End of the Chrétien Consensus?

The Spanish philosopher and writer George Santayana famously said that “Those who cannot remember the past are condemned to repeat it.” In Ottawa today, and in many provinces, it’s not a matter of forgetting the lessons of the past but rather actively rejecting them.

Canada enjoyed an economic and fiscal renaissance starting in the mid-1990s that lasted more than a decade. The boom was rooted in sound fiscal policy (balanced budgets, focused spending and tax competitiveness), which we have coined the Chrétien Consensus. The undisputed success of this period raises the obvious question—why is it being rejected for a set of alternative policies that have consistently failed.

It’s difficult to recall just how bad the fiscal situation was when the Chrétien government assumed power in 1993. The total federal debt had reached $607.3 billion, the deficit in 1993-94 alone was $38.5 billion, and interest costs on the national debt had reached $40.1 billion, which meant that almost one-third (32.4 per cent) of the government’s revenues were being spent on interest costs.

One of the now lost insights from this period is how such fiscal policies create uncertainty in the economy, which impedes economic growth and prosperity. Specifically, large deficits, mounting debt and related interest costs mean there’s significant risk that governments will raise tax rates in the future. But investors, businesses and entrepreneurs don’t know which taxes could be raised or by how much. So projects that might look profitable today could quickly become uneconomical when taxes are increased. Due to this uncertainty, investment and entrepreneurs either take a wait-and-see attitude or move their activities to other more hospitable jurisdictions.

For a number of reasons, the Chrétien government took decisive action in Budget 1995. All told, program spending was reduced by almost 10 per cent, from $123.2 billion in 1994-95 to $111.3 billion in 1996-97. This entailed real reductions in ministerial spending, including a 51 per cent cut in the Ministry of Transportation and a 38 per cent reduction in the Ministry of Industry. Critically, though, the federal government insisted on not just smaller government but “smarter government,” which meant reforming existing spending so that more was achieved with less.

Spending increases were further constrained the following three years, which meant that per person spending (adjusted for inflation) declined by 15.5 per cent between 1993-94 and 1999-00.

The impact was almost immediate. The federal government balanced its budget in 1996-97 and began paying down debt. The fiscal room created allowed the government to focus on making sure Canadian taxes were competitive, which resulted in reductions in business income taxes, capital gains taxes and personal income taxes.

Contrary to the naysayers of the time and particularly those advocating a more Keynesian economic view of the world, the Canadian economy boomed. Between 1997 and 2007, Canada’s economy grew by an average of 3.2 per cent, compared to 2.7 per cent in the rest of the industrialized world. Canada enjoyed the sixth highest job-creation rate among all industrialized countries and outperformed the United States (2.0 per cent versus 1.3 per cent). And Canada had the strongest record of investment of any G7 country.

The Chrétien Consensus, namely balanced budgets, declining government debt, smaller and smarter government spending, and competitive taxes spread across the country and all political parties. For instance, it actually started in Saskatchewan under the NDP and was then deepened in Alberta under the Progressive Conservatives before being enacted in Ottawa.

Fast forward to 2017 and it’s clear that governments across Canada have purposefully rejected the successful policies of the Chrétien Consensus and replaced them with the exact opposite. Governments in Edmonton and Toronto, and most poignantly in Ottawa, have markedly increased government spending and the active role it plays in the economy. In addition, they’ve chosen to finance such spending largely through deficits (i.e. borrowing) while also raising tax rates.

Unfortunately, but quite predictably, the Canadian economy has slowed, in part due to these policies. In the Conservatives’ last budget, economists expected future economic growth would average 2.2 per cent. The 2016 fall update lowered those expectations (again) to 1.7 per cent.

But Canadians know there’s a better way that leads to heightened prosperity and opportunities because we’ve been there before. It’s founded on smart, competitive government that establishes an environment where individuals, businesses and entrepreneurs can thrive. Canada can return to this prosperity if it returns to the Chrétien Consensus.