By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
The federal Liberals have repeatedly talked about the importance of encouraging long-term economic growth and bringing about greater prosperity, particularly for Canada’s middle class. As part of the effort to achieve this worthy goal, and following recent disappointing reports on economic growth and employment, Finance Minister Bill Morneau met with his Advisory Council on Economic Growth earlier this week, a group tasked with providing “bold and innovative ideas” to grow the economy.
The need for “bold” policy ideas is right on the money; the country needs a departure from the status quo. However, there’s little need for “innovative” policy ideas to create the right economic environment for long-term growth. What’s needed is a return to proven economic policies of the past – a Liberal past, we should add.
Consider the faltering economy of the early 1990s, where from 1990 to 1992 economic growth virtually stalled. And similar to today, there were serious concerns about chronically weak growth.
At the same time, federal finances were a mess. The government’s budget was regularly in deficit, with the federal deficit in 1992/93 equalling $39 billion or 5.5 percent of GDP.
In the face of these economic and fiscal challenges, the federal Liberal government led by Prime Minister Jean Chretien and Finance Minister Paul Martin, took decisive action. Starting in 1995, the government reduced program spending by almost 10 percent in three years. By 1997/98, the federal government achieved a balanced budget for the first time in nearly a quarter century.
With the budget balanced, the federal government began to reduce debt and make Canada’s tax system more competitive. Over the next decade, the government cut income taxes for Canadian families and businesses and reduced the economically damaging capital gains tax.
Along with similar fiscal reforms at the provincial level, the federal government’s efforts to balance the budget, reduce debt and reform the tax system helped lay the foundation for an economic turnaround. Thanks in part to these policies, the late 1990s and mid-2000s were marked by considerable economic prosperity with Canada enjoying one of the strongest economies among industrialized countries.
Unfortunately, the current federal government has enacted several policies that sharply contrast those enacted by the Chretien government. It has increased taxes on our country’s most skilled and educated workers, discouraging them from working harder, investing in their skills and being entrepreneurial.
It has led the charge for a looming payroll tax hike that will more than wipe out the government’s reduction to the second lowest personal income tax rate. In other words, the government has failed to deliver on its campaign promise of reducing taxes on middle-income Canadians.
It has also dramatically increased spending (7.6 percent this year alone) largely to fund current spending rather than investing in growth-enhancing infrastructure.
It has increased the budget deficit to $29.4 billion this year and is planning multi-year deficits totalling at least $113.2 billion. With no end in sight to budget deficits, the government is set to pile on ever more government debt.
These policies have reduced the incentives to work hard, save and invest and have created a troubling fiscal outlook that is sure to breed policy uncertainty – neither of which are conducive to economic growth. Consider the empirical research that shows increasing government debt hinders economic performance, in part by casting a cloud of uncertainty over the fiscal future of the government, which undermines investor confidence and entrepreneurship.
Rather than seek “innovative” ideas, Morneau should follow the proven path of success taken by his predecessor, Paul Martin. Doing so, however, requires a bold change in direction from the status quo.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is policy analyst at the Fraser Institute.