Part 1 in a two-part series. In Part II: Is being tough on spending and deficits the best measure of sound fiscal management?
As we approach the next federal general election, lots of claims will be made regarding the performance of different political parties as fiscal managers. At least in the case of the federal Liberals and Conservatives, we can use historical data to inform our views. Many factors can affect governments’ fiscal results. For example, the financial state inherited from one’s predecessor or economic booms or recessions or even the political mood of the country. Looking at a few summary measures won’t give a very nuanced view of fiscal performance and the reasons that lie behind it. But an examination of the numbers will give us a starting point from which to assess governments’ successes and failures.
So what do the numbers say about the performance of the last three governments as fiscal managers? Can any party or Prime Minister lay claim to being the best? Today and tomorrow we look back at the fiscal record of the current and previous two governments.
In addition, how you judge the three contenders will depend on how you define sound fiscal management. The figure governments have the most control of at any point in time is program spending. So one measure of fiscal management is how program spending is changing. Federal program spending can be divided into two main categories: transfers to provinces and direct programs. Of course, we should also examine the (very imperfect) headline measures of fiscal performance, net debt and the budget balance, i.e. the deficit or surplus.
Once we settle on measures of good fiscal management, a few adjustments to the raw numbers are required to ensure an apples-to-apples comparison. First, we adjust for inflation, dividing the raw numbers by a price deflator to express them in constant 2014 dollars. Next, we adjust for population growth, expressing our measures in per capita terms. Finally, we adjust for the different length of mandates by calculating average annual values over the mandate.
Before turning to the results, we need a few historical facts. Prime Minister Jean Chrétien came to power in October 1993. His first budget was in the spring of 1994 and he was Prime Minister for 10 budgets ending with Budget 2003, i.e. for 10 fiscal years from 1995 to 2004. Prime Minister Paul Martin came to power in December 2003. He was Prime Minister for the two fiscal years ending 2005 and 2006. Prime Minster Stephen Harper came to power in February 2006 and to date has been PM for the eight fiscal years from 2007 to 2014, with 2014 being the most recent full year for which fiscal data are available.
We begin our comparison by looking at the three governments’ record on total program spending. Chart one shows that Chrétien was the toughest fiscal manager on overall program spending, with average annual increases of just $7 dollars per capita. Harper maintained an overall upward trend with average annual increases of $66 per capita. The big spender of the three was Paul Martin with average annual increases of $231 dollars per capita.
Turning to first component of program spending, transfers to provinces, in Chart two we see the same pattern emerge. Chrétien reduced transfers at an annual average rate of $22 per capita while Harper and Martin increased transfers at an annual average rate of $32 and $177 per capita respectively.
Direct spending is the second component of program spending, shown in Chart three. Once again, Chrétien is the toughest fiscal manager with average annual increases of $30 dollars per capita. He is followed closely by Harper at $34 per capita. Martin is again the biggest spender at an annual average growth of $54 per capita.
Of course, looking at program spending ignores the revenue side of fiscal balance. When we look at budget surpluses in Chart four, we see that Chrétien posted a surplus seven of 10 years or 70 percent of his mandate. Martin’s budgets were in surplus in both years or 100 percent of his mandate. Harper posted a surplus in only two of eight years or 25 percent of his mandate.
Finally, if we are interested in the longer-term fiscal effects of a government we can look at changes in real net debt per capita in Chart five. Chrétien reduced real net debt at an average annual rate of $533 per capita. Martin posted a whopping average annual reductions of $870 per capita. Harper increased net debt at a modest average annual rate of $4 per capita.
In sum, if you measure good fiscal management by the stringency of program spending, Chrétien is the clear winner with significant reductions in transfers to provinces and near steady program spending overall. Harper increased transfers to provinces and direct program spending in roughly equal amounts. Martin was the biggest spender with average increases to provinces roughly three times greater than increases in direct spending.
If instead you focus on changes in net debt and budget surpluses as your measure of good fiscal management, Martin is the clear winner. Based on these measures, it appears that Chrétien and Martin must share the honour of best fiscal manager, perhaps not surprising since they served so long together as Prime Minister and Finance Minister.
Of course, this analysis takes no account of the political and economic conditions each Prime Minister faced when they were in office. We will look at how those factors affect our conclusions in a follow-up post.
Paul Boothe is Director and Sandra Octaviani is Research Associate at the Lawrence National Centre for Policy and Management in Western University’s Ivey Business School.