Austerity and Economic Stagnation: The Liberal Record

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Murray Dobbin, January 20, 2006 –

Paul Martin's Liberals made deep cuts to social spending.How do you judge a politician's promises?

It depends, in part, on whether or not they have a record to go by. Of course, that's not absolutely necessary — you can judge Stephen Harper by what he has said for nearly 20 years about what his core beliefs are. Many of his policies this time around fundamentally contradict everything he has ever said. Score zero for the credibility of his promises.

But Paul Martin is even easier. He has a real and very extensive record — which the media, to their shame, is not interested in any more. If you want to know what a prime minister would really like to do, take a look at what they did when they had no restrictions on their power. Judging Martin on the recent minority government doesn't count - he was trying to stay in power and had to please the NDP (and the public) with at least some progressive policies.

No, much better to look at what he did as finance minister from 1993-2002. Martin was for those nine long years the de facto prime minister of the country. Jean Chrétien wasn't interested in policy or governing. He was a politician who saw his job as maintaining the Liberals in power. He gave virtual carte blanche to Martin to determine the direction of the government. While this was disastrous for the country, it does give us a crystal clear view of what the man is really all about.

The Martin myth

Conventional wisdom tells us that Paul Martin's place in history, so far, is most notable for his getting rid of the deficit. Our image: he spent most of his time as finance minister slaying the “deficit dragon.” But in fact, no finance minister in Canadian history had ever been blessed with so many large and uninterrupted budget surpluses: six to be exact, between 1997 and 2002 when he was fired. The only deficits Martin faced were in his first two full years — 1994-95 and 1995-96.

Another persistent myth is that it was Martin's huge budget cuts from 1995-97 that killed the deficit. In fact, those cuts (they represented a 40 per cent reduction in federal social program money, compared to Mulroney's 25 per cent cut) almost brought the economy to a halt. A study by CIBC-Wood Gundy concluded that Martin's cuts reduced economic growth in Canada by a huge 3.5 percentage points through 1994-1996. The resulting loss in tax revenue almost eliminated the savings gained by making the spending cuts.

The cuts combined with the zero inflation policy of the Bank of Canada to create a recession lasting much of the 1990s. Pierre Fortin, former President of the Canadian Economics Association, put the cost of the cumulative unemployment caused by the cuts and high interest rate policy at “âe¦about $400 billion in foregone national income” — equal to 30 per cent of the losses in the Great Depression.

When the Bank of Canada realized in 1997 that its high interest rate policy was helping cause a growing recession it eased up. The result? A huge burst of economic growth — and a huge increase in government revenue. According to CAW economist Jim Stanford, had Martin simply frozen spending at 1994 levels, and eased interest rates, economic growth would have eliminated the deficit anyway — just two years later. Without all the pain.

There is little doubt that Martin and his deputy minister, David Dodge (now running the Bank of Canada) knew this. How do we know? Because Paul Martin told us, in his February 27, 1995 budget speech in Parliament. He did not boast about “slaying the deficit.” He boasted about cutting back the role of government to levels not seen since 1951.

He proclaimed that he intended to “redesign the very role and structure of government itself. Indeed, as far as we are concerned, it is âe¦ the very redefinition of government itself that is the main achievement of this budget.” Announcing over $25 billion in spending cuts over three years, he boasted: “Relative to the size of our economy, program spending will be lower in 1996-97 than at any time since 1951.”

Martin's mandate and power went far beyond that of any contemporary finance minister and his cuts reflected his conservative commitment to restructure government. The most significant change was the elimination of the country's core nation building legislation: Established Program Funding, which targeted federal dollars to post-secondary education and health care, and the Canada Assistance Plan (CAP), which gave Ottawa influence over provincial social welfare schemes.

More than any other programs, these represented a generation of federal leadership in social programs and nation building. Martin replaced them with the Canada Health and Social Transfer — a lump sum the provinces could spend as they pleased. It was radical decentralization.

But he didn't stop there. The other departments key to nation-building — natural resources, agriculture, the environment, fisheries, regional and industrial development — saw huge and disproportionate cuts of 50-60 per cent.

