By William Robson
This article was published in the print edition of The Dorchester Review, Vol. 10 No. 1, Spring/Summer 2020, pp. 81-87. It is part of a running series of articles under the general title "HOW GOOD WAS HARPER?" Subscribe today!
THE QUESTION “How good was Harper?” recalls the Henny Youngman set-up: “How’s your wife?” As many readers drawn to an article about Canada’s economy will know — it has become a familiar “economist” joke — the response is: “Compared to what?”
Measured against the statist, redistributive aspirations of many on the left, Harper’s economic record was bad. Measured against the aspirations of many on the right, it was better. The differences between the aspirations of market-oriented libertarians on one side, and conservatives who like policies favouring families, small businesses, or certain activities on the other, however, complicates matters. Harper’s governments pursued both types of objectives, and its record measured against either set of ideals is necessarily mixed.
In assessing any government’s economic record, another framework is helpful: public economics grounded in utilitarian concepts of well-being. That framework references criteria such as equality of outcomes and correcting externalities that tend to be preoccupations of the left, and criteria such as efficiency and growth that tend to be preoccupations on the right. Dodge and Dion (2016) measure the federal government’s economic record during Harper’s terms as Prime Minister against widely-accepted public economics criteria. They temper their assessment by noting that Ottawa’s influence on Canada’s economy between 2006 and 2015 was slight compared to that of external events — and conclude a mixed survey with a cautiously positive verdict overall.
On the statist/libertarian spectrum, I’m toward the end that views Harper’s record more favourably, and against public-economics criteria, I’d grade more generously than Dodge and Dion.
Economies are too complex, and the alignment of interests between citizens, policy wonks, and the officials who actually implement policies too loose, for us to assert that most initiatives will have as much impact, or even the type of impact, we expect. Sharper redistributionist and libertarian critics say, and likely believe, that policies they like or dislike have straightforward, powerful impacts on economic wellbeing. People trained in public economics also favour policy explanations for good or bad economic outcomes. Someone who is comfortable with a degree of dissonance when it comes to objectives, and accepts that chains of cause and effect are complex and sometimes perverse, can reasonably argue that Harper was good for Canada’s economy.
What Happened?
WITH Covid-19, and the economic and fiscal impact of spontaneous and policy measures to contain it in full force at the time of writing, the events of the Harper years are fading quickly from memory. To refresh, when Harper’s Conservatives formed their first minority government in early 2006, they inherited a robust economy. Steady global growth, and China’s industrial boom in particular, were supporting natural resource prices and Canada’s terms of trade. Domestic demand was strong, real incomes for most Canadians were rising, and inflation was pretty much in the middle of the Bank of Canada’s 1% to 3% target range. Workforce participation was high, and the unemployment rate was low, and falling.
The external environment soured in late 2007, and became sharply negative in 2008 and 2009, as overbuilt housing and excessive mortgage lending, notably in the United States, triggered a financial crisis and a recession. Demand for Canadian exports sagged, the housing sector cooled, and business investment fell. Fortunately for Canada relatively strong demand and prices for natural resources — again a consequence of strong growth in China and elsewhere in Asia through the crisis — mitigated and shortened the hit to Canada’s terms of trade. Output and employment growth flagged, but by less than in the United States and other advanced economies. Year-over-year CPI inflation was only negative for four months in 2009.
Having fallen less than in the United States and elsewhere during the recession, Canadian output and employment snapped back less sharply. Nevertheless, the main indicators show Canada doing well from 2010 until 2014. Annual growth of GDP and jobs slightly outpaced that elsewhere, the unemployment rate dropped steadily, and inflation averaged only slightly below 2%.
An abrupt fall in the price of oil in the second half of 2014 hammered Canada’s terms of trade and business investment. Output and employment shrank in the first half of 2015, and were growing only slowly when Harper’s third term ended later that year.
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What Did the Feds Do?
WHILE that was happening, the Harper government was active in many areas. A persuasive assessment needs to rest on more than two or three examples — so I have chosen a dozen as important and distinctive enough to help answer the question about Harper’s economic goodness.
