Lessons from the past on governance in Canada
Prime Minister-designate Justin Trudeau led his Liberal Party back from third-party status in Parliament to capture a majority government, the first Liberal majority government since 2000 under former Liberal PM Jean Chretien. Trudeau can learn much from his Liberal predecessor in terms of successful governance, which led Chretien to three successive majority governments in 1993, 1997, and 2003.
It is in the interests of all Canadians, regardless of political allegiances or philosophical dispositions, that our national government succeed. This is particularly true given the Liberal focus on promoting stronger economic growth.
A critical Chretien lesson for Trudeau is that winning an election is different from governing. Chretien understood this and did not become fixated on checking boxes from the campaign promises contained in the Liberal Red Book. Early on in the first mandate, Chretien realized the need to balance the country’s finances and begin reducing debt, which became the animating goal for his entire government between 1994 and 1997.
This almost singular focus on balancing the books meant discarding one of the Red Book’s most prominent commitments—scrapping the GST. It also meant shelving the commitment to a national daycare program. While Chretien was heavily criticized for failing to implement these policies, they in part helped his government achieve an historic set of objectives: balancing the budget, reducing federal debt, and beginning to reduce the most damaging taxes (capital gains, income and business) so as to make Canada more competitive. The balancing of the budget was a critical success for which the Liberals were rewarded with an overwhelming electoral victory in 1997.
The animating theme of the Trudeau Liberals is to improve economic growth and middle-class economic prospects, though the reality of the latter being a problem is more folklore than reality. Nonetheless, the Trudeau government will be rightly judged against the country’s economic performance.
The Liberal campaign platform has some laudable goals and policies that could lead to improved economic performance. However, one of the worrying policy initiatives, and one that is hopefully de-prioritized, is the raising of the top marginal federal tax rate on personal income from 29 to 33 per cent.
This four percentage-point increase needs to be understood within the context of several provinces having already raised their own top marginal tax rates. For instance, Alberta has increased its provincial tax rate from 10 to 15 per cent. This means the combined federal-provincial personal tax rate in Alberta will increase from 39 per cent to 48 per cent, an increase of 23 per cent. But most provinces will have rates over 50 per cent.
The problem with this policy is that research overwhelming shows that such tax increases and high tax rates influence economic decisions by workers, employers, investors, and entrepreneurs. Their decisions on where to locate, the extent to which they work, their willingness to create or expand businesses, and whether they invest are all influenced in part by the reward they receive from undertaking such activities. By markedly reducing the returns to such activities, the government will create strong disincentives for people to undertake such activities.
Skilled labour, professionals, investors, and entrepreneurs need to be encouraged, not discouraged, from fully employing their talents in Canada, which is the foundation for improved economic growth.
The economic framework of the previous Liberal government, A Plan for Growth and Prosperity, highlighted the importance of lowering—not raising—personal income tax rates on middle- and upper-income Canadians: "Lower personal taxes would also provide greater rewards and incentives for middle-and high-income Canadians to work, save and invest."
The Trudeau Liberals recognized the power of tax incentives in their own platform by remaining committed to the policy of competitive business taxes, which were started under the Chretien Liberals and continued under the Tories.
There are other policies that are hopefully re-assessed within the framework of pursuing stronger economic growth. Weakening the incentives for work effort, savings, investment, and entrepreneurship while making Canada less competitive, is not the path to stronger economic growth. Let us hope that the new government realizes quickly the difference between campaigning and governing like their Liberals predecessors did in the 1990s.
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