End of the Chretien Consensus in Canada?

Printer-friendly version
Appeared in the Financial Post, November 24, 2015

Canada enjoyed an economic and fiscal renaissance starting in the mid-1990s that lasted more than a decade. The boom was rooted in sound fiscal policy (balanced budgets, focused spending, and tax competitiveness), which we have referred to as the Chretien Consensus. The question for Canadians, given the undisputed success of this period, is why it is being entirely rejected for a set of alternative policies that have consistently failed.

Canada’s economy was faltering in the early 1990s. From 1990 to 1992, real growth in the economy averaged -0.4 per cent. Unemployment reached 11.2 per cent in 1992. Slow growth and all the costs it entails were the norm. (Does this sound familiar?)

Slow economic growth coupled with a long record of governments across the country failing to control spending meant that the finances of the federal and most provincial governments were in serious peril. According to federal data, in 1992-93, the federal deficit reached $39.0 billion or 5.5 per cent of GDP. Interest costs on the federal debt (net of financial assets), which had reached $487.0 billion, totalled $41.3 billion in 1992-93. This meant that 0.33 cents of every dollar collected by Ottawa in 1992-93 went to paying interest on past spending rather than on current programs and services.

And the provinces compounded the fiscal irresponsibility of the federal government. Collectively the provinces ran a $25.0 billion deficit in 1992-93. All 10 provinces were in deficit and spending more than $15 billion annually on interest costs to service existing debt.

But beginning in 1992, a group of political leaders, transcending political parties, confronted their own constituencies and made difficult political decisions to genuinely tackle the country’s deteriorating finances.

Notably, the fiscal revolution started in Saskatchewan under NDP Premier Romanow. Program spending (spending excluding interest costs) was reduced by 12.0 per cent between 1991-92 and 1993-94. This was followed by large-scale reform in Alberta led by Conservative Premier Ralph Klein. Program spending was reduced by 21.6 per cent over three years (1993-94 to 1995-96). Critically, both premiers not only reduced spending but also introduced broad reforms to focus on value-for-money for taxpayers.

In 1995, the Chretien Liberal government introduced the most important budget in a generation, reducing spending by almost 10 per cent over three years, cutting the public sector, reforming provincial transfers, and broadly reviewing all federal spending to focus on “smarter government.”

The leadership exhibited by Romanow, Klein, and Chretien was replicated by several other governments transcending political parties.

The results were extraordinary: in short order the federal government and a majority of the provinces achieved balanced budgets and began to reduce debt. Elimination of deficits was not an end, though, as the federal and several provincial governments, particularly Alberta, started to reduce taxes to regain competitiveness.

The federal government, for instance, started reducing business tax rates and twice cut the capital gains tax. Alberta implemented the country’s first single-rate personal income tax. Ontario and Saskatchewan both began reducing both personal and business income tax rates. British Columbia, albeit not until 2001-02, followed suit.

The ensuing decade from 1995 through to roughly 2005 marked a period when Canada enjoyed one of the strongest economies of any industrialized country. Incomes rose, jobs were created, and opportunities for progress abounded. It’s hard to look back at the decade from roughly 1995 to 2005 with any serious complaints. These were good economic times.

And yet the lessons from this period, namely how the Chretien Consensus ushered in economic prosperity by focusing on balanced budgets, value-added government spending, and tax competitiveness, seem to have been entirely rejected in Canada outside of perhaps B.C.

Ontario, Alberta, and now the federal government have explicitly rejected the Chretien Consensus. The policies pursued and defended by these governments are ongoing deficits (in some cases purposeful), pronounced increases in government spending, and higher tax rates regardless of the implications for competitiveness. It’s as if the bipartisan lessons of the 1990s didn’t exist.

Unfortunately Canada will suffer the exact same results as we did before when these types of policies were implemented: slower economic growth and deteriorating government finances. The Chretien Consensus served Canadians well for more than a decade and can again.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.