If you could cut through the partisan name-calling and endless election speculation, you might notice an eerie sense of déjà vu hanging over the playing field of federal politics lately.
On Sept. 17, 1,500 Tories past and present jammed into a Montreal ballroom to celebrate the 25th anniversary of Brian Mulroney’s first majority government. It was a chance to relive the crowning moment for Canada’s conservative movement over the past four decades, and perhaps to buff away a little of the tarnish that has settled on the ex-PM’s legacy in the quarter century since that historic landslide victory. Prime Minster Stephen Harper is not eager to be associated with Mr. Mulroney these days, but he sent along a taped tribute message.
Four days later, in another jammed conference room in Toronto, Michael Ignatieff was trying to conjure a little history himself. In his first major economic policy statement since taking over as Liberal party leader in May, Ignatieff assailed Harper’s spotty fiscal record and presented himself as the responsible alternative. Just as Jean Chrétien and Paul Martin did in the early ’90s, he is working hard to position the Liberals as the pragmatic, centrist party of stable management.
“How can we support a government that is so smugly satisfied with achieving so little?” he asked the Bay Street crowd. “[One] that promises to create 190,000 jobs, then loses half a million?”
The theme was balance, prudence and fostering growth. It was a decent pitch, but the prodigal academic clearly has a big hill to climb. The latest Canadian Business/Compas poll of corporate executives shows that Harper still has the clear upper hand when it comes to credibility on the economy, with 69% of respondents saying that a Harper majority would be the best for fostering economic growth. Just 19% favoured an Ignatieff majority.
Still, Harper’s actions in office over the past few years have left him surprisingly vulnerable with Canada’s corporate donors and voters. For an economist who rose to power by preaching smaller government, lower taxes and less confrontation with the provinces, Harper’s actions have often seemed out of step with his ideology. There have been broken promises, questionable tax policy, and bailouts for automakers, not to mention those 500,000 job losses in the past year. But the biggest strike against him is the soaring budget deficit, now projected to be $55.9 billion this year. The government is not projecting a return to surpluses until 2015 at the earliest.
Catherine Swift represents 105,000 small-business owners as head of the Canadian Federation for Independent Business. She says her members continue to worry about what drastic action might be necessary to climb out of that fiscal hole. “Our members did not believe we had to rack up as much debt as we did,” she says. Maybe $12-billion to $15-billion debt would have been reasonable given the economic crisis, but “$50 billion is another whole order of magnitude.”
That concern is echoed by Kevin Gaudet, the federal director of the Canadian Taxpayers Association. “Harper’s saying he’ll balance the budget, he won’t raise taxes and he won’t cut spending. Short of being in deficits for a decade, what does he really mean? Some clarification would be helpful.”
It seems increasingly likely that clarification will come in an election sometime this winter or next spring. For the two leading parties, the stakes are obvious, but they may be just as high for the country as a whole.
Canada’s economic future and fiscal health are at a crossroads. The key question deciding Canada’s next election may be which leader is best qualified to be the steward of Canada’s future prosperity. Seventeen years ago, essentially the same question faced Canadians, and a Conservative government that had racked up huge deficits in the midst of recession was crushed by the big red Liberal machine. This time, the country is looking to Harper and Ignatieff for a solution. Whoever can prove he has the better plan will have a shot at a majority government. The loser is almost certainly headed into a political wasteland.
Stephen Harper never tires of reminding people that he’s an economist. Whether the subject is taxation, equalization, interest rates, deficit spending or private-sector bailout, the prime minister likes to lead with his academic credentials. And for the first three years of his government, he was generally considered a reliable friend of business.
He cut business corporate taxes, signed numerous free trade agreements with the likes of Panama, the U.A.E. and Colombia, and continued to pay down the debt. It all seemed part of a steadfast approach to economic stewardship that he had spent much of his political career articulating.
Ever since he spoke at the Reform party’s inaugural convention in 1987, Harper has championed smaller government, tax cuts, privatization and reduced public-sector spending. As leader of the Canadian Alliance he made these ideas the party’s bedrock, and carried them through into the founding of the new Conservative Party of Canada. At the latter CPC’s national convention in 2004, he promised that he would “strive to make this not the highest-spending country in the world, but instead the lowest taxing one.”
