Majority economics in a polarized house

Stephen Harper already led the longest-serving minority government in Canadian history before his majority win on May 2nd.  After five years of centrist economic management as a necessity for passing budgets as a minority government, Harper now has an opportunity to put his and the Conservative Party’s stamp on the Canadian economy for the coming decade.  The question now becomes whether the government will continue to pursue centrist, incremental policies or if it will embrace several big, bold, transformational ideas to leave a lasting effect on the Canadian economy.

The last government to make radical changes in the Canadian economic structure was the Mulroney Progressive Conservatives in their second term.  After a wobbly first term during which there were scandals among cabinet ministers and an ill-fated foray into cutting pensions for seniors, the government found its footing after the 1988 election on free trade with the US and resolved to undertake the structural changes that are still being felt today.  The adoption of free trade with the US and later, NAFTA with Mexico has tripled North American cross-border commerce and has better positioned all three countries to complete in a world increasingly divided into giant trading blocs.  The replacement of the manufacturer’s sales tax (a hidden 13% tax that hindered exporters) with the 7% GST turned into the deficit slayer under the Liberals as the consumer economy expanded and provided the federal government with revenue far exceeding its estimates from the early 1990s.  Jean Chretien threatened to cancel the GST until Paul Martin and the Finance Department showed him how essential the GST was to the revenue base and deficit reduction.  On government spending, Mulroney created the Priorities and Planning Committee of cabinet that gradually steered federal spending into an operating surplus, meaning that at least the taxes coming in were covering all expenses aside from charges on the existing debt.  Along with the Acid Rain treaty signed with the US that provided Canadian emitters with a clear path towards pollution reduction, these major policies were the last brave initiatives from a federal government before the  Chretien era.

The first “big idea” that Canadians are going to hear more about is the Security and Prosperity Partnership of North America (SPP) that the US, Mexico and Canada have been working on since 2005.  The Harper government has been negotiating the concept of a North American security perimeter with the US in earnest, trying to move more quickly than under the three way talks with the Mexicans since their drug and illegal emigrant problems have been a constant irritant to the US.  Harper understands that trade and security are directly linked to future economic prosperity and has to sell the idea of compromises on Canadian sovereignty to a reticent and, in some cases, fearful Canadian public.  With a majority government, Harper will be able to weather the political storm over the SPP initiative without risking a snap election and fear mongering by the opposition parties.

The second major area where Harper will have his opportunity to leave a lasting impression will be in the renegotiation of the Federal-Provincial Fiscal Arrangements Act (covering transfer payments) due to be renegotiated by 2014.  This will be an area of major strife and discord due to the poor fiscal shape of some of Canada’s traditionally prosperous governments like Ontario and Alberta.  Other recently healthy provinces like Newfoundland and Labrador will resist becoming net contributors to Canada in any new round of negotiations.  Harper recognizes that Canadian institutions like health care require reshaping if they are to remain financially viable as the baby boomer generation ages and places increased stress on government finances at all levels.  As speculation, we may shortly see the formation of a working group among finance, health and treasury board ministers from all the provinces and the federal government to begin looking at this issue well in advance of the due date.

Will Harper reign in federal spending and start behaving like a fiscal conservative?  The table below looks at federal government program spending (without interest payments on the debt) up until 2009.  One can see that aside from the fiscal restraint practiced by the Liberals during the mid-1990s, the spending increases have been substantial.  Program spending rose from $175 billion in 2006 to $208 billion in 2009.  According to the CATO institute who compiled the data, “Canadian spending did grow during the past decade, but much less than U.S. government spending. Between 2000 and 2009, total Canadian federal spending increased 47 percent, but total U.S. federal spending rose 97 percent.”

The growth in spending did not slow down under the previous minority government, and certainly the two year stimulus package worth $52 billion was responsible for a substantial part of the increase.  However, Harper has committed to balance the books by fiscal 2013-14 and that is going to require the maintenance of the current spending restraint program in the very least.  If the high Canadian dollar continues to eat into corporate profits due to reduced exports and curbs tax revenues, expect more restraint in the budgets to come.  Two or three years of tight budgets that hold government spending increases within a percentage of the Canadian inflation rate would restore the government’s credibility with its fiscally conservative western base.

The newly-minted NDP opposition is going to have a hard time getting its act together since at least 50 of its 102 MPs are complete neophytes who will require extensive training before they are able to comprehend the complexities of the issues presented in the House of Commons.  The NDP front bench will be composed of the existing portfolio critics and a smattering of its most talented new faces.  For the first year, the NDP will have to concentrate on providing traditional left-wing opposition to Harper’s tight budgets, foreign policy and tough-on-crime social agenda.  Harper should expect to have an easy ride in the house during this period as the Liberals, more skilled in the nuances of national policymaking, will be distracted with a leadership race and rebranding exercise of their own.

The longer term perspective for the NDP is not that clear.  There are parallels to be found in UK political history after Margaret Thatcher came to power in 1979 and the Labour party was left with a profound identity crisis.  Under leader Michael Foote, the party continued with shrill, radical left wing policies that turned off voters and left them languishing in the polls.  With the arrival of Neil Kinnock as leader in 1982, Labour began the difficult process of introspection and the purge of the more controversial elements of its platform in order to refashion itself as a government in waiting.  The process took a long time, was messy enough to easily allow the Tories re-election under Thatcher and even under the decidedly uncharismatic John Major.  Kinnock’s leadership did not survive the process; he resigned and Tony Blair won the leadership to complete the transformation.

Jack Layton may have a Kinnock-esque political future.  He will have to decide sometime midway through the current mandate whether the party is going to remain true to its working-class roots (and the socialist-style wordings of its party constitution) or whether it will attempt to crowd the Liberals out of the political centre and become a government in waiting.  Layton will have to develop his own set of centrist “big ideas” and sell them to his party, and then to the Canadian public.  His political career may not survive the controversy that is likely to erupt within the party and the reaction of his neophyte MPs is practically impossible to predict.  Like Kinnock, he may have to cede the leadership to a new face, unblemished by the debate, to carry his new platform before the electorate.  In the meantime, the Harper Conservatives can occupy the centre-right of the political spectrum and have it all to themselves for at least one term.

In a House of Commons polarized between an experienced Conservative government and a work-in-progress NDP the debate is likely to sound more like the parties talking to their own electoral bases rather than to each other.  For the Harper government, it has to decide how truly conservative it wishes to be; for the NDP, it has to decide what it wants to be, period.  Advantage: Harper.