Cutting the GST
A key plank in the Conservatives’ 2006 platform was a cut in the Goods and Services Tax (GST) rate from 7% to 5%, which the new government delivered in two steps, in mid-2006 and the beginning of 2008.
From a redistributive point of view, the GST cut scored well, benefiting people who consumed more of their incomes — and people who had little or no income — more than income tax cuts would have done. From a libertarian point of view, it was a tax cut — a good thing.
Many public-economics-oriented analysts criticized this move, however. Broad-based consumption taxes discourage work and investment less than personal or corporate income taxes. They complained that reducing those taxes would have done more for income and productivity growth at equivalent short-term “cost” to the treasury — which is almost certainly true.
Taxing Income Trusts
A much less popular early move that sparked outrage because it broke an election promise was the imposition of taxes on income trusts in October 2006. Businesses arranged as income trusts distribute their earnings to investors free of corporate income tax — attractive for the investors, but problematic for the absence of reinvestable earnings inside the business, and constant requirements for new capital that turn badly or unscrupulously managed businesses into Ponzi schemes. The number of businesses organized as trusts was growing, and some major companies, including Bell and Telus, appeared to be on the path to conversion.
Managers of and investors in income trusts bitterly opposed the move — to this day, the Wikipedia entries on Harper’s economic policies and then Finance Minister Jim Flaherty reflect their anger. While many tax experts and economists would prefer to overhaul business taxation to make flow-through structures less attractive, they tended to see taxing income trusts as a necessary patch for the current system, and it had its desired effect.
Income Splitting
Taxing income trusts also rates mention because the government sought to cushion the blow for older investors who particularly liked trusts’ high yields by letting couples split income from pensions and annuities starting in 2007. The income-splitting initiative mattered because individuals have long been the formal focus of Canada’s personal taxes. Splitting for seniors set a precedent for the move in 2014 — when Flaherty was no longer Finance Minister — to allow very limited income-splitting also for couples with children.
The idea behind income-splitting is to reduce the disparity that individual taxation creates between families with the same combined incomes but different earnings between the two spouses. If the spouse with the higher marginal tax rate can transfer income to the spouse with the lower marginal tax rate, families with the same combined incomes will pay the same tax — an straightforward-seeming way of achieving horizontal equity.
Many redistributionists dislike income-splitting, because they use individual metrics that presume no sharing and/or problematic power relationships within families. Individual metrics make income-splitting look regressive, since it results in the higher-earning spouse paying less tax. Opposition from people who argue that income-splitting benefits “the rich” helps explain the limited scope of the initiative. Libertarians tend not to get excited one way or the other about it. Social conservatives, who are probably likelier to presume that families do share income, and are not as preoccupied with power relationships within families, tend to like income-splitting. Many economists criticized this move: taxing family income will often raise the marginal tax on earnings for the lower-income earner, more often than not a woman.
Justin Trudeau’s Liberals rescinded the second measure when they came to power, but left splitting for seniors in place. That result testifies to the fact that tax principles do not yield a clear answer as to whether individual or family income is the better basis for taxation. I would give the Harper Conservatives a pass on this issue — which is almost certain to come up again, especially if personal income-tax rates rise.
Corporate Income Tax Rates
A more economically significant change that owed something to the income-trust furore also began in 2007: cuts in the corporate income tax rate that took it from 22% down to 15% by 2015. Not surprisingly, these cuts irritated critics on the left and attracted praise from libertarians. Also not surprisingly, most economists — who tend to see corporate income taxes as particularly hostile to investment and growth — supported them.
Complemented by less dramatic cuts by several provinces, lower corporate tax rates made Canada more attractive to capital investments and other activity. Business investment per person rose in Canada relative to other advanced countries during the Harper years (Robson 2019). Cuts elsewhere, notably a massive change in the United States shortly after the Trudeau Liberals took power, have reduced Canada’s advantage since — which underlines the degree to which Harper outperformed on that front.
Personal income tax thresholds and rates
The Harper government also reduced the federal government’s personal income tax take, but that reduction owed less to lower rates. They preferring increases in the basic personal amount — the threshold at which people begin to pay income tax. “Taking people off the tax rolls” is a redistributive move with populist appeal, but economists point out that it is less helpful for encouraging work, earning and declaring income than lower rates would be.
