The partisan battle lines over federal economic policy keep shifting. For much of last year it looked like the defining clash would be over middle-class incomes. More recently, Prime Minister Stephen Harper’s new tax break for couples with kids has dominated his sparring with NDP Leader Thomas Mulcair and the Liberals’ Justin Trudeau. On any given day, though, the hottest economic argument might seem to be about government spending levels, or trade policy, or programs meant to boost competitiveness. Maybe the best way to squeeze all these elements, and more, into a single frame is to consider a slogan the Conservatives are testing out in the run-up to the federal election set for this coming Oct. 19: “We’re better off with Harper.”
Expect to hear Conservatives deliver many variations on that crucial, debatable claim in the days before Finance Minister Joe Oliver delivers his budget on April 21. Oliver’s signature pledge is to balance the books, but staunching the flow of red ink won’t settle the bigger question of whether Canadians are, in fact, better off sticking with the current PM. Seriously trying to answer it requires ditching partisan clichés. Voters used to thinking along the stereotypical lines of party brands need to give their heads a shake when the Conservatives in power have run a string of deficits, after an era when Liberals delivered a run of sizable surpluses.
And that’s not the only way Harper’s record fails to conform to expectations. This is a Tory government that often spends freely—one might even say liberally—to intervene in the private sector, is less than frugal by some measures when it comes to government administration, and cuts taxes in unexpected ways. It’s the surprises that make it all interesting. So here, with the help of some top analysts and data compiled by experts exclusively for Maclean’s, is the most comprehensive look yet inside the black box of Harper’s economic record—from the moment he won power in 2006 to today.
Taxes: Hardly a Republican agenda
No criticism is more often levelled at Harper these days than the charge that his tax policy tilts toward the wealthy. At issue is his new “family tax cut,” which will allow couples with kids to transfer up to $50,000 from the higher-earning to the lower-earning spouse, so that income is taxed in the lower bracket. The yearly saving is capped at $2,000 per couple, but still adds up to an eyebrow-raising $2.2 billion—a huge revenue sacrifice for a government still struggling to stop deficit-spending and return to surplus. Trudeau charges that Harper “spent that surplus, before it even arrived, on a big tax cut for wealthy Canadians—a $2,000 gift.”
In fact, most of the benefits won’t flow to Canadians in the highest tax brackets. The independent parliamentary budget officer provided Maclean’s a breakdown of how income-splitting will be divided among families. The PBO’s projection: 52 per cent of the $2.2-billion in income-splitting benefits will flow to the roughly one-third of two-parent families that make between $60,000 and $120,000. Only 32 per cent of the benefits will go to households making more than $120,000, while just 17 per cent helps out families making less than $60,000.
It’s hard to construe that division as mainly benefiting the rich. And this isn’t an isolated case. Last spring, the PBO analyzed the effect of all the tax reforms of the Harper era up to 2013, including the introduction of the Child Tax Credit, the Working Income Tax Benefit, and an increase in the basic personal exemption. The PBO concluded that the changes “have been progressive overall and most greatly impact low- and middle-income earners,” those making between $12,200 and $23,300, who saw an average four per cent boost in after-tax income. The highest 10 per cent of earners, by comparison, pocketed tax savings of 1.4 per cent of income.
Even experts who are sharply critical of Harper’s tax policy in other respects don’t tend to see his reforms as particularly skewed toward upper-income earners. “A lot of the tax policy of this government hasn’t been terribly pro-rich,” says University of British Columbia economist Kevin Milligan, who serves on Trudeau’s economic advisory council (and contributes online for Maclean’s). “Contrast it to the Republicans in the U.S.,” he adds, “who are always saying, ‘Cut that top rate to unleash the innovation of the richest people.’ You just don’t hear that argument from the Harper Conservatives.”
Milligan sees big problems, however, with other facets of Harper’s tax-policy approach. On income-splitting, he points to the unfairness of excluding single-parent families and Canadians without kids. Like many tax experts, Milligan is also frustrated by the complicated array of gimmicky changes Harper has introduced—like the credits for children’s fitness and arts activities, or transit passes.
