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The Globe and Mail

Jim Flaherty’s Keynesian moment, and its mixed results

Finance Minister Jim Flaherty speaks with reporters as he leaves Question Period in the House of Commons on Parliament Hill in Ottawa on Thursday, March 6, 2014.


Former Finance Minister Jim Flaherty will be rightly remembered for the 2009 federal Budget that provided much-needed fiscal stimulus to boost a crisis-ridden Canadian economy and helped set the stage for recovery.

While the government was reluctant to act, domestic political as well as international pressure from the G20 forced even strict fiscal conservatives such as Prime Minister Stephen Harper and Mr. Flaherty to find their inner Keynes.

Short-term infrastructure projects put many unemployed Canadians back to work, and extended unemployment benefits made a big difference in many hard-hit industrial communities. Unlike the United States, however, there was little investment for the longer term in renewable energy and green technologies.

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The Flaherty record is much weaker when it comes to dealing with the long-term structural issues facing the Canadian economy, and laying the basis for long-term prosperity and sustainability in a changing global economy.

Since about 2002, the Canadian economy has been primarily driven by a household-debt-driven housing boom, and by the rapid expansion of the primary resource sector. As traditional manufacturing has shrunk due to the high Canadian dollar, it has not been replaced by advanced manufacturing and related service industries which compete in the global market via investments in research and development, innovation and skills.

The resource boom and its spillover effects have created jobs, but not enough jobs to restore anything like broadly based prosperity in central and eastern Canada. Unemployment remains above 7.5 per cent everywhere east of the Prairies.

Resources have expanded GDP and exports, but we now run a massive deficit in the trade of manufactured goods, especially advanced machinery and equipment, as well as in high-end services. This translates into a huge net loss of highly productive, skilled, middle-class jobs.

The near-demise of national technological champions such as Nortel and BlackBerry, and the very small scale of our renewable energy industries, are symptomatic of our failure to seriously build a knowledge-based economy capable of competing in global markets.

Report after report from the Organization for Economic Co-operation and Development, the International Monetary Fund, the Conference Board of Canada and bank economists have flagged Canada's painfully slow rate of productivity growth compared with the United States and other major industrial powers. Much of this is the result of low investment in machinery and equipment, which has lagged behind overall GDP growth in the recovery.

Canada's record in research and development is especially dismal. Business spending in this area peaked at more than 1 per cent of GDP in the early 2000s, but fell to 0.88 per cent in 2012. This is less than half of the 2 per cent, or even higher, in the United States and other G7 countries.

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The approach of Minister Flaherty and the Harper government has been to leave decisions on investment to the market, while creating a broadly "business-friendly" climate through deregulation and tax cuts.

In its flagship policy, the government slashed the statutory federal corporate income tax rate, from 22 per cent to 15 per cent, notwithstanding the deficit, and watched the cash reserves of non-financial corporations climb to more than $600-billion on the basis of near-record high profit margins.

To date, this leave-it-all-to-the-market approach has clearly failed to build a new economy. The much-anticipated rebound in business investment in advanced capital goods, innovation and skills has not taken place, even as profits have soared. And, given the real shrinkage of our innovative and productive capacities over the past decade, there is good reason to question whether it ever will.

To his credit, Mr. Flaherty did modestly expand some more targeted tax measures, such as tax credits for investment in new machinery, as well as funding for university-based research. But public investment in the new economy has generally taken a distant second place to fiscal austerity.

The Harper Conservatives have failed to heed the voices of economists such as Canada's own Richard Lipsey and Mariana Mazzucato of the U.K., who argue that public investment and government leadership in the development and diffusion of of new technologies are absolutely central to private sector success.

As Mazzucato shows, in the United States, defence research through DARPA has played a huge role in the development of innovative capacity in the private sector. And the U.S. government has also played a major role in capital markets, investing in start-up firms in Silicon Valley before venture capitalists were prepared to take on the risk.

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In some European countries such as Germany, governments have played a central role in creating the technological building blocks for a major transition toward renewable energy and high energy efficiency, creating major new industries and new jobs in the process.

Finance Minister Flaherty saw little room for such public-sector entrepreneurship and leadership in building a sophisticated modern economy. That blind spot has cost us dearly.

Andrew Jackson is the Packer Professor of Social Justice at York University and senior policy adviser to the Broadbent Institute.

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