The Liberals want the wheel back.
For a quarter century, federal finances have worked in the shadow of the 1995 Liberal budget that did not just tame the runaway national debt, but defined a more modest role for government. The private sector would drive economic growth, and government would only do what it had to.
That era is now at an end, with the federal Liberals laying out a vision of an activist government that takes a leading role in driving the postpandemic economic recovery and beyond, muscling aside the private sector. For this generation of Liberals, government’s role is to do everything within its reach. And that reach extends throughout the economy.
Everything means, most notably, billions of dollars in new spending for subsidized child care outside of Quebec, turning three decades of broken political promises into a new national social program.
Everything means a new round of pandemic subsidies, expanded to include payments to businesses that hire workers. Everything even means money for small businesses to speed their move into digital commerce, and money for thousands of young Canadians to show those businesses how to use their newly acquired technology.
Most immediately, everything within reach means speeding up the pace of economic recovery, and a deliberate repudiation of the Harper government’s focus on balancing the federal budget in the wake of the 2009 financial crisis.
The Liberals will instead ramp up spending by $135.2-billion over five years, with the goal of accelerating economic growth to speed up the rate of job creation for the 450,000 Canadians who currently cannot find work – “a lot of human tragedies,” as Finance Minister Chrystia Freeland described them to reporters on Monday. “We believe it is absolutely essential to act quickly to get those jobs back.”
At the same time, the government is counting on economic growth paying for its spending ambitions. There are no broad tax increases, with only a few boutique measures, such as taxing yachts. The Liberals are betting that their activist agenda will allow a supercharged economy to outpace the buildup in the national debt, although just barely.
The budget projects that the debt burden, measured by the ratio of net debt to gross domestic product, will peak in the current fiscal year and drop only slightly over the next three years. The Liberals say hitting that target is their fiscal anchor, but they have not set any goal beyond fiscal 2025-26. In the meantime, Ottawa’s public debt charges are projected to double between fiscal 2020-21 and fiscal 2025-26, rising to $39.3-billion from $20.4-billion. Alexandre Laurin, director of research at the C.D. Howe Institute, said his analysis shows that even modest increases in interest rates at the end of the decade would mean that debt would start growing faster than the economy.
The Liberals’ rebuttal: It would be foolish not to spend heavily now, when interest rates are so low and the cost of debt so easily borne. “The best way to pay our debts back is to invest in long-term growth,” Ms. Freeland said, adding that child care has the potential to provide a structural boost to the economy much in the same way that the North American free-trade agreement did a generation ago.
Economist Armine Yalnizyan said the program announced Monday is a recognition of the economic benefits of child care. And she said it marks a historic moment in which decades of ineffective talk have finally turned to action. “This is a very good day,” she said.
If Ms. Freeland is right, this budget will mark an inflection point in the economy, and a clean break with the fiscal orthodoxy of the past quarter century. If she’s wrong, the 2021 budget will be just as noteworthy – as the point that Canada began to fall back into the debt spiral that threatened the country’s finances in the 1990s.
Federal budgets have, for the most part, been the political equivalent of soap bubbles – attention grabbing for a short while, but quick to dissipate.
A handful stand out as watersheds. The introduction of income tax in 1917 set in place a framework that, in the next global war two decades later, would lead to a huge expansion in Ottawa’s revenues. In the late 1950s, the Louis St. Laurent government launched the system of equalization payments that underpins fiscal federalism to this day.
A decade later, in the mid-1960s, Liberal governments led by Lester Pearson and Pierre Trudeau put in place the final elements of the modern welfare state, introducing employment insurance, the Canada Pension Plan and social-program transfers to the provinces.
Those budgets had a second, much less happy, legacy. They marked the start of a 30-year deterioration in federal finances. Deficits and the national debt grew inexorably, as the growth in spending outpaced a slowing economy in the 1970s. Rising interest rates accelerated Canada’s descent into debt. And a lack of political will throughout the 1980s meant the debt kept on growing, even during that decade’s economic expansion.
By 1995, Canada’s finances were dangerously degraded, with the country’s net debt rising to 66 per cent of gross domestic product, more than triple the level of the mid-1970s.
It would take another Liberal government, in 1995, to reverse that course, in what many economists point to as the single most significant federal budget – the hell-or-high-water reshaping of federal finances by Jean Chrétien and Paul Martin.
Fundamental to that approach was the recognition that economic growth had permanently slowed, said Don Drummond, then a senior official in the finance department. Before that point, successive administrations had not come to grips with the reality of slowing economic growth, instead choosing to “deny, deny and hope” – deny that federal spending was out of control, and hope that somehow economic growth would surge and avoid the need for any reckoning.
The 1995 budget was important in four ways. In an immediate sense, it recast the fiscal underpinnings of the federal government. The Chrétien-Martin budget slashed spending – cuts in real-dollar terms, not just a painless and ineffective paring back of planned increases. Employment insurance, transfers to the provinces, subsidies to farmers and businesses: All were on the chopping block.
But the 1995 budget did more than to simply reduce expenditures. The Liberals also redefined the role of the federal government. Mr. Martin, in his budget speech, said that was “to do what only government can do best and leave the rest for those who can do better.”
Backing up that rhetoric with action, the Liberals privatized Canadian National Railway later that year and committed to selling the government’s stake in Petro Canada. Selling off the national railway, synonymous with nation building, and the public oil company, synonymous with the Liberals’ previous enthusiasm for economic intervention, were unapologetic moves to enact a philosophy of a more focused federal government.
The 1995 budget also re-established Ottawa’s credibility, sorely tested by year after year of whistling-past-the-graveyard fiscal projections masquerading as fiscal planning. Instead, Mr. Martin famously sold his budget targets as something the government would achieve “come hell or high water.” (Mr. Drummond confessed that such confidence resulted in part by conservative assumptions, the reverse of the undue optimism that had led to budget misses in previous years.)
And it had a lasting impact, both fiscally and politically. On the budgetary front, the success in reducing the deficit, and then the debt, created enough fiscal flexibility that Ottawa could cut individual and corporate tax rates within a few years. Later, the Conservatives would cut the GST rate. None of that would have been possible without the fiscal restructuring of 1995.
But the budget’s political legacy was just as important. For two decades, deficits were toxic, and balanced budgets obligatory. Even with the 2008 financial crisis and a then-record deficit of $55.6-billion in fiscal 2009-10, the Conservative government pushed hard to return to surplus quickly.
It was not until the 2015 election, when Justin Trudeau’s Liberals proposed a three-year string of modest deficits devoted to infrastructure spending, that the hold of the 1995 budget was loosened.
Now, Mr. Trudeau and Ms. Freeland have broken free of its grasp altogether.