It is almost unfathomable that some are attempting to immortalize former finance minister Paul Martin as a hero. Martin has attempted to make himself appear fiscally conservative and as the antithesis of Jean Chrétien. While some point to the current Liberal Party fracture as evi- dence that Martin and Chrétien are two different breeds, the truth is less flattering. Martin and Chrétien are not opposites, but are cut from the same political cloth. They both value political expediency over good policy, wasteful spending over restraint and accounting trickery over transparency.
The skeptic need only reflect longer and deeper on the reality of Canada’s economy and public finances to see that Paul Martin’s record as finance minister is based on good spin rather than actual facts. The true legacy of the tag team of Paul Martin and Jean Chrétien is that they ripped the fab- ric of the health-care system and pushed it to near crisis by slashing funding to the provinces.
How was Martin able to dictate budgets to his boss in a government where the prime minister and the PMO have virtually absolute control? He did not impose fiscal policy on his political master. Martin and Chrétien effectively co- wrote the budgets that reduced spending only out of politi- cal necessity. It was only after six years of tax increases that they finally capitulated to the demands of Canadians in 2000 by grudgingly reducing taxes. Martin is no different from Chrétien and will always do whatever is politically expedient. It really was a Chrétien-Martin government.
Some praise Martin because he eliminated the deficit, but originally he only promised to reduce it from six percent of gross domestic product (GDP) to three percent. Martin’s first budget in 1994 did not tackle the deficit and therefore was viewed as a failure. Budget 1994 actually initiated $1.7 billion in new spending and a $1.3 billion tax hike for 1995- 96. The 1995 Budget was very different because it proposed to reduce the aggregate level of program spending. On the revenue side, however, the annual tax burden was again increased, this time by $1.4 billion.
Between these budgets, what happened? What caused the Chrétien-Martin government to alter its course? It was the Mexican peso crisis in late 1994 and credit downgrades of Canadian sovereign debt. With the highest level of for- eign debt in the G7 and interest charges eating up one-third of revenue, the peso crisis focused investor attention on Canada’s fiscal and political problems. Canada was subject to the every whim of international markets that were wor- ried about which country would be next. Would Canada fol- low New Zealand into insolvency? Would the IMF have to bail out Canada?
With Canadian economic sovereignty at risk, greater fiscal action was required after the misguided 1994 Budget. Therefore, the Chrétien-Martin government was forced to actually reduce spending, but when they did, political expe- diency was their principal guide.
From peak-to-trough, program spending fell 14 percent, or $17.8 billion, according to the government’s public accounts that overstate the decreases and understate recent increases. Under the Chrétien-Martin government these financial statements have become as genuine as have those at WorldCom or Enron. As C.D. Howe economist William Robson remarked after the 1999 budget,
…Canadians generally can no longer rely on feder- al budgets, nor on the figures presented in the pub- lic accounts at the end of each fiscal year, to give a straightforward account of the nation’s finances.
Unlike accounting firm Arthur Andersen, the auditor general of Canada has reported the gov- ernment’s accounting failures many times and has repeatedly requested corrective action. However, one of the main Chrétien-Martin lega- cies is accounting trickery and sleights of hand. Fortunately for Canadians, the national accounts published by Statistics Canada are based on inter- national standards and provide a non-politicized source of financial information. Unlike the pub- lic accounts, the national accounts measure peak- to-trough decline as slightly less than nine per- cent, or $11.3 billion.
Historically both sources of financial informa- tion were comparable. However, after 1992 the public accounts have presented a systematic understatement of program spending. That’s why, according to the public accounts, program spend- ing was below the record high set in 1993 right through to 2001. In contrast, the national accounts reveal that the earlier high was surpassed in 1999. A significant reason for the over $10 bil- lion difference between the two accounts is the public accounts’ improper accounting of family child benefits and year-end ad hoc spending. The auditor general has criticized both these practices. While expenditure reduction was an integral part of taming the deficit, what was cut is important. Was it done fairly? The answer is no. The reason is the Chrétien-Martin team effectively off-loaded their problem by slashing social spending transfers to the provinces. The national accounts reveal that transfers to other levels of government were cut by just over 20 percent, or $6.6 billion. This category includes social transfers and the constitutionally required fiscal transfers””equalization””and, therefore, understates cuts to social transfers since the fiscal transfers grow inline with GDP.
Consider the impact of reduced social trans- fers on Canada’s largest province, Ontario: Federal cash transfers were cut 36 percent or $2.6 billion between 1993 and 1998. Therefore, the source of today’s fiscal difficulties between provincial and municipal governments can be traced back to these Chrétien-Martin cuts.
In direct contrast to the dramatic cuts to social transfers, the Chrétien-Martin government reductions in their ownbackyard were relatively tepid. Spending on the bureaucracy fell seven per- cent, or $2.6 billion, compared to the 20 percent cut in provincial transfers. The dichotomy in Liberal priorities extends throughout their time in power.
Between 1993 and 2001 the Chrétien-Martin team increased spending on the Ottawa bureau- cracy by 16 percent, or $6.0 billion; transfers to business increased nine percent, or $330 million (even though Martin promised to cut business subsidies by 60 percent in the 1995 Budget), and transfers to the provinces increased just six per- cent, or 1.9 billion. It is clear that the Chrétien- Martin government cut deeper where there would be less political backlash and reduced expenditures the least where the repercussions would be stronger. The dramatic off-loading forced the provinces to reduce their own budgets and result- ed in the premiers bearing the brunt of the back- lash. Thus, expenditure reductions were shaped by political expediency rather than good policy.
But we may make the point that he cut taxes too. It is true, after six years of tax increases the Liberals reduced taxes just before calling an elec- tion. In early 2000 the Canadian Alliance pro- posed a $100 billion tax reduction plan that the Chrétien-Martin Liberals claimed was not afford- able. To ensure electoral success following strong Alliance polling numbers, the Liberal’s introduced their tax plan to appeal to the growing number of Canadians demanding a tax cut. Although the Liberal plan was smaller than the Alliance plan, it stole several key proposals to augment its political expediency. In summary, the Chrétien-Martin tag- team government eliminated the deficit because they had no choice: Canada’s economic sover- eignty was at stake. They focused the cuts dispro- portionately on social transfers and dealt Canada’s health-care system a body blow. At the same time, the Chrétien-Martin government increased taxes over 60 times, including bracket creep and CPP premium increases, before capitulating to electoral demands to reduce the tax burden. Yet, they still managed to add $40 billion to the over half-tril- lion dollar federal debt.
It was only through slashing funding to the provinces and rising revenues from ongoing tax increases that the Chrétien-Martin tag team was able to balance the federal books and produce surpluses. That is no legacy to be proud of and the fact that Martin has the reputation he does is based purely on misrepresentation of the record. In other words, it’s good spin.