Most knowledgeable commentators on the Canadian economy as we enter a new year seem to think we are completing a familiar cycle that everyone in or about middle age has been through in this country before. Governments, here and elsewhere, tend to believe that “deficits eliminate themselves,” or other such stupefyingly Panglossian nonsense, and governments can borrow and spend money with self-flattering enthusiasm and assurance that inflation will not result. Inflation does result, and has.
Despite the fact that every one-point rise in interest rates produces a half-point rise in inflation, the politicians go to the corner like naughty schoolchildren while the central bankers raise interest rates, pouring gasoline on the fires of inflation until they induce a sharp reduction in economic activity, which creates a good deal of unemployment and mortgage calls six months before there is any moderation in the rate of inflation.
Then we endure a nauseating sequence of professions of official blamelessness, self-congratulation on taking “the hard decisions,” clairvoyance on detecting the green shoots of economic recovery, and pseudo-Churchillian statements of defiance against foreign economic mismanagement of which we are the unoffending victims, along with purposeful and wildly overoptimistic invocations of the broad sunlit economic uplands which the courageous fiscal and economic management of the incumbent regime has presciently prepared for us.
Eventually, all the major free-market national economies are going to have to get to grips with the built-in failures of this system of gradually reducing the value of the currency but disguising it by the fact that currencies can only be valued in terms of other currencies, and they are all being devalued simultaneously at various changing speeds.
Canada is not, on the basis of the record of its fiscal and economic management, the country to look to for the radical measures that the creation of a stabler and more durable and reliable currency will require. John Turner took a first important step in fiscal reform by adjusting income tax rates to inflation when he was Pierre Trudeau’s minister of finance. As with many of his other actions in his distinguished career as a senior government official, Turner has received inadequate recognition for this innovation, apart from the compliments of the leading academic supply-side economists, such as Jude Wanniski.
Brian Mulroney rendered great service to the country with the free trade arrangements that the Liberals swore to renounce when they returned to office, but prudently did not. He also showed the way toward a tax system that would encourage wealth creation and a growing private sector while assuring adequate revenues by reducing income taxes and extending what was then the Goods and Services Tax (GST). This has the effect of increasing savings, investment, and disposable income, and replacing it with what is essentially a tax on elective spending. Generally, GST was avoided or moderated on necessities such as groceries and children’s clothing, but was imposed on spending that could reasonably be described as nonessential or luxury goods and sales.
Jean Chrétien and Paul Martin also deserve credit for eliminating the federal deficit and running 12 consecutive budget surpluses. Their achievement was mitigated somewhat by the fact that it essentially consisted of devolving a great deal of concurrent spending obligations upon the provinces without conceding any increased area of shared taxing authority. The provinces effectively passed on this unequal burden-sharing to the municipalities, and in many places the increases in urban property taxes and the decline in municipal services were onerous and regrettable. But they were so far removed from the federal budget that the Chretien, Martin, and Harper governments did not pay any serious political price for it and the country undoubtedly benefited from this long and internationally admired period of fiscal and monetary responsibility.
Stephen Harper continued the balanced budget policy until the convulsion in the international financial markets in 2008 and the following years made that impossible. He built upon Brian Mulroney’s use of the tax on transactions (GST and then HST).
Apparently operating on the theory that a balanced budget was now a recognized multi-partisan necessity, Harper twice adjusted the GST downwards, in the apparent belief that this cap on federal government revenue would impose restraint upon successors. Even successors who dislike these limits would supposedly accept the requirement to contain federal government spending and thus reduce public-sector share of GDP. This was Harper’s way of, as he imagined, assuring a steadily expanding private sector with the resulting higher economic growth rates and wealth creation that expanding private-sector economies almost invariably produce.
By the time of the 2015 election, Harper apparently assumed that he was secure in office for at least another four years, bringing him up into contention for longevity as a prime minister with Pierre Trudeau and Wilfrid Laurier, behind only W. L. Mackenzie King and John A. Macdonald. He had substantially banished from his thoughts the idea that government could revert to the hands of someone completely cavalier about deficits and their impact, and equally relaxed about raising taxes all around the spectrum of federal revenue-producing imposts. To some extent this was understandable at a time when the leader of the New Democratic Party, the Official Opposition, Thomas Mulcair, was pledging to balance the budget.
What Harper did not notice was the fact that his campaign for re-election to a fourth term was so unnecessarily prolonged (presumably to avoid having Parliament sit while embarrassing evidence was being given in the Mike Duffy case that struck close to the Prime Minister’s Office), and was so denuded of campaign ideas, he would assure that 400,000 Syrians did not arrive on our shores and would take draconian measures to prevent hundreds of thousands of people covering their faces apart from their eyes in public.
The rest is notorious: We have had Justin Trudeau for nine years, deficits have ballooned to vertiginous heights, capital is fleeing the country, our economic growth rate is uncompetitive, and our per capita income is steadily falling in relative terms.
This government has gone to war against our greatest industry, oil and gas, for which there is unlimited appetite in the world, and Canada has transformed itself into a caricature of an economically stagnant, intellectually impoverished, Peter Pan culture of pieties and platitudes, embarrassed at the incomparable treasure house of resources we possess. We are steadily losing the esteem and stature we had won in the world by becoming a raddled and decrepit flower-child among nations.
In democracies, however, people get the government they deserve, and we will be able to put that right and return to useful economic and fiscal innovation next year.
