Who was Canada's best fiscal manager?

Who was Canada’s best fiscal manager? Part II

Is being tough on spending and deficits the best measure of sound fiscal management?

by
(THE CANADIAN PRESS/Fred Chartrand)
(Fred Chartrand/CP)

Part II in a two-part series. In Part I: Chrétien, Martin, Harper: Who has the best fiscal record? 

Yesterday we posted our analysis of the fiscal performance of Prime Ministers Chretien, Martin and Harper. Using program spending restraint as the measure of fiscal performance, Jean Chretien is the clear winner. Alternatively, using budget surpluses and net debt reduction as the measure of fiscal performance gives the honours to Paul Martin.

But neither of these measures account for the political and economic environments in which the three governments operated. Both Paul Martin and Stephen Harper had to deal with the realities of minority government. Jean Chretien and Stephen Harper operated with majority governments for at least part of their mandates. Further, all three governments dealt with the impacts of economic fluctuations on their revenues and spending. It’s to these to issues we now turn our attention.

Like yesterday, we make a number of adjustments to ensure an apples-to apples comparison. We first adjust for inflation, dividing the numbers by a price deflator to express them in constant 2014 dollars.  Next, we adjust for the growth of the population by expressing them in per capita terms. Finally, we adjust for the different length of mandates by calculating the average values over the mandate.

We focus first on minority governments. Paul Martin lacked a parliamentary majority for most of the two years of his mandate. Stephen Harper led a minority government for five years before gaining a majority. In Chart 1 we compare the two governments’ program spending during their minority years. In terms of total program spending, both increased annual average expenditures rapidly: $231 per capita for Paul Martin and $195 per capita for Stephen Harper.

Turning to the components of total program spending, we see a marked divergence in strategy. Paul Martin increased transfers to provinces rapidly while Stephen Harper focused his spending increases on direct program spending. As we see from Chart 2, transfers to provinces increased at an annual average rate of $177 per capita under Paul Martin versus $35 per capita under Stephen Harper. Conversely, direct program spending grew at an annual average rate of $54 per capita under Paul Martin compared with $160 per capita under Stephen Harper.

What about the contributions of the two minority governments to the longer-term fiscal health of the country? To measure this, we look at changes in net debt per capita, thus including the effects of both revenue and expenditure. Once again, we see a marked divergence in strategy in Chart 3. Paul Martin’s government reduced net debt per capita at a stunning annual average rate of $870 dollars, while Stephen Harper’s minority government reduced it on average by $33 dollars.

Thus, the results from minority governments are mixed. While Paul Martin increased total program spending by more on average, the bulk of these increases were transfers to provinces. In contrast, Stephen Harper focused on increasing his direct program spending. Measured in terms of net debt per capita, Paul Martin is the clear winner as toughest minority government fiscal manager.

While political factors can have an important effect on fiscal management, so can economic conditions that are often largely beyond the control of governments. To evaluate the effect of economic conditions we need to look at measures that are adjusted for economic fluctuations. Fortunately, the federal Department of Finance publishes a cyclically-adjusted measure of the deficit. In layman’s terms, the measure adjusts for the changes in revenues and expenditures that occur automatically when the economy is above or below capacity. In other words, it gives us a sense of the government’s discretionary fiscal policy.

In Chart 4 we show the average cyclically-adjusted surpluses or deficits per capita for the three governments. Jean Chretien ran modest surpluses of $15 on average over his mandate while Paul Martin ran whopping surpluses of $488.  In contrast, Stephen Harper ran cyclically-adjusted deficits per capita of $214.  Thus, if you measure good fiscal management by running cyclically-adjusted surpluses, Paul Martin is the overwhelming winner.

In sum, if you measure sound fiscal management by tight control of program spending, you probably judge Jean Chretien as our best fiscal manager in recent years. If you measure it by running surpluses (regardless of economic conditions) and reducing net debt you probably regard Paul Martin as top fiscal manager among recent Prime Ministers.

Is being tough on spending and deficits the best measure of sound fiscal management? Economists would argue that fiscal management is a complex matter and that it hard to judge performance based on a few summary measures. They would remind us that a number of factors beyond politicians control may also be important. However, politicians will soon start talking about their records as we get closer to the general election. It never hurts to have a few facts on hand to check the claims they are sure to make.

 

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.