The bottom line? When the Tories took power, personal income taxes amounted to 7.4 per cent of gross domestic product; by 2014, those taxes on individuals’ earnings had notched down just slightly to seven per cent of GDP. Corporate income taxes fell a lot more over the same period, to 1.9 per cent of GDP from 2.6 per cent—a major complaint of the NDP. All told, Oliver can accurately claim that “the federal tax burden is at its lowest level in 50 years.” Personal tax relief has been spread across the income spectrum, but an already complicated tax code has been made more unwieldy in the process.
Jobs: More but not the best kind
Even more than bragging about lower taxes, Harper and Oliver jump at any chance to boast of adding 1.2 million new jobs since the recession. That’s measured from the 16.7 million Canadians working at the low point in the 2009 recession to the 17.9 million with jobs now. Job creation was strongest early in the recovery. The Canadian economy added just 121,000 jobs in all of 2014, and that was before the oil-price plunge really started to hurt. But many economists don’t view the unemployment rate, or even total employment, as the most telling indicator. They focus instead on the labour market participation rate: This measure of all those working or actively looking for jobs stood at 65.7 per cent at the end of last year—its lowest level since 2000.
Related reading: The A to Z of the oil crash
Making international comparisons is tricky, but for 2015, the forecast from the Paris-based Organisation for Economic Co-operation and Development puts Canada in the middle of the pack, adding jobs at a slightly slower rate than the U.S. and Britain, but better than France, Germany, Italy or Japan.
Sorting out how good any new jobs are is an even tougher challenge. The CIBC’s closely watched employment-quality index blends data on the split between full- and part-time jobs, and between self-employment and paid employment, while also taking into account which parts of the economy are generating jobs. CIBC deputy chief economist Benjamin Tal said the index has shown the quality of jobs declining overall since the early 1990s. When Tal’s latest job-quality report came out last month, Harper’s opposition adversaries pounced on its finding that the job quality index dropped 1.8 per cent in the past year.
But pinning that on the Tories may be too glib. “This is not a political statement,” Tal says. “This is not about what should be done; it’s about what I see.” He stresses that long-term deterioration in the quality of jobs isn’t a uniquely Canadian problem; it reflects a troubling decline in middle-paying work, especially in manufacturing, across many developed countries. One result is a rise in self-employment. Although he is careful not to denigrate working for yourself, Tal notes that it tends to pay less and be less stable. And last year, the ranks of self-employed Canadians increased four times faster than the number in new salaried jobs.
Not everyone looks at the job market with Tal’s eye for durable trends and deep patterns. Perceptions depend on boom-and-bust cycles and vary dramatically across provinces. The boldest theme of Harper’s economic message used to be his vision of Canada as an “energy superpower,” and where oil rules, Canadians have indeed prospered—at least until lately. According to Statistics Canada, the median family in Alberta enjoyed a 20 per cent raise between 2006 and 2012, the latest figures available, from $72,700 to $87,410. That was considerably better than the rise in total income for the median Canadian family (including couples or single parents with kids, plus couples without kids), which rose 14 per cent between 2006 and 2012. The median family in Ontario saw its total income climb from $62,200 to $67,900, or nine per cent, less than half the Alberta income hike.
That imbalance has been thrown into sharp relief by the stunning drop in oil prices that began last year and is hitting those former boom provinces hard. Harper has to hope good news starts materializing, as some economists forecast, in other regions. The petro-sensitive Canadian dollar’s fall should make manufactured products, particularly from Ontario’s industrial heartland, more competitive in export markets—eventually. In the meantime, the punishing oil-sector slump can only underscore the fact that Harper’s employment record—both on job creation and middle-class incomes—has relied to a great degree on a resource boom that was ultimately outside any government’s control.
The jobs and incomes stories of the Conservative years have looked healthy enough on a national basis, but those regional differences are what Canadians really feel. The question is whether voters shrug that off as inevitable in a geographically sprawling, industrially diverse country—or as evidence of an oil-obsessed government that failed to fully consider the wider picture.
Trade: Bright patches in a clouded scene
The only part of Brian Mulroney’s legacy that the Harper Conservatives fully embrace is free trade. They tout new free trade deals like the Canada-South Korea agreement, which came into force this year, and the Canada-European Union pact, for which prolonged negotiations wrapped up last year, although the deal hasn’t yet been implemented. Trade Minister Ed Fast recently launched a blue-chip advisory council for Canada’s global markets action plan, made up of nine business executives.
