On slaying deficits and what to do next - Macleans.ca
 

On slaying deficits and what to do next

What we can learn from how Jean Chretien and Paul Martin balanced the books


 

090910_moneyThe Don Drummond interview I posted earlier has prompted a bit of discussion about how any federal government will dig its way out of today’s alarmingly deep deficits.

Drummond deftly sketches how hard it will be to balance the books without touching the wide areas of spending now deemed sacrosanct—payments to seniors, to provinces, to fund the military.

Indeed, Finance Minister Jim Flaherty has vowed not to touch transfers to the provinces. And Prime Minister Stephen Harper and Liberal Leader Michael Ignatieff alike have promised no tax hikes.

I’m skeptical about how any plan with those sorts of conditions attached could possibly work, but I’m trying to keep an open mind. Meanwhile, it might help to think back on how the Liberals actually managed to slay the deficit back in the 1990s, and what they did next.

Tories like Flaherty bitterly slam the Grits for balancing the books back then by slashing transfer funding to provinces for health and education. Liberals tend to go all glassy-eyed and vaguely allude to some sort of fiscal-management genius that manifested itself back in the Chrétien-Martin heyday.

There’s some truth to both partisan perspectives. Considerable temporary pain was inflicted on the provinces, and the Liberals of the day did display a good deal of discipline. Still, I think the saga is widely misunderstood.

Here’s what I would argue really happened. Martin mapped out his fiscal strategy in the 1995 and 1996 budgets, setting a target across all federal departments of 22 per cent less spending by 1998-99 than in 1994-95.

But that never happened. It didn’t have to. Instead, total program spending declined just six per cent in the crucial five-year period—substantial but not nearly as painful as legend would have it. So why did the deficit vanish? The main reason: tax revenues soared by 26 per cent from ’95 to ’99, thanks to steady, strong economic growth.

In other words, a powerfully expanding economy, combined with reasonable spending restraint, did the trick. What’s too often forgotten in recounting of the deficit-slaying story is what the Chrétien Liberals did—and did fast—once they had the government back in the black.

In the 1999 budget they dramatically boosted transfer payments to provinces, effectively reversing the cuts of the previous few years. For example, health-care transfers were restored to pre-1995 levels.

In 2000 they embarked on a sweeping five-year tax cutting plan, including a landmark move to full indexation of personal taxes, which meant inflation would no longer amount to a tax hike.

I would argue that those two budgets offered clear evidence of priorities not often associated with the Liberals. Did they greet the end of deficits mainly as a chance to greedily expand federal range and reach? No. They first looked to restoring the provinces’ ability to fund health and education, and then to cutting personal and corporate taxes.


 

On slaying deficits and what to do next

  1. "I would argue that those two budgets offered clear evidence of priorities not often associated with the Liberals."

    I'd argue that you are correct. I'd further suggest that those are budget priorities that are not often associated with the plurality of Canadian voters either. What was it that made it possible to do then?

    • Majority governments, and politicians interested in doing what was right for the country more than what was electorally expedient.

      • I'm a Chretien admirer about some things but even in my most charitable moments I can't quite imagine him doing anything without calculating electoral expedience. I genuinely believe he wanted to do the right thing (although I didn't always agree with him about what the right thing was) but I don't think he ever forgot about getting re-elected.

        No, something lined up then that made things that otherwise would have been politically impossible at other times (cutting CBC funding for example).

  2. I think you’re about to get a whole lot of disagreement.

    It’s also worth considering that we shifted our fiscal deficit into an infrastructure deficit. We have a $150 billion backlog of infrastructure in this country. And that is the kind of stimulus I was looking for this winter: take advantage of below-average construction activity and low materials prices to take a big chunk out of that infrastructure gap. I didn’t even particularly care whether it stimulated growth–it would employ some, but it would mean the country would get needed infrastructure at a discount.

    • Oh, man, yet another reason why we need to educate the electorate. Because fixing bridges and sewer lines aren't sexy and new, no politician will want that to be his legacy. No, a new institute or gallery or rail line or something shiny! That's where to put any money that comes our way! And while we hold architectural bids for the shiny NEW thing, we can sell off the old buildings to pay the architectural fees. Of course, the new thing won't house the old thing so we'll need to rent space for that . . .meanwhile we can't get there because our roads are crumbling beneath our feet. And we can't even blame the politician because we REWARD politicians who scrap the necessary, boring maintenance stuff. You'd be an idiot to do it anyway. I agree with you that I thought that's where this stimulus spending was going to go, myself. Instead all I hear about is NEW this and NEW that. And wouldn't maintenance stuff have been ready to go sooner? Such that we'd have had the stimulus out the door when it would have made a real difference?

