The policy direction of the Liberal Party of Canada and its leader Justin Trudeau, as evidenced by the speeches, motions, and debate at the recent national party convention seem to indicate that the party is rejecting the successful pragmatism of the 1990s. Instead, the federal Liberals favour a more interventionist and activist government, much like that of the current Ontario Liberal government. If such policies are enacted, the results would be ruinous for Canada.
One of the central themes repeated consistently at the convention was the need for the federal government to incur more debt in order to finance infrastructure and other long-term spending. Mr. Trudeau and his policy advisers seem to have been influenced greatly by U.S. economist Larry Summers. Mr. Summers, who served in the Clinton and Obama administrations, is a vocal advocate for more expansive government spending using debt as a method by which to stimulate the economy.
One problem of many for this approach is that it belies history, both in the U.S. and Canada. Bill Clinton and Jean Chretien enjoyed enormous economic and political success by doing the opposite. U.S. President Obama and the Ontario Liberals have struggled with a weak economy by doing exactly what Mr. Trudeau now proposes for the entire country.
Beginning in 1995, the Chretien Liberals cut program spending by almost eight per cent in just two years and continued to constrain spending even after balanced budgets were achieved for the following three years. Federal program spending as a share of the economy declined from over 17.1 per cent in 1992-93 to just under 12 per cent by the end of the decade. Federal debt was reduced from 67.1 per cent in 1995-96 to roughly 30 per cent by the time the Tories took over. And critically, the Liberals enacted a series of tax cuts and reforms aimed at making our economy more efficient and competitive.
The results, contrary to the rhetoric of Mr. Summers, were stunningly positive. Over the decade spanning 1997 when the federal budget was first balanced to roughly 2007, Canada led the G7 in both economic growth and business investment. Our record on job creation was unparalleled, more than doubling the U.S. rate and higher than any G7 country. And poverty rates fell by more than 40 per cent.
These actual results stand in stark contrast to the predictions of Mr. Summer: "To start, this means ending the disastrous trend towards less and less government spending and employment each year and taking advantage of the current period of slack to renew and build out our infrastructure."
Of additional concern is the naiveté that Mr. Summers continues to display and has apparently now infected Mr. Trudeau with in terms of the actual ability of governments to do the things he advocates. Mr. Summers was front and centre in advocating for and shepherding through the Obama stimulus, which contained hundreds of billions of dollars for "shovel-ready" projects. Mr. Summers insisted that the mark of success of such policies were that they were timely, temporary, and targeted. The reality of what happened is that, not surprising, politics affected the program. High priority projects were shelved for more politically expedite ones. Projects were delayed and hung up in red tape and bureaucrat infighting. The assumption that government can simply flick a switch and spend efficiently is both conceptually and historically false.
Mr. Summers can be forgiven for not being aware of the actual experience in Ontario. The same cannot be said of Mr. Trudeau. The large and continuing deficits in Ontario, despite economic growth, coupled with heavy-handed interventionism in a host of sectors has placed Ontario on a path of decay, not prosperity. Economic growth in the province has remained sluggish despite large-scale deficits and debt accumulation. (As a measure of the province's problems -- Ontario is markedly worse on every measure of indebtedness compared to California.)
It's not at all clear how the country will benefit from Ontario-style policy when such policies have been an abject failure. The country would benefit from a return to the sound policies of the Chretien era in the 1990s -- balanced budgets, reducing debt, decentralization of responsibility and authority for services to the provinces, better value-for-money focused spending by the federal government, and incentive-based tax relief and reform. That's a recipe for success for any government, or government in waiting. The Trudeau Liberals should look back to this period rather than down south for their policy ideas.
This piece was co-written by Milagros Palacios, Senior Research Economist, Fraser Institute.
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