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Is the Canadian economy headed for a crisis?

By Mark Wegierski
web posted November 15, 2004

With the recent announcement of a $9 billion dollar (Canadian) federal surplus, it is possible to believe that Canada's federal government has been exercising amazing fiscal prudence. Nevertheless, one should focus a sharper spotlight on the economic performance of Canada and its Liberal government, as well as look at some rarely explored relationships between economic and social policy.

Ralph Goodale

The picture which Ralph Goodale, Canada's current Liberal Finance Minister, endeavours to convey today, is the impression of a robust economy which has all "the fundamentals" right -- thanks to the prudent custodianship of the federal Liberals. Nevertheless, it could be argued that there are many deep structural flaws in the Canadian economy -- and in Canadian society in general -- that may eventually lead to both an economic and social crisis. There are also less predictable external factors -- such as the precipitous rise of the price of oil throughout most of 2004 -- that may have a huge impact on the economic outlook.

The federal Liberals under Prime Minister Paul Martin, Jr., claim to have imposed major fiscal discipline on the federal Canadian budget, beginning with Martin's tenure as Finance Minister under Jean Chretien. However, this achievement of Martin should be closely examined, in context.

One thing that can be immediately noted is that Canada never had a period of fiscal conservative government in the 1980s (unlike Reagan in the U.S. and Thatcher in Britain). Under Progressive Conservative Prime Minister Brian Mulroney (in power from 1984-1993), the federal debt doubled from $250 billion to $500 billion (Canadian), with an annual deficit of close to $40 billion dollars, on average. Only the Liberal government of Prime Minister Chretien (from 1993 forward), under his Finance Minister, Paul Martin Jr., finally reduced the annual deficit to zero. Indeed, substantial surpluses have occurred in the last seven years -- although these had been considerably whittled down by the large increases in the federal budget in the last two years of Chretien's tenure, especially under the then-Finance Minister, John Manley.

What is not frequently enough noted, however, is that much of the Liberal's success was accomplished by "stealth" tax-increases, i.e., while the income tax rates weren't formally raised, several measures like hiking unemployment insurance premiums and changing the rules for collecting unemployment insurance; raising Canada Pension Plan premiums; the taxing back of Old Age pensions above a certain, comparatively modest income threshold, and so forth, increased government revenues. There were also enormous revenues from the GST (Goods and Services Tax), Canada's version of a value-added tax (VAT), which Mulroney had introduced late in his second term, and which the Liberals never rescinded, despite explicit earlier promises to do so. Another factor to be noted was the operation of Canada Post as a cash-cow -- which was making huge profits because of exorbitant postal charges to the public. Some real cuts were made to the health funds transfers to the provinces; however, much of the resulting crisis in healthcare was laid at the door of the provincial Premiers. In fact, very little federal government spending has actually been cut, except in case of the military, which has been suffering budget curtailments for the last three decades. It is a dubious achievement to cut the costs of a vitally necessary arm of government that now receives about six percent of the federal budget.

The federal debt, while manageable, is still around $500 billion dollars (Canadian). In Canada, the public sector accounts for about 50 percent of the economy (about 34 percent in the U.S.). In Canada, this creates a high degree of inertia for support of high government spending.

Some might say that there are simply too many people on the government payroll for any real cutbacks in government spending to occur. It could be argued that even purely fiscal conservatism is marginalized to a greater extent in Canada than in most other Western democracies, while social conservatism has an even lower profile.

Because of a combination of factors, it has been argued that Canada has become a sort of "one-party dictatorship" -- of the federal Liberal Party. The Liberals are experts in co-opting the private sector. Large corporations and banks as well as smaller businesses give huge donations to the Liberal Party, and in exchange receive various semi-monopolistic benefits. One could even speak of a "post-modern," post-Western, and "post-democratic" society in Canada. It could be argued this is largely a government of special-interests (including both "rainbow coalition"-members and favoured businesses) with very little real popular input or opposition.

Canadians have had a long tradition of deference to authority. When the prevalent paradigm was conservative, Canadians were very conservative, but after the decisive shift in the paradigm at the top after the mid-to-late-1960s, it could be argued that they became almost uniformly liberal, in a compliant, conformist fashion.

The economic and social problems of the Canadian state are possibly exacerbated by a huge, dissimilar immigration (roughly twice as high per capita than in the U.S.) and aggressive multiculturalism. The policies are -- roughly speaking -- that everyone on the planet is putatively a Canadian citizen; that all social benefits are almost immediately available to all persons who manage to reach Canada; and that if any minority groups are seen to be lagging behind the majority in benefits, enormous efforts have to be made on their behalf. There is the ridiculous refugee policy -- that any person reaching Canada (even if, for example, they arrive from the United States which has already accepted them -- or if it is clear that they have destroyed their travel documents en route) is entitled to make a refugee claim, and has to be supported by the government in the interval.

