To defend 2021 stimulus spending, Liberal government attacks Conservative austerity – in 2011

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The federal Liberals say they are determined not to make the same mistake as the Conservatives did in the wake of the 2009 recession by withdrawing stimulus too quickly, arguing that the Trudeau government’s costly spending plans are well worth the big price tag.

But that history is much less decisive than how they portray it – and they could be drawing the wrong lesson.

In presenting her first budget, Finance Minister Chrystia Freeland vowed to keep the government’s promise to create one million jobs by the end of the year. “The world has learned the lesson of 2009 – the cost of allowing economic hardship to fester,” she said in her speech to the House of Commons. “In some countries, democracy itself has been threatened by that mistake. We will not let that happen in Canada.”

Key to Ms. Freeland’s argument is the contention that the Conservatives did allow economic hardship to fester after the 2008-09 financial crisis by pivoting too quickly to spending restraint. That certainly was the case in the European Union, and to a lesser extent, the United States.

But in Canada, there is a divide between progressive opinion that sees the Harper government’s efforts to return to a balanced budget from 2011 onward as a damaging ideological fixation, and more right-leaning economists that see that move as essential – and one that left federal finances in a position to withstand the onslaught of the coronavirus.

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Looking at gross domestic product, Canada fared much better than most other advanced economies in bouncing back from the financial crisis. As the chart below shows, the Canadian economy contracted less in 2008-09 and grew faster between 2010 and 2015 than the U.S., the Group of Seven and the broader group of advanced economies. “We really were an international example,” says economist Miguel Ouellette, director of operations at the Montreal Economic Institute (MEI).

Jason Clemens, executive vice-president of the Fraser Institute, rejects the premise that the Conservatives impaired the economic recovery. To the contrary, he says, the government would have driven up the costs for labour and materials had it not pared back its stimulus spending, which focused on infrastructure projects. “It’s the opposite of what the minister is saying,” Mr. Clemens adds.

But GDP figures aren’t the whole story. Economist Jim Stanford, director of the Centre for Future Work, says there is strong evidence that the Harper government “aggressively and prematurely” reduced fiscal stimulus after the financial crisis. He points to the fact that the Conservatives cut program spending excluding actuarial charges, adjusted for inflation and population growth, starting in fiscal 2010-11 and continuing through to 2013-14.

However, real per capita program spending jumped sharply in 2014-15, the last full fiscal year the Conservatives were in power, rising past the prerecession levels of 2008-09.

Mr. Stanford says the Conservative fixation on austerity left Canada’s economy in a weakened state by 2015, turning what should have been a downturn limited to the energy sector into a broad-based decline. The Fraser Institute’s Mr. Clemens takes a contrary view. He says the relatively weak growth after the 2015 downturn, when the newly elected Liberal government started running deficits, compared with the post-2011 period is proof that expansive government spending does not propel growth.

There’s also the counterfactual question of how the Bank of Canada would have responded to a more expansionary fiscal policy in 2010-15. In real life, the bank kept its benchmark at 1 per cent from 2011 through to the end of 2014, which it called “considerable monetary policy stimulus.”

If it had stepped up the pace of benchmark rate increases, that would have blunted the impact of higher government spending. (Mr. Stanford says he believes the divergence of fiscal and monetary policy in those years demonstrated the need for them to work in sync, a lesson being applied in the current downturn.)

The Liberals, for their part, are focusing more on the recovery of the labour market when they argue that the Conservatives were too hasty in paring back stimulus. As proof, the government points to the trend in the labour-force participation rates for people 15 years old to 64 years old in the wake of the financial crisis. As the chart below shows, the participation rate (which count both those working and actively looking for work) did take a long time to regain its prerecession levels – 100 months, to be precise.

But if a rebound to a prerecession participation rate is to be the trigger for cutting back stimulus spending, the government has a problem, at least politically. The participation rate edged past its prepandemic level last October – and it blew past that mark in March to reach a 45-year high.

Katherine Cuplinskas, Ms. Freeland’s press secretary, said in a statement that the government is committed to helping the hardest-hit workers secure jobs or expanded hours. The statement noted that the International Monetary Fund has cautioned Canada against a premature winding down of fiscal support, and that Ottawa believes the risks of doing too little are greater than the risks of doing too much.

Employment rates, however, indicate that the job market still has ground to make up, although it is rebounding much more quickly than after the 2008-09 recession, as this third chart shows, even with vaccination rolling out slowly.

But Alexandre Laurin, director of research at the C.D. Howe Institute, points out an additional difficulty for the government as it seeks to link its fiscal ambitions to the pace of economic recovery: Many of its spending plans are long term, so whatever boost they provide is likely to come well after labour markets have recovered from the pandemic downturn.

Mr. Ouellette, the MEI economist, says more than bad timing could be at issue, with the government seemingly ignoring the difference between earlier recessions, including that of 2008-09, and the current downturn. A lack of demand, particularly consumer spending, drove previous downturns – businesses did not have enough customers. But the pandemic recession is largely a result of supply constraints, with there not being enough businesses open to meet existing consumer demand.

Nevertheless, he says, the Liberals seem intent on stimulating demand in the economy, even though there is every reason to believe that consumer spending will roar back as vaccination rates rise and health restrictions ease.

In Mr. Ouellette’s view, the government’s critique of the Harper record has less to do with making the case for greater temporary stimulus, and much more to do with softening up public opinion for increasing Ottawa’s spending permanently. “I feel like they are setting the table for more interventions of this kind.”

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