Cold statistics, however, don’t fully back up the Tories’ pro-trade narrative. During the Harper era to date, exports actually fell as a share of the Canadian economy to 31.5 per cent from 35.5 per cent, according to Export Development Canada. As well, the EDC says manufacturing’s slice of Canadian merchandise exports dropped to 60.7 per cent from 72.3 per cent—another reminder of Harper’s emphasis on oil and other commodity exports to drive growth.
But Peter Hall, chief economist at EDC, the federal agency that provides insurance and financing services to Canadian exporters and their international buyers, points to promising data about the share of Canadian merchandise exports going to fast-growing new markets, like China, Brazil and India, rather than slower-growing traditional ones, like the U.S. and Europe. Exports to emerging economies climbed to 12 per cent in 2014 from 7.5 per cent in 2006. “That’s a remarkable change in the distribution of trade,” Hall says.
Still, the woes of Canadian firms selling into the U.S.—by far Canada’s biggest foreign market—cast a dark shadow. Harper’s failure to convince Barack Obama’s White House to approve the proposed Keystone XL pipeline, which would funnel Alberta oil sands crude to refineries on Texas’s Gulf Coast, is the most glaring setback, but far from the only worry. Even before the international credit meltdown of 2008, and the recession that followed, the U.S. was proving problematic. Hall points to three factors: “border thickening” that followed the Sept. 11, 2001, terrorist attacks, as tighter security rules made it harder for Canadian firms to ship south; the “tech wreck,” led by the fall of Nortel, that shrank Canada’s export-intensive technology sector; and, until recently, the loonie’s high value, which hiked the effective price of all Canadian exports to the U.S. and beyond.
Those setbacks, and then the Great Recession, were mostly beyond the Harper government’s control. Sealing a major European deal, along with other agreements either signed or in the works, was within its reach and has to be credited. Presiding over those rising sales to emerging markets helps, too. Taken together, the positive signs should be enough for the Conservatives to make a credible case for looking forward to better days on the trade front.
Innovation: An old problem still unsolved
Anxiety in Ottawa about Canada’s weak record when it comes to creating innovative companies goes back decades. Harper’s response had a familiar ring: commission a report. He appointed a high-profile panel on federal support for research and development, headed by Tom Jenkins, the chairman of Canada’s biggest software company, Open Text of Waterloo, Ont. The Jenkins panel tabled its findings in 2011, recommending, among other things, establishing an industrial research and innovation council to oversee dozens of federal programs aimed at helping companies bring new ideas to market.
That council hasn’t been created. Other key Jenkins recommendations have been only partially acted on or shelved. So it’s not hard to find disillusioned experts on science and technology, research and development. “The Jenkins report wasn’t a watershed because it got deep-sixed,” says David Arthurs, president of Hickling Arthurs Low, an Ottawa consulting firm specializing in innovation and technology policy. “The government really didn’t follow up on it.”
Nobina Robinson, chief executive officer of Polytechnics Canada, an association that represents technical institutes and research-oriented community colleges, served on the Jenkins panel. Robinson says the government’s main goal, and the panel’s mission, was to boost private sector spending on innovation—a category in which Canada has persistently trailed rival countries. Business R & D spending in Canada fell from $16.5 billion in 2006 to $15.4 billion in 2014, a trend blamed by a Council of Canadian Academies panel in part on isolated setbacks like the fall of Nortel—once the country’s biggest corporate R & D spender—but also on broadly based declines in many industries. “If the objective was to increase business innovation,” Robinson concludes, “we’re not seeing it.”
But the Conservatives’ defenders say it’s too early to judge if key policy changes designed to spur innovation will succeed or fail. In their 2012 budget, the Tories tried to better target the key Scientific Research and Experimental Development tax incentive, known as SR&ED. The SR&ED tax credit rate was cut to 15 per cent from 20 per cent, and firms were no longer allowed to claim capital expenditures, only expenses like salaries, materials and overhead. The government followed up by revamping the National Research Council, shifting its focus from funding basic science to “better serve Canadian businesses and help them compete in the global marketplace against the world’s most innovative companies.”
Critics argue the NRC’s new mandate short-changes fundamental research. As for the SR&ED reforms, even the lobby group Canadian Manufacturers and Exporters, which praises much of Harper’s policy mix, complains that some of its members are finding it harder to get tax breaks for their R & D. But these reforms at least mean the Tories can’t be accused of ignoring this long-standing Canadian economic shortcoming, even if the numbers so far don’t add up to clear progress.