Canada's economic policy? A singular commitment to an “aggressive trade strategy.” Part of that was a commitment to a “flexible labour” policy. Martin's additional cuts to unemployment insurance and his elimination of the CAP, accompanied by zero inflation targets, produced unemployment levels of over nine per cent for most of the decade. While workers in the U.S. saw a cumulative wage increase of 14 per cent in the 1990s, Canadian workers stood still, all in the aid of making us “competitive” with the U.S.

The surplus shuffle

There are still doubters — those who want to believe that Martin, in his heart, is his father's son. (Paul Martin Sr. was a left-Liberal cabinet minister in the 1960s and a dogged advocate of medicare.) If Martin had wanted to live up to his father's image he had the authority, he had Chrétien's blessing and, most importantly, he had the money. But instead of spending it — and keeping his promise of re-investment in social programs — he cynically and deliberately covered up his repeated surpluses.

Between the years 1999 and 2002, Martin underestimated the accumulated surpluses by over $36 billion (and spent it on the debt). This was one and a half times the size of his 1995-97 cuts. Other economists were consistently making more accurate estimates, including the Canadian Centre for Policy Alternatives, whose cumulative estimates were out by less than one billion.

The surpluses were so enormous that, by 2000, Martin could no longer simply hide them. So he cut taxes by $100-billion over five years (77 per cent of the personal benefits going to the wealthiest eight per cent of the population). Billions also went to Canada's largest corporations. This was at a time when tax cuts were nowhere on the list of Canadians' priorities. But Martin — loathe to undo the historic work of his 1995 budget — had to get rid of the money somehow.

So who was Martin listening to, if not the ghost of his father? He was listening to the master of Bay Street, Tom d'Aquino, the head of the Business Council on National Issues. In mid-1994, d'Aquino presented the new finance minister with a 10-point program for “restructuring” the country. By the time of his unprecedented tax cuts in 2000, Martin had delivered on almost every one of the demands of big business.

Promises made. Promises broken.

In looking back on all of this there looms the question of election promises. If Paul Martin had pledged all these things, and Canadians voted for them — shame on them. But the 1993 federal election was dominated by a book of progressive promises. The Liberal Red Book — full of social democratic policies, a huge section on environmental policy, and a promise to promote economic growth to defeat the deficit — dominated the 1993 election like no election platform document ever had before. It was everywhere — waved in the air every time Chrétien appeared on television.

The importance of the Red Book was twofold: it provided a genuine vision of the country and it put in writing what the government was going to do. Within two years virtually every promise was broken. But within months, Martin had already rejected its prescriptions. “Screw the Red Book,” he admonished bureaucrats who still thought it was Liberal policy. “Don't tell me what's in the Red Book. I wrote the goddamned thing. And I know that it's a lot of crap.”

So, did his experience with making false promises have a salutary effect on Paul Martin? Did it make him reluctant to make promises again — promises he knew he would break? Not for a minute. He was back at it in his acceptance speech at the leadership convention where he became Liberal leader and prime minister.

A more grotesquely hypocritical speech could hardly be imagined. Amongst his declarations were these: “...Canadian people and its [sic] leaders created the modern social foundations of Canadian life — our pension and universal health care systems. Foundations which Canadians hold as cornerstones of our national identity, our pride and our values.” A foundation that Martin ruthlessly attacked.

He went on to say that his challenge is to “...rally the nation to its unfulfilled promise: To build a society based on equality, not privilege; on duty, not entitlement. A society based on compassion and caring; not indifference or neglect.” And then: “We know quality of life when we see people working, with dignity, with good pay, with the opportunity to move ahead.”

Perhaps as disturbing as Martin's hypocrisy is the sense one gets that he isn't even conscious of what he is doing. It goes back to the fact that Paul Martin was, for years, a CEO and never really escaped that persona or mode of operating. A CEO cannot afford to take account of his personal values or concern over consequences — everything is about the bottom line.

Canadian philosopher Ursula Franklin has a phrase for this kind of behaviour: moral dyslexia. “Unfortunately, unlike those with learning disabilities, who need and appreciate help, those who have moral disabilities don't come to us for help. ...Most of them are morally disabled by their own choice.”

