cabinet members are going to fight for their department.  That's what they should do, but in the end they all recognized the greater good - the country had to deal with a deficit and every single one of them supported what had to be done.  Caucus members, individual members of parliament, had to go down into their ridings and they would take even more flack, and those individual members of departments didn't have to defend their department and they took it. The fact is that one of the great things that happened at some point was that there was a real coming together, part of it was because for 15 months we had talked to the Canadian people and the Canadian people wanted to see it be done. The other thing that we did, which I think is very important, is that we set one-year targets so the people could measure…


NM:  So people could see what you were doing?


PM:  People could measure our success, because the initial issue is to get Canadians on side, but if they think that the sacrifice is in vain, if they think that you're cutting something that they really want and that there is no end gain that's going to pay off, then they are not going to support you.  But if they can see, year by year, you're making progress, then all of a sudden it becomes a great national project and that's what happened.  The first year we beat our target, the second year, we beat our target.  After the second year we did that, the Canadian people really then said "we want to eliminate this deficit". It became something much bigger than the government, it became a national project, and so when we eliminated the deficit, it was a victory, and then we said we're going to put the money back in health care, back into education, and Canadians felt "look, this game has been worthwhile".


NM:  You know, every single Euro zone country is in violation of the pact's own internal rule on deficit and debt, every single one.  It's clear that some pretty severe measures have to be taken.  What would you tell the leadership in Greece or the leadership in Portugal or even the leadership in France or some of the richer countries whose populations are almost addicted to some very expensive entitlements and aren't going to give them up easily?


PM:  Well, I would spend a lot more time basically telling my people what it is we have to do and why we have to do it.


NM:  By "my people" you mean the public?


PM:  The people of Greece, the people of Portugal, the people of those countries who are being asked to make those sacrifices. I mean, you take a look at the situation in Greece and all of a sudden, the head of state comes out and says "my predecessors have not told the truth, the deficit is much worse and now we're going to deal with this", that's pretty tough stuff for a population to take.  It seems to me that what they have to do is to sit down, they have to engage in a national dialogue the way that we did, long before you're going to succeed. The second thing is you have to have very clear targets, and those targets have got to show that ultimately, there is a win.  I mean, part of the problem that many of the European countries have is that, in fact, they borrow all of this money, this huge bail out package that's coming in, but that's not going to solve their problem, it's just simply going to increase their interest rates. There has to be a game plan that shows that in the end, people are going to be better off. And I'm not sure that this has been done yet.


NM:  But you weren't asking Canadians to change their way of life.  Those leaders are going to ask populations to change something that is, in fact, their way of life: retirement at 55, cradle to grave nanny state, things like that.  How do you do that?


PM:  You basically, you talk to them about what the alternative is.


NM:  What's the alternative?


PM:  Well, the alternative is a much worse quality of life than if you don't act. We did the same thing in Canada, when we were cutting this kind of spending.  Health care spending was, in fact cut, but we then we reimbursed it fully four years later, but it was, in fact cut.  But the fact is it had been cut year by year for the previous eight years, and it was going to get worse unless we dealt with it now, and we dealt with it now, and we basically were able to pay Canadians back four or five years later, and that was crucial. If I'm living in one of those European countries, I'm going to be able to have to say, if we act now, then the situation will be a lot better in five years then if we don't act now, and here's why.


NM:  Given the currency of this topic, are you getting calls from foreign leaders saying "You did this, how do we do this?"


PM:  Oh, I have been there, spending a fair amount of time either on the phone or in Europe over the last little while.


NM:  What did you tell them?


PM:  Well I am telling them exactly what I have said to you - that there were two essential keys.  Number one: you've got to make the people your partner, and you've got to take the time to talk to them, and if it takes months upon months, then take the months upon months and do it. The second thing that you have to do is you have to have very clear targets – short-term measurements to a long-term gain, and you have to beat those targets. What's absolutely crucial is, if you're asking people to sacrifice in order to achieve a target, is that you achieve that target so they don't think that the sacrifice has been in vain.


NM:  How close do you think the European countries and, for that matter frankly, the United States of America, are getting to that point, to what you call the tipping point?


PM:  Oh, I think that some of the European countries are there. I don't think that the United States is, and I think the United States will be able to take actions before they get there, but I don't think there's any doubt that some of those Europeans are there. The fact is, this huge package simply replaces one kind of debt with another kind of debt.  That doesn't solve their basic problem.


NM:  Last question:  Our Prime Minister, your successor Stephen Harper, is making debt reduction an agenda item.  He's telling the rest of the world as a matter of fact when going to these meetings in Toronto that we have to reduce debt.  Do you think it's a realistic thing for him to say? Do you think it's a realistic demand to make?  


PM; I think that it's...


NM:  That it can be done?


PM:  I think that the OECD is doing what I think everybody is saying.  Listen, you're going to have to deal with these deficits and these debts problems and obviously I think that those kinds of pressures are coming on, and one of the things, by the way, that helps, you know, especially with the OECD doing it and other countries doing it, is that if everybody's doing it, then there's a bit of, there is actually a momentum that is created, as opposed to you being this lone wolf out there by yourself acting.  At the time that we were doing it, the Americans were doing the same thing, the provinces were doing it in Canada, and so there was an understanding across the country that in fact this was not just simply one government's whim but that this was really a national issue that others were facing as well.


NM:  How serious was it being called a basket case and what was the reaction after the ‘94 Budget.  In what kind of regard were we held?


PM:  Oh, we were, you know, I certainly found as a brand new Finance Minister that I didn't have much credibility, because we had been making promises and not keeping them. We were called a third world country in terms of our debt and deficit, and I think that that's the way that an awful lot of the markets saw us. I certainly found out after my first budget when I went out and I would talk to these people. That's why I was so worried that if there was a financial crisis, we would be so badly sideswiped and why we were sideswiped when the Mexican crisis came and hit us.


NM:  It must be a nice legacy you have, given the current climate in Europe and United States.


PM:  Well, you know, it's really a Canadian legacy. I go back to this, I've said it a number of times.  If Canadian people hadn't really been on side, if the Canadian people hadn't come and said yes we want you to do this and we understand what you're going to do, it never could have been done.


NM:  Canadians are more persuadable, perhaps more malleable than the populations of Europe, when it comes to giving things up and biting the bullet, you know.


PM:  Well, I prefer to say, I think Canadians are tougher.


NM:  Thanks for doing this, Prime Minister.


PM:  Thank you.