BY Jason Clemens
and Niels Veldhuis
The Fraser Institute
All Canadians, regardless of political allegiance or philosophical disposition, should want the federal government to succeed – particularly since the Liberal focus is on promoting stronger economic growth.
And to ensure strong economic growth, Prime Minister Justin Trudeau should heed the lessons of successful governance learned by Jean Chretien, who led three successive majority governments in 1993, 1997 and 2003.
A critical Chretien lesson is that winning an election is different from governing. Chretien understood this and did not fixate on checking boxes from the campaign promises in the Liberal Red Book. Early in the first mandate, Chretien realized the need to balance the country’s finances and began reducing debt. That 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 platforms – scrapping the GST. It also meant shelving the plan for a national daycare program. Although heavily criticized for doing so, Chretien’s refusal to implement these policies helped his government achieve some historic objectives: balancing the budget, reducing federal debt and trimming the most damaging taxes (capital gains, income and business) to make Canada more competitive. Balancing the budget was a critical success and the Liberals were rewarded with an overwhelming electoral victory in 1997.
The animating theme of the Justin Trudeau Liberals is to improve economic growth and middle-class economic prospects, though the latter problem is more folklore than reality. The 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 raising the top federal tax rate on personal income from 29 to 33 percent.
This potential tax increase needs to be viewed within the context of similar increases to top earners in several provinces. For instance, Alberta has increased its top provincial tax rate (for those earning $300,000 and more a year) from 10 to 15 percent. This means the combined federal-provincial personal tax rate in Alberta would increase from 39 percent to 48 percent. Most provinces would have rates over 50 percent for those in the top income brackets.
Research shows that 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 by the reward they receive from such activities. By markedly reducing the returns for such activities, the government creates strong disincentives.
Skilled labour, professionals, investors and entrepreneurs need to be encouraged, not discouraged, from fully employing their talents in Canada. That’s 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 Conservatives.
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’s hope that the new government realizes quickly the difference between campaigning and governing, just as their Liberal predecessors did in the 1990s.
Jason Clemens and Niels Veldhuis are economists with the Fraser Institute and co-authors of The Canadian Century, which documented the historic reforms of the 1990s.