In late April, Joe Oliver, Canada’s current Finance Minister, delivered his first budget. In a nice touch, the budget began with Oliver’s homage to his predecessor: “Our first balanced budget since the downturn is the legacy of a man who steered our nation through the worst economic crisis since the 1930s: my predecessor, colleague and friend, Jim Flaherty.”
We can quibble about the accounting, but essentially Oliver is right: the Tories have balanced the budget despite an unexpected collapse in oil and gas prices over the last year. When, post-2011, the Tories became a majority government, Flaherty had more discretion to follow his instincts. The result is, as the budget announces, the lowest ratio of federal tax revenue to GDP in 50 years. On the other side of the House, claims such as this have prompted Liberal and NDP MPs to predict an end to Canada’s Nordic tradition of a compassionate welfare state.
If you download the budget1 and look at the graph on page 340, you will see that the maximum sustained federal tax/GDP ratio over the last 50 years was about 18 per cent. This was during the years from the late 1980s to the late 1990s when Tory and Liberal governments sought an end to two decades of continuous federal deficits. In 2000, the Liberals lowered tax rates significantly and the ratio fell to about 16 per cent. Since 2008, the Tories have lowered the ratio to 14 per cent – initially in a grudging Keynesian exercise of lowering taxes and maintaining spending during a recession, subsequently in a conservative exercise of constraining spending to match the lower tax revenues.
For many reasons I would like a return to 16 per cent, but there are other more important questions to debate. There is something surreal about Canadian politicians devoting so much rhetoric to the wisdom or error of a two-percentage-point reduction in the federal tax/GDP ratio since the Tories assumed office.
The most important question raised by Harper’s leadership, I suggest, is: do we want Canada to be the Saudi Arabia of North America? Beyond lowering taxes, the “big idea” among Tory leaders over the last decade has been to put an end to eastern domination of Canadian politics by exploiting Canada’s vast energy resources – tar sands in particular. A corollary to this “big idea” has been to label concern with expanding world use of fossil fuels and consequent climate change left-wing paranoia.
That a Calgary-dominated government has sought to minimize climate change as an issue may not be honourable, but is understandable. Less understandable is the timorous criticism by Liberal and NDP leaders of the Tories’ “big idea.” There have been exceptions. Thomas Mulcair made a few speeches in 2012 to the effect that Canada is suffering from “Dutch disease”: excessive resource development, distorted prices and wages and stagnant productivity. When challenged, he backed off. A more notable exception was Stéphane Dion’s “green shift” campaign in 2008. His inability to make carbon taxing a politically palatable subject was due to more than a stilted rhetorical style. The NDP played a disingenuous role. During the 2008 campaign Jack Layton vigorously attacked both Dion’s “green shift” and British Columbia’s recently enacted carbon tax:
Our plan works without taxing your family like the tax Campbell imposed and that Harper approved and that Dion wants to make three times worse. Our plan makes the big polluters pay instead, and it doesn’t tax ordinary families like yours.
This was staggering political opportunism. By 2008 the evidence on cap and trade was clear: it is open to so much manipulation by governments issuing permits that it usually doesn’t work. And if any such scheme is vigorously implemented, the “big polluters” pass on the cost of permits to “ordinary families.” Not content to attack Dion, Layton damned B.C.’s carbon tax, which is now widely credited as the most ambitious initiative to date in North America to introduce emissions pricing.
The post-2008 conclusion drawn by both Liberal and NDP leaders has been to avoid challenging the Tories’ “big idea.” However, for many reasons, this “big idea” is a bad idea and should be challenged.
First, it led to an unwarranted appreciation of the Canadian dollar against its U.S. counterpart, from 65–70 cents in the early 2000s to above par in the early 2010s. As Tom Courchene has argued, speculative expectations of rapidly expanding oil and gas exports created a demand for the loonie beyond economic fundamentals.2 The unwarranted increase in the exchange rate exacerbated the post-recession problem of maintaining manufacturing jobs in the Canadian economy. The decline of the Canadian dollar to 80 cents over the last year is due to the Saudis’ refusal to curtail production and to other geopolitical conflicts over oil and gas exports – not to any rethinking among Canadians of the value of the “big idea.”
Second, the hegemony of the “big idea” has meant that Canada has dragged its feet on the diplomatically difficult task of defining climate change policy. For example, the opposition often criticizes pipeline proposals, but only under the cover of objection by Native groups making land claims or by environmentalists fearing oil spills. What an NDP or Liberal government would do on this file, were either in power, is unknown.