For many libertarians and public-choice-oriented critics, a drawback of raising the bottom threshold versus cutting rates is the way it shrinks the tax-paying population relative to the transfer-receiving population, and the encouragement it gives to see all personal tax changes in purely redistributive terms. Other important principles in taxation include requiring everyone who benefits from public programs to contribute at least a token amount, and not taxing income required for the necessities of life — which is the fundamental reason for having a bottom threshold.
Trudeau’s Liberals recently raised the personal amount for lower earners, clawing the resulting tax relief back from higher earners — which increases marginal tax rates and violates the principles that everyone should contribute and that income that covers necessities should not be taxed. The Harper Conservatives’ record here was not particularly good, but better than that of their successors.
Tax Expenditures
The Harper government also added many tax expenditures — often termed “boutique tax credits” — related to a host of activities and characteristics, including children’s fitness and arts programs, adoptive parents and family caregivers, first-time home buyers and donors to charities, renovations, public transit, textbooks, volunteers for firefighting and search and rescue. Importantly, these are not deductions. Deductions for, say, medical expenses, children, or charitable donations reflect a principle of horizontal equity: that people should not pay tax on income that covers necessities. Credits refund taxes at an arbitrary percentage — the fact that the percentage is usually equal to the lowest income tax rate disguises the arbitrariness, but it is nevertheless arbitrary. They are transfer payments.
Economists and tax experts criticized these measures on many grounds. Besides the horizontal inequities, they discourage work and declaring income, which lower rates would not, and — being spending programs in disguise — they inappropriately escape Parliamentary and public scrutiny (Brooks 2016; Robson and Laurin 2017). The Liberals abolished several of the Conservatives boutique measures and introduced their own — a de facto validation of the idea that the personal income tax system is a legitimate tool for surreptitious rewarding of “your” voters.
Although the “GST credit” pre-dated Stephen Harper, it merits attention here too. It has nothing to do with a taxpayer’s GST payments. It is a federal income-support program that, delivered through the tax system, does not show up in government spending. By cutting the GST rate and leaving the “credit” unchanged, they made federal taxes and transfers more redistributive, but missed an important opportunity to reclassify “tax expenditure” that — at more than $4 billion annually — is a sizeable spending program that ought to receive Parliamentary scrutiny.
The Tax Free Saving Account
The Tax Free Saving Account (TFSA), introduced in 2009, was a major innovation. In order to avoid “double-taxing” saving — both taxing the income that is saved and the returns on the saving — income saved in registered pension plans and retirement saving plans is deductible from personal taxable income. The TFSA provides the alternative of saving out of post-tax income and avoiding tax on the returns to that saving. For people whose tax rates — ordinary taxes plus benefit clawbacks — will be higher in retirement than when they are working, the TFSA is better (Laurin 2019).
Redistributionists were split on the TFSA. Some dislike tax relief of any kind that is available to higher-income earners. Others, conscious that many lower-income earners were saving in RRSPs — not knowing they would lose a lot of it to high effective tax rates, or lacking any alternative vehicle —praised the TFSA. Late in their final term, the Conservatives increased the TFSA contribution limit, but also cancelled the annual indexation to inflation that was previously raising it over time. The Trudeau Liberals undid the ad hoc increase, but restored inflation indexation. At present, the TFSA appears a durable and valuable addition to Canada’s system of retirement saving.
The Working Income Tax Benefit
The Working Income Tax Benefit (WITB) was another innovation under Harper worthy of note. A federal wage subsidy was something new in Canada. Introduced in 2007 and enhanced several times during the Conservative governments’ terms, the WITB garnered praise from market-oriented economists for mitigating the work-discouraging effects of benefit clawbacks, and from redistributionists for enhancing incomes of lower-earning workers. Although the Trudeau Liberals renamed it the Canada Workers Benefit, this programs looks to be a durable feature of the federal tax and transfer system.
The Universal Child Care Benefit
The UCCB stands out for another reason. Harking back to the old “baby bonus,” the UCCB paid families $1,200 annually for each child under the age of six. In a sense, the UCCB substituted for national daycare. After they won the 2015 election, the Liberals replaced the UCCB and several other programs, not with daycare but with the geared-to-income Canada Child Benefit (CCB). The CCB is a strongly redistributive program that recognizes no child-related expenses for higher-income earners, and features clawbacks that sharply reduce the benefits of additional earnings for larger families.