      • Sewer lines are a federal responsibility?

  3. I disagree with one of the main arguments made in this post.

    Do not belittle a 6% decrease in spending over 5 years as "reasonable" restraint: for a government, that is INCREDIBLE restraint. In your interview with Drummond, he talks about an average ANNUAL spending increase of 6% in the years since. Over five years, that amounts to almost 34%!!!.

    Over a five year period, Jean Chrtien presided over a 6% decline in spending, rather than a 34% increase which is approximately the average in every five-year period since (as an aside, a 6% decline is more than 16% adjusted for inflation).

    That is a hell of an accomplishment for a Prime Minister, and there is nothing partisan about my statement.

    I agree, it is unfortunate that PMs Chretien, Martin and Harper all returned to big-spending intertia in the years following, although at least Chretien had a good argument for doing so as he put everybody through some pain to balance the books.

  4. I disagree with one of the main arguments made in this post:

    Do not belittle a 6% decrease in spending over 5 years as "reasonable" restraint: for a government, that is INCREDIBLE restraint. In your interview with Drummond, he talks about an average ANNUAL spending increase of 6% in the years since. Over five years, that amounts to almost 34%!!!.

    Over a five year period, Jean Chrtien presided over a 6% decline in spending, rather than a 34% increase which is approximately the average in every five-year period since (as an aside, a 6% decline is more than 16% adjusted for inflation).

    That is a hell of an accomplishment for a Prime Minister, and there is nothing partisan about my statement.

    I agree, it is unfortunate that PMs Chretien, Martin and Harper all returned to big-spending intertia in the years following, although at least Chretien had a good argument for doing so as he put everybody through some pain to balance the books.

  5. Fiscally there is a strong argument that the Chretien Liberals did a good job.

    It was their social policy and ruthlessly ugly slash/burn politics that made a lot of us willing to chop our left arms off if that would somehow help to get Chretien out of office.

  6. Fiscally there is a strong argument that the Chretien Liberals did a good job.

    It was their social policy, foreign policy, and ruthlessly ugly slash/burn politics that made a lot of us willing to chop our left arms off if that would somehow help to get Chretien out of office.

    • Hahaha! That's a funny one. Umm, you were making a Harper joke, right?

      • The endlessly sunshiny charm of his supporters worked wonders too.

  7. It's important to note that the Liberals did increase taxes as well to help slay the debt, along with decreased spending. This has paid remarkable dividends for dealing with the downturn in 2001, and the recession today. Even this, rather severe recession, has few roots in our country, it's mostly spillover from the burst housing bubbles and subsequent financial collapse in the US and parts of Europe.

    I'm very interested to see what, if anything, the parties offer as a means of balancing this budget. As it was in the 1990's, the best solution will likely be a combination of cuts to certain programs (NOT transfers to provinces – they're in worse shape than the federal government) and taxes increses in key areas, especially consumption taxes. However, their economists should have some more inventive and interesting ideas, and I look forward to seeing them.

      • Link doesn't work =(

        If I remember, the tax increases were not on income tax, but on businesses and certain goods, such as alcohol and cigarettes, so they didn't get too much attention.

  8. I disagree with one of the main arguments made in this post.

    Do not belittle a 6% decrease in spending over 5 years as "reasonable" restraint: for a government, that is INCREDIBLE restraint. In your interview with Drummond, he talks about an average ANNUAL spending increase of 6% in the years since. Over five years, that amounts to almost 34%!!!.

    Over a five year period, Jean Chretien presided over a 6% decline in spending – rather than a 34% increase which is approximately the average in every five-year period since (as an aside, a 6% decline is more than 16% adjusted for inflation).

    That is a hell of an accomplishment for a Prime Minister, and there is nothing partisan about my statement.

    I agree, it is unfortunate that PMs Chretien, Martin and Harper all returned to big-spending intertia in the years following, although at least Chretien had a good argument for doing so as he put everybody through some pain to balance the books.

    • Hear hear! I was going to make the same post myself.

      I looked at the data, however, and found only three precedents.
      1. The late 1870's (possibly tied to Alexander Mackenzie's cheapskate approach to the CPR).
      2. The early 20's as WWI spending was cut back.
      3. The Great Depression, as revenues plummeted.

  9. Did they greet the end of deficits mainly as a chance to greedily expand federal range and reach? No. They first looked to restoring the provinces' ability to fund health and education,

    …which, you must allow, is at least a RE-EXPANSION of the federal range and reach to previous levels of expanded federal range and reach.

  10. I wonder if don drummond has thought about the impact of unions in ontario and how that has impacted the shape ontario is in…..could we save some money here in ontario but letting private ppl take on alot of jobs and not so many union jobs……?
    just wondering