Now that the dust has settled from last week’s spendthrift federal budget, we’re better able to evaluate the content of the budget to discern whether or not it truly places Canada on a path towards becoming the ’Northern Tiger’. The ’Northern Tiger’ reference has been used repeatedly by Finance Minister John Manley to describe a future era of unprecedented economic prosperity in Canada. The question is whether the content of the federal budget serves the goal of making Canada the Northern Tiger.

There are two relevant comparisons: Ireland, which has been called the Celtic Tiger and Japan, which was one of the Asian Tigers. The results of such a comparison will be disappointing for those who hoped that the 2003 budget would lay the foundation for improved productivity, increasing income, and generally better economic performance in Canada.

Prior to undertaking the review, it’s worthwhile to recall the contexts of last week’s federal budget. Program spending increased $14.3 billion or 11.5 percent. The contents of the spending are largely aimed at healthcare, aboriginals, children, innovation, and infrastructure. There were some minor tax cuts but not enough to offset the $1.7 billion increase in Canada Pension Plan premiums. The net result of the federal budget was more spending and more taxes.

This contrasts significantly from the prosperity path of the Celtic Tiger. Ireland’s economic reforms were based on two foundations: less government intervention through lower spending and taxes and wage moderation. Specifically, Ireland reduced personal income taxes and slashed corporate income tax rates. In addition, the size of government, as measured by government spending as a percent of GDP, declined from 50.7 percent in 1985 to 30.6 percent in 2001.

Ireland’s economic performance, as a result of these fiscal reforms, has been nothing short of stellar for the better part of the last two decades. It led Europe in economic growth and significantly outstripped the OECD’s average growth rates throughout the 1990s. It dramatically reduced its unemployment rate and for the first time in its history has begun to attract back significant numbers of expatriates.

Japan chose a very different path of reform. In an attempt to facilitate economic growth, Japan implemented eleven separate fiscal stimulus packages, amounting to $949 billion (Canadian) during the 1990s. Over 40 percent of the funds were allocated to public infrastructure such as roads, bridges, and housing. A mere 12 percent of the stimulus package came in the form of tax cuts, much of which were temporary and as one would expect had little economic effect. Consequently, Japan has experienced a steady increase in government involvement in the economy. The projection for 2003 is for government spending to reach 37.6 percent of GDP, a 27.9 percent increase since 1985.

Japan’s economic performance, like its economic policies, dramatically diverged from that of Ireland. It has remained in the economic dungeon for over ten years. It has gone from consistently outperforming the OECD average economic growth rate to performing well below the OECD average. Its unemployment rate has steadily increased to the point where it is now hovering near the OECD average. Further, Japan’s rate of fixed capital formation has been at best stagnant and at worse falling.

The path established in last week’s federal budget is more reminiscent of Japan than Ireland. Rather than continuing to constrain the growth of government and enacting real and meaningful tax relief, the federal government chose to increase spending dramatically and did so under the auspices of making Canada a Northern Tiger.

Economic prosperity is not based on punishing capital through high taxes or punishing hard work and thrift. Our personal income tax rates are still much too high and take effect at relatively low levels of income. Our business taxes also remain high. The best set of economic policies, and the ones that deliver economic prosperity, are based on focused, rationalized governments, which provide a core set of services in an effective manner coupled with low taxation. These governments aim to establish and maintain environments within which economic activities can flourish. Our government, like the Japanese, seems to want to remain actively involved in the economy, meaning, it wants to retain high taxes and high spending rather than providing more resources to individuals and businesses.

The path towards improved prosperity, characterized by rising incomes, increasing employment, heightened opportunities, and greater wealth creation is through reduced government spending, tax relief, and effective regulations, as demonstrated by Ireland. Mr. Manley would serve Canadians’ economic interests well by heading the success of Ireland and emulating its reforms. Maybe then Canada could truly embark on a path towards becoming the Northern Tiger.