Austerity works according to Jean Chretien
We are regularly inundated with how fortunate is Canada that its governments worked hard to reduce the outstanding debt in the mid 1990s. As a result, the narrative goes, Canada is in a superior fiscal position to the other members of the G-7 today, and has been better able to cope with the financial and economic crises during the past few years.
In an interview reported in the Globe and Mail Report on Business on November 22, Jean Chretien, the Prime Minister of Canada for a decade between November 1993 and December 2003, and the architect of the fiscal policies that converted $35 billion plus deficits into a string of surpluses, claimed that “cuts to social programs in the 1990s saved Canada from turning into what Greece is today”. He added that “austerity works”.
During his tenure as Prime Minister, when he effectively had no opposition from the right as the Conservatives and the Reform parties were locked in a battle to the death, federal government program spending did decline from 16.8% of GDP to 12.7%, and an operating budget surplus of $1.6 billion (corresponding budget deficit of $38.5 billion) in fiscal year 1993-94 peaked at $63.8 billion (corresponding budget surplus of $19.9 billion) in fiscal year 2000-01.
In the first four years with Chretien as PM, when the government’s budget position improved by almost $43 billion, transfer payments, including transfers to the provinces for health care and education, declined by 4%, and other program expenses declined by 9%. Personal income taxes increased 29% and corporate income taxes increased 86%. Interestingly, in his last five years, transfer payments increased 20% and other government expenses rose 77%. I guess he didn’t want his legacy to be: the PM who balanced the budget by destroying all social programs in Canada.
I should point out that while Chretien’s Liberal Government was dramatically turning around government finances, President Clinton was achieving similar success in the US, although not to the same relative degree. Indeed, government finances on both sides of the border benefited enormously from a sustained period of economic growth.
But I am really interested in his comment that austerity works. If I compare real GDP growth in Canada and the US during Chretien’s time as PM, I find that Canada outperformed the US in only four of the 10 years. When I compare unemployment rates, I find that the unemployment rate in Canada exceeded the rate in the US throughout Chretien’s 10 years. The gap did decline form 3.4% in 1994 to 1% in 2003, but the relative improvement occurred post the 2001 recession. Prior to 2000, Canada’s unemployment rate exceeded the US rate by a 3.2% plus or minus each year. In fact, during Chretien’s first three years, when his “austerity” measures were most stringent, the gap widened from 3.4% to 4.3%.
Did austerity really work as Chretien claims? Not really – by the time Chretien won his first election in 1993, Canada was beginning to recover from the first ever made-in-Canada recession (courtesy of John Crow who was the Governor of the Bank of Canada at that time). So too was the US economy (too late to help George Bush I). The US continued to grow strongly throughout the remainder of the 1990s, the product of accommodating monetary policy and low interest rates, the absence of an oil price shock, and rising confidence.
In other words, Canada was fortunate to be able to ride the coat-tails of the US economy. This helped reduce unemployment rates in Canada and generate large increases in income tax revenues for the Chretien Governments.
If Chretien’s attempt at austerity had not been accompanied by declining interest rates and a strong US economy, I am quite sure Chretien would not be claiming today that austerity works. He was lucky politically; he was lucky fiscally and economically. One should never confuse luck with wisdom!
The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.