The choices before us

An election is as much about the past as the future. A government’s record is a part of its platform, inasmuch as it offers clues to how it actually behaves in office versus how it says it will, and though in the end the choice before the voters is always about who will govern us next, they may also choose to reward an incumbent for the good things it has done and punish it for the bad.

When it comes to the economy — the first broad subject area to be covered in this series comparing the major parties — that effort is complicated by the difficulties in separating outcomes (what the economy did) from policies (what the government did): though both might have happened on the government’s watch, it does not necessarily follow that the latter were responsible for the former, for good or ill..

Strictly in terms of outcomes, the record is rather good, for all the opposition’s attempts to obscure it. The economy is not, as claimed, in recession (it declined slightly early in the year, but has been growing ever since); middle class incomes are not stagnant (median household incomes are up 20 per cent after inflation since the mid-1990s); inequality is not growing (the share of income going to the top 1 per cent has been falling steadily since 2006, while the poverty rate is at an all-time low); and the federal budget is not in deficit (it showed a small surplus in the last fiscal year, and is on track to record another this time).

How much credit should the Conservative government get for all this? Not a lot — in the same way as it cannot fairly be blamed for the worldwide financial crisis of 2008, or the more recent global oil price collapse. Certainly the Conservatives’ hand- ling of the crisis itself was adroit; less so the decision to plunge into deficit afterward, which the evidence shows had very little to do with the recovery that followed.

Indeed governments can do relatively little to alter the short-run performance of the economy, at least intentionally. They can, however, mess things up, by letting inflation and/ or deficits to get out of hand. So the Conservatives also deserve credit — we do not mean this as faint praise — for not messing things up. Having needlessly got into deficit, they have spent the years since digging us out of it, on more or less exactly the schedule promised. This is a significant achievement.

It is somewhat distressing, then, to find that one of the few points of disagreement between the parties this election should turn out to be over whether to plunge the country back into deficit again. To be sure, the deficits the Liberals propose (the NDP is now for balanced budgets) are small: just $10-billion a year at their peak, roughly one-half of one per cent of GDP, not enough even to stop the debt-to-GDP ratio from declining. But if the Liberal deficits are too small to do much harm, they are also too small to do much good — by the very Keynesian reasoning invoked in their defence. And they are unnecessary: whatever our doubts about the efficacy of the Conservatives’ fling with deficit spending, at least there was a recession on. To be so eager to go into deficit, on such slight pretext, does not speak well of the Liberals’ determination to get out of them later.

In the short term, then, the economy’s fortunes will be determined much more by world events than anything governments do. Of greater import, and much more susceptible to policy influence, is the economy’s performance in the longer term. Here the prospects are undeniably grim, owing to the entirely predictable phenomenon of population aging, which will impose much higher costs (notably for health care) on society, with far fewer people of working age, proportionately, to pay them. The only realistic solution to this slowmotion crisis is a sustained rise in national productivity, to ensure that future generations are rich enough to pay for us in our dotage.

What has been the response from the parties in this election? What sorts of policies have they proposed to spur growth in productivity — to increase incentives to work, save and invest? From the Liberals, increasing the top rate of personal taxes; from the NDP, increasing the corporate tax rate. The two have, entertainingly, traded critiques of each other’s tax hikes, the NDP noting the Liberals’ will push the top combined personal rate in some provinces to nearly 60 per cent, the Liberals countering with academic research on the harmful effects of corporate tax increases on investment. We’re bound to say we agree with both of them.

No, the amounts are not large, and yes, both also offer tax cuts (the Liberals would cut taxes for the “middle class,” while both parties support cutting the small business tax rate, in line with the Conservative budget). But the direction, in productivity terms, is all wrong — to say nothing of both parties’ support for an “expanded” Canada Pension Plan, ie higher CPP levies, a pointless and destructive imposition. (While the Liberals’ infrastructure plan is more defensible in principle, its practical benefits may be doubted in view of the party’s determination to set a target for total spending in advance of identifying how it would be spent.)

The Conservatives have rightly opposed these tax increases. Yet their own record on taxes is less than stellar. While they have been bold in cutting corporate taxes, and innovative in a couple of other areas — incomesplitting, and Tax-Free Savings Accounts, both to be expanded if the party is re-elected — they have also littered the tax code with all sorts of special tax credits, deductions and preferences, distorting economic choices and greatly complicating tax filing. What the country needs is comprehensive tax reform, of the kind the 1980s Conservatives enacted, simultaneously broadening the base and cutting rates. Sadly, no party is promising it this time around.

The news is brighter on the trade front, where the Conservatives have pursued an ambitious agenda of trade liberalization, opening negotiations on free trade with Japan and India, among others, and closing deals with South Korea, the European Union, and most recently the Trans-Pacific Partnership. While the economic impact of each is not large, cumulatively they add up to a real legacy. And while the other parties profess support for free trade in principle, it is doubtful either would have invested the kind of political capital in it that the Conservatives have.

Here again, however, the record is decidedly mixed. The allegedly freemarket Conservatives have lately become entranced with the sort of subsidy-driven industrial strategies — “picking winners” — that have proven failures wherever tried. At the same time, they have left in place barriers to entry to Canada’s transportation, telecommunications and financial industries, while raising new obstacles to foreign investment — the opposite of what their own panel on competition policy, chaired by former BCE chairman Red Wilson, recommended. The party that made building energy pipelines one of its signature priorities has not overseen the building of a single mile of pipe.

And yet: however imperfect the government’s policies are, the opposition’s would undoubtedly be worse; they are prone to all of the same temptations to meddle as the Tories, without the latter’s occasional free-market reflexes. However unambitious the Conservative platform is, it is broadly in the right direction: balanced budgets, lower taxes, freer trade. We cannot say the same for the other parties, and for that reason would award the edge, in this area, to the Conservatives.

There is only so much credit, or blame, a government should get for our economic performance

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