Canada and the Anti-Austerity Movement

At a time, in the United States and much of Europe, when debate over austerity measures seems stuck, Justin Trudeau’s victory in Canada has sent a powerful message. At a time, in the United States and much of Europe, when debate over austerity measures seems stuck, Justin Trudeau’s victory in Canada has sent a powerful message. Credit Photograph by Chris Wattie / REUTERS

The election result in Canada was fascinating in many ways. As my Canadian colleague Jeremy Keehn wrote on Tuesday, and as Michael Ignatieff, a former leader of the triumphant Liberal Party, also noted, in the Financial Times on Tuesday, it represented a welcome repudiation of the politics of reaction and division exercised by Stephen Harper, the former Conservative Prime Minister. Justin Trudeau, Harper’s successor, won “not just because Canadians wanted a change of regime but also because Canadians wanted a change of politics,” Ignatieff wrote.

Good for the Canadians!

From a global economic perspective, much of the interest in Trudeau’s success lies in his rejection of Harper’s balanced-budgets pitch, and his promotion of an economic plan that would have the federal government borrow money at low interest rates and invest it in infrastructure. While the absolute numbers in Trudeau’s proposal appear to be small—additional outlays of nine and a half billion Canadian dollars a year—they would virtually double infrastructure spending over the next decade. With a collapse in commodity prices having forced the resource-rich Canadian economy into a recession, this investment policy, which would be combined with a tax cut for low- and middle-income families, will provide a much-needed boost to over-all spending. It will also improve Canada’s transport system, which has failed to keep up with population growth, and create more affordable housing—a big issue in a country that has seen a sharp rise in real-estate prices.

To repeat, the spending plan is a modest one. According to the Liberal Party’s projections, it would see the federal government’s budget deficit rise to about ten billion dollars a year—a sum that would be considered a rounding error in Washington. Still, Trudeau’s victory represents a repudiation of the commitment to balanced budgets and spending cuts that all of the major Canadian parties had previously endorsed, his own included. (The Conservatives ran deficits after the 2008-09 economic crisis struck but ended this approach with the budget they presented earlier this year.) Coming at a time when, in the United States and much of Europe, the debate about austerity policies seems stuck, what is happening in Canada sends a hopeful message that progress is possible, after all.

Two of Trudeau’s predecessors as Liberal leader, Jean Chrétien, who was Prime Minister from 1993 to 2003, and Paul Martin, Chrétien’s finance minister and then Prime Minister from 2003 to 2006, championed the politics and economics of austerity in Canada. The Chrétien government cut spending on welfare programs, raised payroll taxes, slashed federal subsidies to Canada’s powerful regional governments, and paid down the country’s debt. In addition to eliminating the budget deficit, his administration reduced the country’s debt-to-G.D.P. ratio by about twenty percentage points.

In a country that likes to see itself as thrifty and sensible, these policies proved popular. Even the New Democratic Party, which traditionally has been furthest to the left among Canada’s three big parties, adopted some of the language and policies of austerity. During this year’s election campaign, the N.D.P. mimicked Harper and the Conservatives in promising to balance the budget despite declining tax revenues caused by the weakness in the economy. Only Trudeau had the courage to break with orthodoxy, saying that ultra-low interest rates provided the country with an opportunity to invest in much-needed infrastructure. Rather than pledging to balance the budget immediately, he said that he would allow deficit to rise modestly over the next three years, and argued that the additional government spending would stimulate growth and tax revenues, bringing the budget back to balance by 2019.

This is pretty much the same argument that President Obama has been making in the United States for the past few years, to no avail. With the Republicans in control of Congress, anything that reeks of another stimulus appears to be a nonstarter. In the United Kingdom and much of Europe, the political environment is similar. In Canada, however, Trudeau showed that it is possible to gain support for a modest dose of Keynesianism.

In a column in the Washington Post on Tuesday, Larry Summers, a big proponent of additional infrastructure spending, pointed to a chart showing how public support for the Liberal Party picked up after late August, when it announced its economic plan. With the N.D.P. sticking to the balanced-budget script, it appears that many of the Party’s supporters, who include a lot of trade unionists and workers on modest incomes, switched to the Liberals. In a poll carried out for Bloomberg earlier this month, thirty-nine per cent of respondents chose Trudeau as the party leader with the best economic plan, compared with just sixteen per cent who chose Tom Mulcair, the N.D.P.’s leader. (Thirty-three per cent chose Harper.)

More surprising, but also encouraging, was the fact that a number of business leaders turned against Harper and supported Trudeau, including Conrad Black, the founder of the conservative National Post. While Black and other members of Canada’s corporate elite have hardly reversed their belief in balanced budgets and small government, at least some of them recognized the logic of adopting stimulus measures to offset the collapse in commodity prices—or, at least, they didn’t consider the Liberal economic plan to be a major threat. (Trudeau’s support for the Keystone XL pipeline and the further development of Canada’s oil sands probably didn’t harm his standing in the business community, either.)

Strictly in economic terms, there is no doubt that Canada has ample fiscal room to introduce a stimulus. According to the latest projections from the International Monetary Fund, the Canadian government will run a structural budget deficit—that is, one that has been adjusted for the state of the economic cycle—of just one per cent of G.D.P. this year, and its net outstanding debt will come to less than forty per cent of G.D.P. For comparison, the structural deficit in the United States is roughly three per cent of G.D.P., and the ratio of net debt to G.D.P. is about eighty per cent.

In Canada, as in many other countries, the real barrier to adopting pro-growth policies isn’t economic: it’s political. Trudeau, with an assist from Harper (whom Black described in a preëlection column as “a sadistic Victorian schoolmaster”) and the N.D.P., demonstrated how to overcome this obstacle. And once his policies are enacted, an editorial in the Financial Times noted, they could also provide a “demonstration effect to other slow growth democracies.”

Let’s hope so. The eyes of the world will be on Canada.

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