Fewer than 10 per cent of refugee claims are rejected, and there is virtually no enforcement of deportation -- all this amounts to a rather disingenuous way of simply increasing the immigration numbers. The notion that Canada's economic prosperity is derived from its current-day policies encouraging and enacting mass, dissimilar immigration -- can certainly be questioned.

Canada is territorially the world's second largest country, and although only a small portion of that vast territory is comfortably habitable (and already somewhat overcrowded), Canada has enormous physical resources (including the world's largest supply of fresh water; vast forests; extremely extensive grain and other food production; and huge oil, natural gas, and mineral ore deposits). It would take extreme mismanagement to plunge it into total economic chaos or ruin.

It should be remembered, nevertheless, that about 95 per cent of Canada is virtually uninhabitable because of extreme cold, snow and bog. Those areas of Canada in which it is the most (comparatively-speaking) climactically pleasant to live, are already fairly crowded, by North American standards. For example, the presence of smog in Toronto in the last two decades has grown highly noticeable.

Around September 1998, the Canadian dollar had reached an all-time low of less than 65 cents against the U.S. dollar. However, in the last six years, it has steadily climbed upward, and recently had an amazing run, touching about 80 cents against the U.S. dollar. The recent success of the Canadian dollar is driven largely by the engagement of the U.S. in the Iraq War, the huge deficit of the fiscally-imprudent Bush Administration, and what could be argued is the battering of the U.S. employment outlook by such trends as outsourcing, and high immigration -- especially, massive H1-B visa hiring. However, even the height of the Canadian dollar which was reached around October 2004, compares unfavourably to the historical record. The value of the Canadian dollar has quite commonly been in the 85 to 90 cents (US) range.

One question which is not often asked -- except by dissident economists -- is whether the government's estimates of inflation are not in fact skewed towards showing a minimal inflation rate. In one's day-to-day life, one notices increases in prices and costs (such as that of gasoline, real estate, insurance, and electricity rates), that are far in excess of the supposed inflation rate.

Taking into account the fact that Canadians are probably among the most heavily taxed populations in the world, it may be high time for real federal budget cuts, and real federal tax-cuts -- which only the newly reconstituted Conservative Party appears to be willing to seriously consider.

Unfortunately, one sometimes gets the impression that there is nothing truly thriving in Canada but big government. One frequently hears of job-cuts in the private sector. There are large corporate profits but apparently little new hiring (except perhaps for the obligatory affirmative-action initiatives). Even today, when Canada is said to be in a comparative boom, and the U.S. is said to be in the so-called "jobless recovery" -- or a recovery where most of the employment comes from low-paying service jobs -- the official unemployment rate in Canada is higher in percentage terms. It could be argued that the only substantial improvement in the job situation had occurred under the Harris government in Ontario, and the Klein government in Alberta, both of which pursued policies significantly different from those of the Liberals in Ottawa.

One question which is sometimes raised is to what extent the official unemployment rate mirrors the real shape of the economy, and the extent of comparative misery in society. It has been suggested by some dissident economists that the "real" unemployment rate in Canada is closer to 15 percent.

It is possible that more savvy international investors still perceive the current federal debt as a heavy liability on Canada, and, moreover, some think a Liberal Party government may in some circumstances be unlikely to be able to properly handle it. Indeed, there looms the issue of ballooning health-costs in a healthcare system (with an aging population and ever-advancing medical technology) arguably as intensely socialized as that of former East Bloc countries. There is also the looming demographic crisis which threatens the Canada Pension Plan (which is being inaccurately presented to the public as an actuarially-sound insurance plan) where ever-smaller numbers of younger workers will be supporting an ever larger number of senior citizens. It is possible that Canada will at some point require some form of economic "shock-therapy." With the collapse of Canadian birthrates below replacement level, the suggestion of mass immigration as the solution to Canada's demographic crisis is infelicitous.

Rather, it is to be hoped that the cultural, social and economic incentives for Canadians raising a family could be elevated to the point where the Canadian birthrate will actually rise.

Based on Canada's enormous natural resources, "the Canadian muddle" is likely to go on. However, it is possible that Canada has a rather low reputation among more realistic-minded and savvy investors, as a rather inefficient economy. The fact that Canada has no real armed forces actually tends to significantly lower its real international stature. The sanctimonious "Dudley Do-right" attitude of the Canadian government is actually a turn-off to realist-oriented persons.

It is to be fervently hoped that an massive economic crisis would never come to Canada, as the result could well be violence, possibly of a very ferocious sort. It may be remembered the ugly scenes which resulted from Ontario Premier Mike Harris's cuts to welfare-payments (which were at that time among the highest in North America). This was seen as "a war on the poor" -- what can one think would happen in a time of truly massive crisis? What if the apparently limitless cupboard of the state actually was bare?

For now, there appears comparatively little possibility of a total economic meltdown in Canada, but it is possible that the standard of living of many Canadians may substantially diminish, as the contradictions between a luxurious public sector and an overtaxed citizenry become ever-clearer.

Mark Wegierski is a Canadian writer and historical researcher.

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