The Liberal legacy
Before Christmas, I shared the general opinion that the upcoming federal election would produce approximately the same result as the last one: a Liberal minority that might or might not be large enough to govern with the support of the NDP. But events since Christmas suggest that the Liberals – who have been in power since 1993 – will no longer be forming a government after January 23.
When the Liberals under Jean Chrétien won power in 1993, they did so with a platform that worried me a bit: they campaigned against the GST and NAFTA and they didn’t seem to be overly concerned with the federal deficit (which was then around 5% of GDP, and had been fluctuating around that level for over 15 years). And they also seemed to be extremely upset with John Crow, Governor of the Bank of Canada, who had – at the cost of an admittedly severe recession – finally managed to get inflation under control.
I was only a bit worried because they had given themselves enough wiggle room to reverse themselves on the GST and NAFTA. If they couldn’t get the US to negotiate a ‘better deal’, then they’d leave NAFTA alone. And if they couldn’t come up with a better way to generate tax revenues than the GST, then it would stay. Unsurprisingly, both NAFTA and the GST are still with us, and a good thing, too. And even though the Liberals did indulge in a petty exercise of instantaneous gratification by not giving John Crow another term as Governor, Gordon Theissen and David Dodge have maintained his policy of inflation targeting. Also a good thing.
Not all of the Liberals’ macroeconomic policy successes amounted to deciding to not reverse Mulroney-era policy initiatives, however. In the spring of 1995, then-Finance Minister Paul Martin announced a series of spending cuts and tax increases designed to eliminate the federal deficit, and the federal government has run a surplus continually since 1997. If Canadian representatives to international economic conferences (G7, OECD, etc) have been insufferably smug over the past few years, it is perhaps a pardonable sin.
In retrospect, the decision to finally deal with the federal deficit was less courageous than it appeared at the time. Credit ratings agencies had already started to downgrade Canadian federal bonds, and there were rumours of bond issues that had difficulty finding buyers and of IMF rescue packages. But it is to the Liberals’ credit that they decided to do the right thing, and risk the electoral consequences. Again, in retrospect, those risks were in fact quite small: the opposition parties were fragmented, and none were in a position to use the dissatisfaction with budget cuts to dislodge the Liberals in the 1997 election.
So here we are in 2006: the largest industrialised economy with surpluses in its government and current account balances, unemployment rates at 30-year lows, and low and stable inflation. As far as macroeconomic policy goes, the Liberals would have been more than justified in expecting a crushing majority next Monday based on the slogan: ‘More of the same’.
But that just goes to show you how important macroeconomic policy is in determining who wins elections.