Assigning the UCCB a score involves many different criteria of fairness. It scores well on horizontal equity, since it offsets at least some of the costs of child-rearing that all families must bear. Redistributionists tend to dismiss that logic, so they were not generally fans of the UCCB, and tend to favour the Liberals’ approach, which treats child-rearing costs of higher-income earners as though they were discretionary expenses. If it did pre-empt national daycare, a host of other judgements matter — about the relative merits of home care for children of different backgrounds, parental workforce participation, and the extent and quality of the federally-supported daycare program that never came into being. I invite readers to assign their own marks, and weights, to this initiative.
Fiscal Federalism
The Harper Conservatives’ approach to fiscal federalism got less attention than most of the initiatives just mentioned. It generated less acrimony and fewer headlines. But keeping federal-provincial relations calm is no small achievement, and Ian Brodie’s contribution to this series (“Harper the Constitutionalist,” The Dorchester Review, Autumn/Winter 2016) could reasonably have cited Harper’s fiscal approach as further evidence of his respect for Canada’s constitution.
The Conservatives maintained an aggressive — and unsustainable over the long term — 6% growth rate for the Canada Health Transfer. That commitment provided cover for their restraint of other transfers. While they bumped up transfers as part of the response to the 2008-09 crisis, those were temporary measures. Relative quiet on this front, part of the Harper government’s general avoidance of jurisdictional conflicts with the provinces, contrasts favourably with the record of most federal governments over the past 50 years.
Returning for a moment to the GST cut, one neglected point in its favour is that Ottawa should reduce its tax take over time. Provincial governments face the more relentless claims on public programs. Although redistributionists tend to favour higher federal transfers, libertarians, people steeped in public choice theory, and many economists would prefer that provinces should raise more of the money they need on their own. They will need more tax room, and a lower GST gives it to them.
Federal finances
Especially in the light of what came after — the morphing of the Trudeau Liberals’ 2015 campaign promise of modest, temporary deficits into larger and chronic deficits, followed by the catastrophic impact of covid-19 on Ottawa’s bottom line, Stephen Harper’s fiscal management deserves a discussion of its own. The Conservatives came to power following the highly effective fiscal consolidation engineered by Jean Chretien and Paul Martin in the mid-1990s. The favourable momentum of surpluses and falling interest payments on shrinking debt had permitted substantial tax cuts and program spending increases under the Liberals, and that momentum continued after them.
In Harper’s first year in power, the federal government allowed some spending promised in a pre-election binge under Martin to lapse, and with revenues buoyed by a strong economy, the budget surplus came in well above forecast. Both revenue and spending came in above target in the next two years.
Then came the financial crisis and recession. In fiscal years 2008/09 and 2009/10, the Conservatives budgeted lower revenue and higher spending, and as the economic decline turned out worse than expected, the actual declines in revenues and increases in spending were larger than budgeted, yielding a deficit of almost $56 billion in 2009/10. The reverse was true in the recovery year of 2010/11: revenues came in ahead of, and spending below, budget. In three of the following four years as the bottom line returned to balance, this same pattern of in-year surprises in opposite directions prevailed.
This pattern stands out in a good way for two reasons. Letting booms push revenue up and spending down, producing positive bottom-line results, and letting busts push revenue down and spending up, producing negative bottom-line results, is the public economics prescription for macroeconomic stabilization. The Harper Conservatives largely did that.
The other reason this pattern stands out in a good way is that, while common in textbooks, it is rare in real life. Canada’s federal and provincial governments over the past 20 years have typically overshot their revenue targets, and spent most of that extra revenue as it came in (Robson and Omran 2019). The Trudeau Liberals reverted to that more common pattern. They recorded better-than-forecast revenues in each of the four fiscal years from 2015 to 2019, and overshot their projected increases in spending in three of them.