His highest-profile tax cut was controversial — the plan to trim the GST from 7% to 5% was criticized by some economists who favoured an income tax reduction. But in politics, a tax cut is a tax cut, says Swift. “You can argue that it may not have been the optimal tax reduction,” he says, “but I don’t care.” Harper’s lone early misstep in his first term was breaking an explicit promise not to tax income trusts. The decision sparked outrage among a vocal group of small investors and won him few friends in his home riding in Calgary, where the trusts had sparked a mini-boom. But even that move didn’t do much lasting damage, since most in the business community were in favour of it and saw the surging growth of income trusts as a threat to the country’s future competitiveness.
On all of the more substantive priorities, Harper delivered. He rode into power with the luxury of balanced budgets engineered by the Liberals, and was thus able to reduce taxes and introduce investment reforms without any real fiscal consequences. One of his major accomplishments has been to begin the process of lowering the corporate tax rate to a projected 15% by 2012 from 22.12% in 2007. According to the Department of Finance, this means Canada will soon have the lowest statutory tax rates in all of the G7.
Even so, to hard-core fiscal conservatives, there were worrying trends beneath the surface. Harper’s vaunted spending restraint never materialized. In fact, the federal budget unveiled last January was the highest-spending budget in Canadian history, and included funding to create a regional development authority for southern Ontario — exactly the kind of big government spending program that Stephen Harper the Reformer would have decried.
It seems that once the recession hit, all bets were off. Harper agreed to pump $10.5 billion into the North American auto sector and ended up owning 7.3% of General Motors and 1.7% of Chrysler. After initially insisting that the budget would remain balanced, the Conservatives eventually conceded that falling tax revenues and the need to create a $40-billion fund to stimulate the economy would push the country back into deficit. Since then, the size of that deficit, and the amount of time required to eliminate it, has steadily crept higher. Needless to say, the business community is restless. This isn’t the party of prudent spending and small government anymore. Even some of Harper’s longtime allies say his principles have been compromised by the realities of an economic crisis, complicated by the demands of surviving a minority parliament.
“Stephen would have been unhappy about purchasing shares in GM and Chrysler,” says his former adviser and confidante Tom Flanagan. “I think he’s conflicted about it. On the deficit-spending issue, he did make some statements about how this was different from the economics he learned in graduate school.”
If Harper lost the blueprint for a small-c conservative government, however, it must be noted that he did so along with the rest of the developed world. All around the globe, the financial crisis put enormous pressure on governments of all stripes to open up the vault and pump cash into their struggling economies. In truth, Harper joined the international campaign for “stimulus spending” rather reluctantly. He did not mention any plans for stimulus spending in the November 2008 fiscal update, which came just a couple of months after the collapse of Lehman Bros. and the near-failure of insurance giant AIG sent global markets into a panic. The public outcry for increased government spending to save jobs was deafening, and it wasn’t just coming from the opposition benches. All G20 nations agreed to implement stimulus funding of 2% of each country’s GDP in order to mitigate the risk of global financial catastrophe.
With the Liberals threatening to join forces with the NDP and Bloc to overthrow the government unless a meaningful stimulus package was developed, the Conservatives relented in the January budget. Some complained that Harper had caved in to economic hysteria, but most in the business community applauded the move, saying that this was an unprecedented crisis that called for desperate measures.
“Because the downturn was so dramatic, business leaders needed the government to come in and make a strong fiscal statement,” says Fletcher Baragar, an economics professor at the University of Manitoba. But as soon as stability is restored, business will “revert back to being wary about new intrusions of government regulation, and they’re going start making the case again for more tax cuts.”
That is the critical question now. Among business leaders, the deficit is forgivable, given that it arose out of genuine crisis. But the challenge is in charting a coherent path back to fiscal health, to greater competitiveness, to a more positive trade relationship with the United States and others, to lower taxes and more modest spending. It’s a tall order, and there is little in Harper’s agenda of the past 14 months to suggest that it is the direction he’s heading. And that’s just the kind of opportunity that centrist Liberals have exploited before.
