By Jason Clemens,
and Niels Veldhuis
The Fraser Institute
A change in budgetary direction would spark real prosperity in Canada. Unfortunately, the current federal government has not learned from at least one predecessor.
Former prime minister Jean Chrétien’s second budget in 1995 was historic – it changed the trajectory of federal finances and laid the foundation for broad prosperity for better than a decade.
Unfortunately, Prime Minister Justin Trudeau’s second budget is a status-quo, indecisive plan that continues the policies first presented in 2015 despite tectonic shifts south of the border and weak economic performance over the last year.
What the country needed was a budget focused on prosperity and competitiveness – what it needed was a Chrétien Budget 2.0.
It’s easy to forget the dismal state of federal finances when the Chrétien government was elected in 1993. The federal debt was $607.3 billion, the deficit was $38.5 billion, and interest payments amounted to $40.1 billion. This meant that almost one in every three dollars collected by the federal government was spent on interest costs.
The Canadian economy was also struggling. One of the barriers to prosperity was the state of federal finances, which imposed incredible uncertainty on the Canadian economy. Large deficits and mounting debt (and their accompanying interest costs) meant there was a real risk of higher taxes in the future.
Investors, businesses and entrepreneurs didn’t know which taxes might be raised or by how much. This uncertainty meant that projects that look profitable today could become losers tomorrow. The result was that too many businesses, entrepreneurs and investors stayed on the sidelines with a wait-and-see attitude or, worse, decided to take their activities abroad.
These are the exact conditions present in Canada today.
Based on the successful reforms enacted in Saskatchewan and Alberta in the early 1990s, as well as several other factors, the Chrétien government took action in 1995 budget. Program spending was reduced by almost 10 per cent over a two-year period and growth in spending was constrained for the following three years. All told, per person spending (adjusted for inflation) was reduced by 15.5 per cent between 1993-94 and 1999-2000. Critically, the federal government enacted reforms to existing spending so that, as former finance minister Paul Martin explained, we got “smarter” not just “smaller” government.
The Chrétien government balanced its budget in 1996-97 and started paying down debt. Interest costs plummeted, leaving room for tax relief aimed at ensuring Canada was more competitive. This combination of balanced budgets, declining debt, smarter and smaller government spending, and competitive taxes, what we have coined the Chrétien Consensus, laid the foundation for more than a decade of economic prosperity.
Canada’s economy grew by an average of 3.2 per cent between 1997 and 2007, while the rest of the industrialized world experienced 2.7 per cent growth. Canada was one of the highest performing countries for job growth and led the G7 for business investment.
These are the economic outcomes espoused by the current federal government and yet it has clearly rejected the foundation for that prosperity – the Chrétien Consensus.
The Trudeau government’s second budget is essentially an extension of its first with no major policy changes. Deficits continue with no end in sight (reaching $28.5 billion this year), debt is growing, government spending is expanding and, despite claims to the contrary, taxes have been increased.
In addition, the federal government failed to clarify whether several rumoured tax hikes, particularly with respect to capital gains, are planned for the fall or next year, which means continued uncertainty.
These policies, the antithesis of the Chrétien Consensus, coupled with continued policy uncertainty will continue to impede stronger economic growth.
The outlook for Canada could weaken further depending on policy decisions made south of the border.
A change in direction based on a realization of the benefits of the Chrétien Consensus, combined with competitive pressures from reforms in the U.S., could be the basis for a Chrétien Budget 2.0 this fall.
Such a change in direction would begin to create the foundations for real prosperity in Canada.
Jason Clemens, Charles Lammam and Niels Veldhuis are economists with the Fraser Institute.