Spending: Not exactly Conservative restraint
Beyond the elusive innovation policy puzzle, anyone who expected the free-market-oriented Conservatives to be restrained about injecting tax dollars into the private sector must have be shocked by what’s transpired. For instance, Harper kept regional development spending up over $1 billion a year, even creating a whole new agency to subsidize southern Ontario (a key electoral battleground) to the tune of more than $200 million a year.During the 2009 recession, the government approved a $9-billion bailout of General Motors and Chrysler. When it comes to infrastructure projects, the Harper government touts its $53-billion New Building Canada Plan as the biggest in Canadian history. Even more spending in the April 21 budget on infrastructure and for business, especially manufacturers, is being promised by Industry Minister James Moore.
Does all this qualify the Harper Tories as inveterate big spenders? Nobody knows their spending record better than Kevin Page, who probed it from 2008-13 as the first independent parliamentary budget officer, and now keeps watch as a professor at nearby University of Ottawa. Page breaks the Harper era into three parts: higher spending and serious tax cuts “out of the gate” in the 2006-08; a gusher of stimulus in 2009-10 to counter the recession; and, since then, restraint to try to rebalance the books.
Federal program spending in 2014-15 stood at 13 per cent of GDP, a shade higher than the 12.6 per cent in 2005-06, when Harper bounced the Liberals from office. “It might be a surprise for people—a Conservative government and spending has gone up as a share of the economy,” Page says. “Or that under a Conservative government, we’ve actually had deficits seven out of nine years.” By comparison, the Liberals under Jean Chrétien and Paul Martin not only eliminated deficits, they shrank Ottawa’s spending sharply as a share of the overall economy. But Page points out that those were very different times: Chrétien ruled while a sustained stretch of growth swelled GDP, and Martin’s assault on deficits as finance minister kept a lid on spending.
Perhaps more telling than total spending is the change in the mix under Harper. Federal transfer payments to individuals (such as pensions) and to the provinces (including health funding) are actually up slightly as a share of GDP, while Ottawa’s spending on its own programs is down as a portion of the economy. From a high of $122.8 billion, or 7.8 per cent of GDP in 2009-10, direct program spending dropped to $114.1 billion, 5.8 per cent of GDP, in 2014-15.
That might seem to give Harper ample room to run as a frugal manager. But Page says a closer look at the efficiency of government operations doesn’t back that up. His tally of “back-office expenditures”—spending on everything from procurement and information technology to human resources—shows an increase during the Harper years, both in absolute dollars and as a share of federal spending. “This is probably one of those inconvenient truths the government would not like to get out—that they’re claiming greater productivity, but we’re not seeing it in terms of their back-office functions,” Page says.
Internal operations, however, are rarely the focus of much public debate. More likely to matter is which highly visible priorities get funded. Page detects some patterns that might be expected under the Conservatives. Spending is up on public safety priorities like the RCMP and prisons, but down—during the recent restraint period—on culture and the environment. Less in keeping with Conservative rhetoric, he notes, is the recent squeeze on Defence, after heralded increases in the early Harper years. All told, he says, the major segments of spending—the shares spent on the economy, social and international affairs, defence and government—look much the same after nine years of Harper. “Spending on the broad policy envelopes,” Page says, “has not shifted that much.” Permanent change to Ottawa’s basic place in the Canadian economy, if indeed it’s coming, is proceeding at a stealthy pace.
But that’s not to say nothing consequential is happening; it’s just unfolding in ways that stubbornly refuse to confirm expectations or justify hasty verdicts. Taxes are down, but the tax system is messier. There are more jobs and higher incomes, but regional and sectoral imbalances create as much anxiety as optimism. Exports haven’t been stellar, but show signs of promise. Canada’s chronic innovation anemia hasn’t been cured, but nobody expected a miracle.
Of course, none of these fuzzy, frustrating, fascinating complications will be showcased in the sales job around this month’s budget. Conservative claims will exaggerate success, opposition counter-claims amplify failure. Somewhere in between lies the real economy where Canadians pay taxes, hope their kids find prosperity, and wake up—even on the morning after a budget or an election—and go to work.