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.
 
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.

Enter Stage Right -- http://www.enterstageright.com