By Jason Clemens
and Milagros Palacios
The Fraser Institute
Canada’s sweeping rejection of the Chretien consensus amounts to a puzzling and hopefully temporary repudiation of prosperity and the policies that produced it.
A generation ago, Canada enjoyed a renaissance. The revival 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, is why it is being almost entirely replaced with alternative policies proven to have failed in the past.
Canada’s economy was faltering in the early 1990s. From 1990 to 1992, real economic growth averaged -0.4 percent. Unemployment reached 11.2 percent in 1992. Coupled with a long record of governments failing to control spending, this meant that the finances of most governments were in serious peril. According to federal data, in 1992-93, the federal deficit reached $39 billion or 5.5 percent of GDP. Interest costs on the $487 billion federal debt totalled $41.3 billion in 1992-93. Thirty three cents of every dollar collected by Ottawa in 1992-93 went to pay interest on past spending. The provinces compounded this by collectively running a $25.0 billion deficit in 1992-93. All 10 provinces were in deficit and spending to service debt amounted to more than $15 billion annually.
Then, beginning in 1992, the fiscal revolution started in Saskatchewan under NDP Premier Roy Romanow. Program spending was reduced by 12 percent 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 percent 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 percent over three years, cutting the public sector, reforming provincial transfers, and broadly reviewing all federal spending.
The leadership exhibited by Romanow, Klein, and Chretien – a New Democrat, a Progressive Conservative and a Liberal – was replicated by other governments and the results were extraordinary: in short order the federal government and a majority of the provinces achieved balanced budgets and began to pay down debt. Elimination of deficits was not an end but a means as the federal and several provincial governments, particularly Alberta, cut taxes to regain competitiveness and prosperity.
The federal government reduced business tax rates and twice cut the capital gains tax. Alberta implemented the country’s first single-rate personal income tax. Ontario and Saskatchewan 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 in the world. Incomes rose, jobs were created and opportunities for progress abounded. Life was good.
And yet the lessons learned – namely how the Chretien Consensus ushered in economic prosperity by focusing on balanced budgets, value-added spending and tax competitiveness – are being forgotten. The Chretien Consensus served Canadians well for more than a decade and can again.
Jason Clemens, Niels Veldhuis, and Milagros Palacios are economists with the Fraser Institute and co-authors of Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today.