It did not take long for that moral dyslexia to show up. Convinced that his coronation as Liberal leader would also deliver him ten years of majority government, in December, 2003, newly minted Prime Minister Martin appointed the most right wing cabinet in almost 30 years. In areas of defence, foreign affairs, trade and finance, he out-did even Brian Mulroney as he prepared to finish the job he had started in finance.

He picked former Tory Scott Brison (right wing economically and proudly pro-America) as parliamentary secretary for Canada-U.S. relations. He appointed a legislative secretary, John Mckay, to be in charge of privatizing government services — through public private partnerships. There was not a single powerful voice in any post dealing with social issues — and almost no mention of such issues in the throne speech.

Bay Street was giddy.

Then came auditor general Sheila Fraser and the 2004 election, dominated by the sponsorship scandal. And the minority government with the NDP — almost — holding the balance of power. Paul Martin, once again, became his father's son. Not because he wanted to but because he had to. 

Reality check

The following quotes are selected from the Liberal Party's election web site. Judge for yourself where they should place on the shameless hypocrisy scale...

1) “[W]hen the time comes to vote on legislation to invest in regional development, well, [Mr. Duceppe] votes against that – He talks about social housing but when the time comes to vote in the House, well, he voted against social housing here in Montreal.”

Reality check: Paul Martin completely eliminated the social housing budget in 1995, making Canada the only developed country without such a program.

2) “I don't believe that Canada was built on American conservative values. It was built on compassion, on generosity, on sharing and understanding,”

Reality check: All of those values were fundamentally, and glaringly, absent from nine Martin budgets.

3) “We as Liberals have always been committed to supporting families, and that means support for all Canadian families. For many Canadian families with immediate relatives overseas, one of the challenges that they have faced is the $975 right of permanent residence fee. We're going to eliminate that fee, over the course of our mandate.”

Reality check: Paul Martin brought in the immigrant head tax in his 1995 budget and immigrant communities have been asking ever since to have it removed.

4) “Canadian families have a right to a health care system that puts their needs first. They have a right to quality care in a timely manner by ensuring that critical wait times are reduced. They have a right to a health care system that is accountable to them. Above all, they have a right to care based on need, not ability to pay.”

Reality check: Paul Martin cut federal health (and other) transfers by 40 per cent — outdoing the hated Brian Mulroney (25 per cent). He eliminated legislation that ensured provinces spent those dollars on health care and then refused to enforce the Canada Health Act's banning of private care.

5) “I believe in a robust federalism, one in which governments work hard, together, to prepare our citizens and our country for the exciting opportunities — and real challenges — that lie ahead.”

Reality check: Paul Martin as finance minister moved further than any other post-war prime minister to decentralize the country — repealing laws that forced provinces to spend transfers on health and education and legislation that gave Ottawa influence over welfare policy.

6) “Together we can ensure that the automobile industry in Canada that has been a source of strength, innovation and pride will continue to thrive in cities like Windsor for many generations to come.”

Reality Check: Paul Martin's aggressive pursuit of trade liberalization contributed to an embarrassing loss at the WTO: the Auto Pact was declared in violation of the WTO. Now his government is handing out $900 million to bribe the companies to stay.

7) “This is about making affordable child care a permanent addition to our social foundation. It's about making clear that this program is here to stay — because it's right for Canadian families, and it's what's right for our children.”

Reality check: You can thank Canadian voters for this one — they didn't give Martin a majority. He promised child care in every election since 1993 — and every time the Liberals won, they reneged.

8) “The greatest investment a government can make in any region is in economic self-reliance — and that's why the Liberal government believes regional development agencies, like the Atlantic Canada Opportunities Agency (ACOA) and others across this country, are so important.”

Reality check: Martin gutted the industrial and regional development departments and their agencies in 1995 — cutting them by nearly 60 per cent.

9 ) “The Liberal government was committed to accepting the Convention [on the Protection and Promotion of the Diversity of Cultural Expressions] before the end of the year and today we met that commitment. ... Every culture must have the means to promote its ideas, its values, its perspectives on the world, and its hopes. The Convention will allow us to do that.”

Reality check: It was Liberal Heritage Minister Sheila Copps, Martin's cabinet colleague, who led the fight for this convention. Paul Martin opposed her efforts in cabinet and when he became prime minister he threw her out of his government and engineered her nomination defeat.

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