IS HARPER A FISCAL CONSERVATIVE? AN UPDATE FROM 2011
The Conservative party will begin its National Convention in Calgary on Thursday of this week. Prime Minister Harper is no doubt looking forward to a strong convention that would get his government out of its mid-term doldrums.
He prorogued Parliament on the hope that he could rejuvenate his government and Party with an energized Speech from the Throne. This strategy failed miserably: in part, because the Speech contained absolutely nothing that would indicate he had a visionary strategy for the country; in part, because the Speech was anything but Conservative; and in part, but more importantly, because he decided, for some unknown reason, to take a scorched-earth approach to “eliminating” three senators. The rest as they say is history, and the Prime Minister, at the end of last week, was doing radio talk shows to make his case on the Senate and to show that he truly is a Conservative. This has been overshadowed by new revelations by Senator Duffy and who knows what could come next.
Some grassroots Conservatives have expressed concern that Harper has given up on his Conservative principles; the ones that got him elected in 2006. Among these many principles is the issue of fiscal conservatism - the belief in lower taxes and smaller government. In 2011, no one was really sure what he stood for.
In March 2011, we published a commentary that questioned, whether after five years, the Harper government was living up to the principles of a fiscally conservative government. Our conclusion was that Harper had failed in many areas, but that he “has shown the kind of flexibility in applying fiscal conservative principles that is needed to stay in power”.
Our 2011 review was done after the government had cut two points off the GST at a cost of $14 billion annually and after the so-called “great recession”, during which Prime Minister Harper tossed aside his Conservative credentials and became a temporary Keynesian as part of a G-20 initiative to “save” the global economy. By the time it was over, his government had recorded the largest deficit in Canadian history. His Conservative supporters were no doubt confused and unhappy.
After our review, Harper won a Parliamentary majority in 2011 and since then a great deal has changed. Prime Minister Harper has shown that he is in fact not just a fiscal conservative, but also more importantly, that he is a pragmatic fiscal conservative.
Below are our 2011 assessments of the Harper fiscal Conservative record:
“If by a fiscal conservative, one means a person who wants to reduce the size of government through less government spending, lower taxes, balanced budgets and lower debt burdens, then Harper is clearly not a fiscal conservative.”
“The real issue going forward is whether the Harper government regards the deficit as a serious problem that requires significant cuts to government programs and/or revenue increases, to eliminate it. The answer is, he does not.”
“The government has rejected the analysis of the Parliamentary Budget Office (PBO), the International Monetary Fund (IMF), and others, that the deficit includes a structural component that will not be eliminated without significant expenditure cuts and/or revenue increases.”
“Prior to the 2010 Budget, the Harper government said that it would not cut major transfers to the provinces or to persons. Recently, it has said that spending on research and health would also be protected.”
“To date, the Harper government has not made any tough expenditure decisions to assist in the elimination of the deficit. It seems unwilling to accept that there is a structural deficit problem and unwilling to cut government expenditures.”
What a difference a majority government makes!
After the 2011 election, Prime Minister Harper showed that he in fact understood very well that his cutting of the GST by two points, although good politics, had created a structural deficit; that the IMF and the PBO had been right all along, although both he and Finance Minister Flaherty wouldn’t admit it. Instead, Minister Flaherty had called the PBO analysis “incredible, unbelievable, and unreliable”.
But the real irony was that the Department of Finance finally released its own analysis (originally promised in 2007) in late 2012 showing that a structural deficit had been created by the cutting of the GST by two points, just as the PBO had said.
Both Prime Minister Harper and Minister Flaherty announced that the government would have to cut government programs, including transfers to the provinces, to restore long-term fiscal sustainability. Direct program spending was cut in the 2011 and 2012 budgets by a cumulative $18 billion over the period to 2015-16.
In December 2011, Minister Flaherty unilaterally announced to the provinces that the annual Canada Health Transfer escalator would be cut from 6 per cent per year to a moving average of growth in nominal gross domestic product, or would grow by at least 3 per cent per year. Finally, Prime Minister Harper announced in Basil in early 2012, without any background analysis, that the age of entitlement for Old Age Security would be increased from 65 to 67. Both of these announcements were included in the 2012 budget.
In the October 2013 Speech from the Throne, Prime Minister Harper announced that the government would extend the freeze on departmental operating budgets, once again committed the government to eliminating the deficit by 2015-16 and to reducing the debt-to-GDP ratio to 25 per cent by 2021, both of which are easily achievable. If that weren’t good enough, the government committed to introducing balanced budget legislation. No one knows what this means but it sounds very Conservative.
Aside from the rhetoric, we really don’t know whether Prime Minister Harper and Minister Flaherty believe the deficit and debt are serious problems. After all, even they know the deficit measured as a share of GDP is quite small and the debt-to-GDP ratio is low and falling. What we do know is that, for Harper and Flaherty, eliminating the deficit is a political absolute, critical to retaining the support of their political base, a group that believes all deficits are bad and that smaller government is good.
Going into the Convention, Prime Minister Harper needs all the “hype” he can get to claim he is a fiscal Conservative. The reality is that his government’s record is not very impressive. Since first being elected in 2006, his government has recorded only two annual surpluses, thanks to the previous Liberal government. If the deficit is finally eliminated in 2015-16, it will have taken eight years since the 2009-10 recession and resulted in an increase of $175 billion in federal government debt. This will have wiped out the entire reduction in debt achieved by the previous Liberal government between 1997-98 and 2006-07.
The whole fiscal story since 2006 is somewhat surreal. The Harper Government inherits a $14 billion surplus and a sustainable fiscal situation in which the debt burden has been cut in half and is continuing to decline. All the Conservative Government had to do was manage this sustainable fiscal framework, while implementing its ideological commitment to smaller government.
Instead the government chose to throw away this opportunity by cutting the GST by two points at a cost of $14 billion annually. In other words, the Government created its own structural fiscal problem, which they then had to struggle to eliminate over the next eight years. On this basis, the Harper Government will claim that they are sound fiscal managers. They have lowered taxes (badly), cut spending (badly) and diminished the size and role of government.
This will play well with the Conservative base in Calgary even though the record is pretty mediocre. They, nevertheless, will want to believe that Harper and Flaherty are sound fiscal managers, because what else will they have to show for their patience and support after eight years.
Our conclusion in 2011 was that Harper “has shown the kind of flexibility in applying fiscal Conservative principles that is needed to stay in power”.
Whether this conclusion still holds will be determined in 2015.