End of the CHRÉTIEN CONSENSUS? Jason Clemens Milagros Palacios Matthew Lau Niels Veldhuis Copyright ©2017 by the Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. The authors of this publication have worked independently and opinions expressed by them are, therefore, their own, and do not necessarily reflect the opinions of the Fraser Institute or its supporters, Directors, or staff. This publication in no way implies that the Fraser Institute, its Directors, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Date of issue: March 2017 Printed and bound in Canada Library and Archives Canada Cataloguing in Publication Data End of the Chrétien Consensus? / Jason Clemens, Matthew Lau, Milagros Palacios, and Niels Veldhuis Includes bibliographical references. ISBN 978-0-88975-437-9 Contents Introduction 1 Saskatchewan’s ‘Socialist’ NDP Begins the Journey to the Chrétien Consensus 3 Alberta Extends and Deepens the Chrétien Consensus 21 Prime Minister Chrétien Introduces the Chrétien Consensus to Ottawa 32 Myths of the Chrétien Consensus 45 Ontario and Alberta Move Away from the Chrétien Consensus 54 A New Liberal Government in Ottawa Rejects the Chrétien Consensus 66 Conclusions and Recommendations 77 Endnotes 79 www.fraserinstitute.org d Fraser Institute d i ii d Fraser Institute d www.fraserinstitute.org Executive Summary TheChrétien Consensus was an implicit agreement that transcended political party and geography regarding the soundness of balanced budgets, declining government debt, smaller and smarter government spending, and competi- tive taxes that emerged in the early 1990s and lasted through to roughly the mid-2000s. The reforms began in Saskatchewan under the NDP led by Premier Roy Romanow in 1992. The quick success of the Romanow reforms set the stage for even more aggressive reforms in neighbouring Alberta one year later by Premier Ralph Klein. The combination of the successful reforms in both provinces were a catalyst for the federal government to enact similar reforms, what we have coined the Chrétien Consensus, under the leadership of Liberal Prime Minister Jean Chrétien in 1995. These reforms spread across the entire country and were implemented in every province to varying degrees and at different times during the decade. Balanced budgets created a stable business and investment environ- ment by eliminating the threat and uncertainty of future tax increases that are inherent to deficits. Declining government debt meant that there was more domestic capital available for private investment. Smaller and smarter government spending meant both that governments were playing a smaller role in the economy—relying more on individuals, families, and businesses to make economic decisions—and that governments were delivering greater value-for-money in the remaining programs. Finally, competitive taxes meant that the incentives for work effort, investment, and entrepreneurship were improving and that Canada was strengthening its relative attractiveness for businesses and entrepreneurs globally. These policies created an environment conducive to and supportive of entrepreneurship and investment, which formed the basis for a robust, pros- perous economy that lasted well over a decade after the reforms were imple- mented. Specifically, Canadians enjoyed rising incomes, incredibly strong job www.fraserinstitute.org d Fraser Institute d iii growth and the opportunities such growth provides, and a prolonged period of business investment, which ultimately forms the foundation for long-term prosperity. This success was no doubt aided in part by other factors such as the commodity price boom and the success of the US economy during this period. However, the basis for that success was the policies imbedded in the Chrétien Consensus. In other words, Canada capitalized on these opportuni- ties because it had established a foundation for success and an environment supportive of economic growth. The better part of the last decade ending in 2016 has seen most Canadian governments moving away from the Chrétien Consensus. Governments across the country, particularly those in Alberta, Ontario, and now federally, have decisively and purposefully moved away from the policies of the Chrétien Consensus by increasing government spending through both borrowing (deficits) and increased taxes. The increases in spending have often been haphazard and without much attention paid to prioritization or impor- tance. Governments have taken a much more active, larger role in the econ- omy of the nation and most provinces. And finally, many governments have also increased taxes without regard for how such increases affect incentives or competitiveness. In short, the country has rejected the Chrétien Consensus and this is nowhere more evident than in Ottawa today, where the Trudeau Liberals ran on and are now governing based on a set of economic principles that are the antithesis of the Chrétien Consensus. It is not surprising to those involved in this project that Canada is now struggling economically since the policy foundation for our success in the 1990s and 2000s has been rejected. Returning to the principles of the Chrétien Consensus will require first and foremost that citizens demand such policies. Only then will governments start to make the difficult decisions needed to rein in government spending, achieve balanced budgets, begin reducing debt, and start to refocus on tax competitiveness. Such policies delivered strong economic prosperity in the 1990s and 2000s, and given the opportunity will do so again. iv d Fraser Institute d www.fraserinstitute.org About the Authors Jason Clemens Jason Clemens is the Executive Vice President of the Fraser Institute. He has an Honors Bachelors Degree of Commerce and a Master’s Degree in Business Administration from the University of Windsor as well as a Post Baccalaureate Degree in Economics from Simon Fraser University. He has published over 70 major studies on a wide range of topics, including taxation and entrepre- neurship. He has published over 300 shorter articles in US, Canadian, and international newspapers. Matthew Lau Matthew Lau is a Toronto-based freelance writer and former Fraser Institute research intern. He holds a Bachelor of Commerce, with a specialization in finance and economics, from the University of Toronto. Milagros Palacios Milagros Palacios is a Senior Research Economist at the Fraser Institute. She holds a B.A. in Industrial Engineering from the Pontifical Catholic University of Peru and a M.Sc. in Economics from the University of Concepcion, Chile. Ms. Palacios has studied public policy involving taxation, government finances, investment, productivity, labour markets, and charitable giving, for nearly 10 years. Since joining the Institute, Ms. Palacios has authored or coauthored over 70 comprehensive research studies, 70 commentaries, and four books. Niels Veldhuis Niels Veldhuis is President of the Fraser Institute. He has written six books, more than 50 peer-reviewed studies, and over 200 articles on a wide range of economic topics. He holds a Bachelor’s Degree in Business Administration, with joint majors in business and economics, and a Master’s Degree in Economics from Simon Fraser University. www.fraserinstitute.org d Fraser Institute d v Acknowledgements The authors would like to acknowledge four anonymous reviewers that pro- vided invaluable feedback and suggestions. Any remaining errors or omis- sions are the sole responsibility of the authors. The authors would also like to thank the Lotte and John Hecht Memorial Foundation for funding this project. Finally, the authors would like to express their appreciation to Brian Lee Crowley and Robert P. Murphy who were co-authors of two previous books upon which this book rests for a foundation. vi d Fraser Institute d www.fraserinstitute.org Introduction As governments across Canada struggle with slow economic growth, budget deficits, rising debt, and tax increases, many Canadians will look back on the 1990s and 2000s with great fondness as it was a period of the exact opposite: strong economic growth, balanced budgets, declining debt, and tax relief. This book explores how the policy consensus regarding balanced budgets, declining debt, smaller government, and competitive taxes was reached in the 1990s, and seeks a better understanding of how this consensus established an environment for economic success and prosperity. This consensus, what we have coined the Chrétien Consensus, specifi- cally consisted of an implicit agreement—that transcended political party and geography—regarding the soundness of balanced budgets and paying down government debt by reducing and reforming government spending, which established a foundation for lower, more competitive taxes. These policies created an environment conducive to and supportive of entrepreneurship and investment, which formed the basis for a robust, prosperous economy that lasted well over a decade after the reforms. There are a host of other factors, including the commodity price boom and the success of the US economy, that amplified Canada’s success during this period; however, the basis for that success was the policies imbedded in the Chrétien Consensus. The book1 first explores the formation in the mid-1990s of the Chrétien Consensus,