Canada’s government has taken impressive steps to get its financial house in order while exercising responsible economic stewardship. Unfortunately it wasn’t recently. We were surprised to read this past weekend’s Wall Street Journal interview in which Finance Minister Jim Flaherty attributed Canada’s resilience in the face of the recession to recent government actions. The truth is that Canada continues to benefit from the sound reforms implemented in the mid-1990s by both provincial and federal governments. By improving Canada’s fiscal fundamentals, previous governments established the foundation for our current economic performance and ability to weather the recessionary storms.
It was the federal Liberals under Jean Chrétien and Paul Martin who, after one false start, brought real reform to federal finances with their 1995 budget. In that year they proposed cutting program spending by almost 9% over just two years to get a handle on federal spending. These weren’t reductions in spending growth. These were actual reductions in spending.
The federal government then outperformed its goal and reduced spending by 9.7%, reducing the size of the federal government relative to the economy from 16% to 13.3%.
Unlike the current government, the Liberals did not protect or insulate any spending from review. Transfers to the provinces were reduce, business subsidies and spending on transportation were slashed, military spending was cut, and even Employment Insurance was reduced through reforms. The Liberals also reformed spending to get more from less.
The combination of spending reductions, an improving economy (which was not just a coincidence) and falling interest rates resulted in the first balanced budget in more than two generations in just three years. This historic achievement was then followed by a series of budgets that reduced personal and business taxes in a way that promoted economic growth by encouraging, rather than discouraging, the things Canada needs more of, such as investment, savings, and entrepreneurship.
Another misunderstood aspect of this period was how non-ideological it was in nature. The first major breakthrough after almost two generations of fiscal irresponsibility came from the NDP in Saskatchewan, followed closely by the Conservatives in Alberta and then the federal Liberals. Indeed, it was an achievement of the entire Canadian political class, because what we termed the “redemptive decade” in our recent book (The Canadian Century) saw a variety of other important reforms as well, most notably to the Canada Pension Plan and provincial welfare programs. Cutting government spending, lowering and simplifying taxes, and paying down debts unleashed a burst of prosperity and confidence that gave people and their elected representatives the courage and fortitude to tackle more difficult problems.
Regrettably, we now seem to be encountering a non-partisan rush to squander these hard-won gains. Provincial governments of every partisan stripe are plunging back into the vicious circle of rising deficits and debt, higher interest costs and taxes, and slower economic growth pushing deficits still higher. The Harper Tories are certainly not the only guilty parties even in Canada, to say nothing of North America or the rest of the industrialized world.
Most years since 2000-01 have seen government spending growth exceed economic growth. For example, in the 2004-05 budget, program spending increased by nearly 15%.
Contrary to public statements, the Conservatives have not been a bastion of conservative fiscal policy. In 2005, the year before the Harper Tories were first elected, program spending was $175.2-billion. Prior to the recession, they had already raised spending by more than 18 % in just three years to $207.9-billion. Worse, according to their latest budget, program spending will reach $249.2-billion this fiscal year. Not surprising, this large increase in spending has been financed by a large deficit of almost $50-billion.
Of course, the 2010 budget showed deficits declining sharply and spending growing far more slowly in the future. That is the approach the previous Progressive Conservative government followed in the 1980s. Rather than make difficult but needed decisions today, budgets assumed better times tomorrow.
There is no doubt that Canada weathered the recession better than many countries, including our most important ally and trading partner, the U.S. And we did so because many of the fundamentals were better here, from banking to federal and provincial finances. Canada now needs to relearn the lessons of the 1990s.