Inexperience can cut both ways. On the one hand, Michael Ignatieff has little or no track record in managing complex fiscal and economic challenges. In his early days as Liberal leader, he said little about the kinds of policies that business leaders really care about. As an academic, he was more focused on issues of international peace and justice than on the best way to build an economy.
On the other hand, inexperience provides a blank slate upon which to define yourself, and this week Ignatieff started filling in the brush strokes with a far more interventionist approach than Harper’s. “When Wall Street crashed, even the most ardent free marketers turned to government to save the free market,” he said. “The last year blew Stephen Harper’s ideology out of the water.”
Overall, his is a program that’s markedly to the left of centre. Ignatieff sees a role for government in leading private enterprise, not merely supporting it. He favours an aggressive drive to open up new foreign markets, especially China and India. He would be far more likely than Harper to defend Canadian companies and technology from foreign takeover. And while he did say there would be no new tax hikes in the Liberal platform, he didn’t promise any tax cuts.
All this can be seen as an extension of the one economic point on which he and Harper clashed, over reforming the federal employment insurance program to benefit the thousands of Canadian workers who have lost their jobs in the recession. That’s not really the kind of policy idea that gets CEOs swooning. In fact, the CFIB’s Swift says that two-thirds of small-business owners oppose the idea of making it easier for workers to collect benefits. But given that Harper ended up extending EI benefits to win NDP support in Parliament and avoid a fall election, you’d have to score that one a draw.
More importantly, Ignatieff has spent months quietly trying to establish ties to the business community — Swift says she had a “very positive” meeting with the Liberal leader back in April, and he seemed very engaged with the concerns and priorities of her members.
He has also built a team of advisers with credibility on financial issues: lawyers, bankers and economists. Some of the bigger names on his team include Dan Brock, a partner at the Toronto law firm Fasken Martineau and one of the top Canadian lobbyists according to The Hill Times; Alexis Levine, son of Ignatieff confidante and leading entertainment lawyer Michael Levine; and former investment banker Michael McNair.
“Business-wise that’s a good thing,” adds Andrew Steele, a former Liberal party adviser and senior consultant at Toronto-based Strategy Corp. “You have people who can interact with big business — they have no problem with their language.”
Douglas Owram, vice-chancellor of the University of British Columbia Okanogan and author of History of the Canadian Economy, says it’s natural for Ignatieff to turn to Bay Street for help. That area had once been a Conservative stronghold — up until the ’80s big business turned to the Progressive Conservatives to implement more sympathetic tax regimes — but when the party floundered after Mulroney left office, business leaders embraced the Liberals and stayed there.
Within the party, Ignatieff’s main advisers are Ralph Goodale, finance minister under Paul Martin, John McCallum, a former chief economist at the Royal Bank of Canada, and David McGuinty, brother of the current Ontario prmier and a graduate of the London School of Economics. Robert Bothwell, a politics professor at the University of Toronto, points to McCallum as his biggest advantage. “McCallum isn’t just an academic economist — he also worked at a bank. So Ignatieff has more to work with than Harper. Harper just has Flaherty, and he’s not the sharpest knife in the drawer.”
It’s the kind of team business could grow to love. The question is whether he’ll get the chance to implement it.
Like most elections, the next one will hinge on the question of credibility — and both men have challenges where that’s concerned.
The lack of an established track record on business issues is “a major problem for Ignatieff,” says Stephen Clarkson, author of Big Red Machine: How the Liberal Party Dominates Canadian Politics. “He has no recorded interest in the economy as an intellectual.”
But Flanagan points out that Harper’s record is hardly pristine, and the prime minister can’t automatically expect the support of business as he could when Stéphane Dion was Liberal leader. “ There are no clear wins for business,” he says.
No clear wins, perhaps, but at least now there is a clear distinction.
Who will corporate Canada put its faith (and its financial support) behind: the man whose ideology is pro-business but whose record in office is a mixed bag of tax relief, high spending and surprise deficits? Or the man of letters, who wants government to play quarterback in the drive to advance the country’s economic future?
The polls suggest this equation favours Harper. But a lot can change between now and election day … whenever that is.