Third, the Liberal/NDP quasi-endorsement of the “big idea” has minimized public discussion of Canadian productivity growth, which has been less than impressive in recent decades. At the core of productivity growth is promoting education success among successive generations. And the foundation of education success is students doing well in Grades K–12.
How is Canada faring internationally in terms of K–12? The best answers to this question come from the Program for International Student Assessment (PISA), the OECD’s international evaluation of math, reading and science knowledge among upper-secondary students in randomly selected schools in more than 60 countries. Overall, Canada fares pretty well in terms of PISA, but its performance has declined over the last decade, both absolutely and in international ranking. And performance across provinces varies immensely. The most precipitous declines have occurred in Newfoundland, Alberta and Manitoba.
Almost certainly, the declines in Newfoundland and Alberta are due to these provinces’ oil-based economies. If – until recently – a teenager could earn $75,000 annually driving a truck to and from Fort McMurray, why struggle with grade 11 algebra? Why finish high school? Not only did PISA scores decline sharply over the last decade in these two provinces, but according to the latest census their high school dropout rates are well above the national average for young adults.
Much of Manitoba’s decline can be attributed to a rising share of Aboriginal students, whose K–12 education outcomes remain very weak. With Aboriginals comprising nearly a third of Manitoba and Saskatchewan school-age cohorts, the productivity and social cohesion of these prairie provinces require that Aboriginal education outcomes improve dramatically. As the controversy over the First Nations Control of First Nations Education demonstrates, improving Aboriginal education is a crucial but politically sensitive subject.3 Liberal and NDP MPs have been absent from the debate.
Fourth, the prospect of easy prosperity from oil and gas exports has coarsened provincial political debate in western Canada and encouraged provincial politicians to evade tough choices. In the early 1990s, Roy Romanow’s NDP government in Saskatchewan inherited the largest provincial debt (relative to provincial GDP) and in its first term raised taxes and reduced spending. The skill with which his government balanced the budget over its first term was such that the NDP was comfortably reelected in mid-decade. Could a western premier repeat such an exercise this decade? In particular, will Rachel Notley be able to do it? I’m not sure.
Saskatchewan Premier Brad Wall has become the most consistent premier in voicing scepticism over climate change. In 2013, B.C. Premier Christy Clark won reelection by wearing a hard hat and promising thousands of construction jobs and billions of dollars in future royalty revenues from liquefied natural gas exports. Admittedly, there is a case for using natural gas as a substitute for coal. If that was Clark’s primary goal, however, she would have been talking to her Alberta and Saskatchewan colleagues on use of B.C.’s gas for the rapid phase-out of their coal-fired power plants. She wasn’t.
This “coarsening” has afflicted not only our politicians but all of us. Albertans have something in common with Greeks faced with the European Union’s post-2008 recession. Both Greeks and Albertans have abandoned the political establishment that prevailed during good times. In both cases the plurality has swung left; a substantial minority has swung right. Jim Prentice deserved to be humbled in Alberta’s recent election. He was among the inner core of Calgary corporate leaders promoting western Canadian oil and gas exports over the last decade. Nonetheless, he was right to insist that Albertans bear collective responsibility for having endorsed low taxes, high public sector salaries and a bloated provincial budget overly reliant on resource royalties.
I don’t want to be merely a curmudgeon. Had I been in Alberta, I too would have voted for the NDP. After four decades, the Tories had become dependent on donations by the Calgary corporate elite. Rachel Notley is a sophisticated politician who, on climate change, has hinted at sensible initiatives – such as expanding the interprovincial power grid and buying B.C. electricity to be generated from the large Site C dam as a means to rapidly phase out Alberta’s coal-fired power plants.
It is too soon to know how the Alberta NDP will govern. Maybe Notley will lead Albertans away from infatuation with the Tories’ “big idea.” Maybe she will display Romanow’s skill in balancing the provincial budget while maintaining services. We shall see.
1 Available online at www.fin.gc.ca
2 Thomas J. Courchene, “A Modest Proposal for Monetary Policy: The Bank of Canada Needs to Pay More Attention to Exchange Rates,” Inroads, Summer/Fall 2014, pp. 30–38.
3 See my “Fixing Aboriginal Education: Ottawa’s Reform Legislation Falls Victim to Competing Agendas,” Inroads, Winter/Spring 2015, pp. 39–49.