One result of that overspending is that the Liberals ratcheted the size of the federal government up year by year. The superior fiscal management of the Harper Conservatives avoided that. Over the full 2006 to 2015 period, notwithstanding the spending pressures of 2008 and 2009, federal revenue and spending declined somewhat as a share of GDP. The Liberals are consistently adding to Ottawa’s accumulated deficit, despite a growing economy. If their approach had been more like that of the Harper Conservatives, Canada would have been better prepared for the fiscal impact of covid-19.
What Else?
THE initiatives and approaches just surveyed are a subset of the economic policies pursued by the federal government under Stephen Harper’s leadership.
A more complete history would also cover policies affecting macroeconomic and financial stability, and the renewals of the Bank of Canada’s inflation targets. Those are both areas in which Canada has generally done well, including during the Harper years.
A fuller assessment of Ottawa’s stimulus in response to the 2008/09 crisis could fill a book — although the focus on infrastructure made the response slow and incomplete, Canada was no worse than other jurisdictions in that respect.
What about policies affecting innovation, productivity and long-run income growth? Dodge and Dion (2016) give credit to the Harper government for pursuing trade agreements with the European Union, South Korea, and the original partners in the Trans-Pacific Partnership agreement. They also note its timidity in promoting domestic competition — in particular, not following up its ending the Canadian Wheat Board’s monopoly by taking on the agricultural cartels in dairy, poultry, and eggs.
These are critical areas — a long-term perspective on living standards makes clear that productivity is central to almost every economic outcome we care about. I agree with Dodge and Dion that Harper could have done better. But he could also have done, as most other countries typically do, and as many Canadian governments have done, much worse. And promoting innovation and productivity growth is not straightforward — these are areas where our confidence that specific support for research and development, say, or conditions on foreign investment, or policies toward key network industries such as telecommunications, transportation and financial services will produce the results we want is not high. There is no magic wand in these areas, so I am reluctant to criticize the Harper Conservatives for not waving one.
IN SUM, measured against the ideals of redistributionists, libertarians and traditional public economics, Harper could have done better. But as students of Canada’s economic history and economic policies elsewhere can testify, he could have done a lot worse.
The proliferation of “boutique” tax expenditures is a blot on Harper’s economic record. A number of other initiatives and policies, notably lower corporate income taxes, the TFSA, his approach to fiscal federalism and his management of the bottom line, were well-motivated and generally well-executed.
Looking back, an inevitable “compared to what” standard for judging Stephen Harper’s record on Canada’s economy is that of the governments that came after. Hostility to the oil sector is the most vivid example of the Trudeau Liberals’ less growth-friendly approach, and the virus crisis has triggered spending programs that, considering their size and improvised execution together, are unprecedented — and will cast a shadow over the economy and federal finances for years to come. It is too early to say how well Canada will emerge from this crisis compared to other countries, but the chances of its emerging as an exemplar of good policy — as it did after 2008 and 2009 — seem vanishingly small.
Compared to the alternatives, and what came after, Harper was good for Canada’s economy. We should do so well again.
William Robson is CEO of the CD Howe Institute. This article was published in the print edition of The Dorchester Review, Vol. 10 No. 1, Spring/Summer 2020, pp. 81-87.
References
Brodie, Ian. “Harper the Constitutionalist.” The Dorchester Review 6:2, Autumn/Winter 2016.
Brooks, Neil. “The Case Against Boutique Tax Credits and Similar Tax Expenditures.” Canadian Tax Journal 64:1 (2016).
Dodge, David and Richard Dion, “Economic Performance and Policy During the Harper Years.” Policy Options. Oct. 2016.
Laurin, Alexandre and William Robson. Adaptability, Accountability and Sustainability: Intergovernmental Fiscal Arrangements in Canada. C.D. Howe Institute Commentary 431. Jul. 2015.
Robson, William. Thin Capitalization: Weak Business Investment Undermines Canadian Workers. C.D. Howe Institute Commentary 550. Aug. 2019.
Idem and Alexandre Laurin. Hidden Spending: The Fiscal Impact of Federal Tax Concessions. C.D. Howe Institute Commentary 467. Feb. 2017.
Unifor. “Rhetoric and Reality: Evaluating Canada’s Economic Record Under the Harper Government.” (2015) pdf. online.