Is too much of Canada’s boom driven by big government?

One of the behind-the-scenes realities of Canada’s economic success through the Great Recession is that much of it is buoyed by government stimulus spending.

Since the recession began, public sector debt north of the border has spiked 38%. Ontario’s provincial deficit this year is now pegged at $16 billion.

A study by the Fraser Institute — a conservative-leaning Canadian think-tank, found that Ontario would have actually lost jobs overall over the last five years, if not for robust government hiring.

Until now, this kind of classic prime-the-pump government spending enjoyed relatively broad support in Ottawa.

Conservative Prime Minister Stephen Harper said bluntly in 2009 that he thought deficits were necessary given the global downturn.

And the spending has meant a lot more stability.

In northern New York, government lay-offs dominate the economic discussion, whether it’s the threat of prison closures, the risk of downsizing the Army presence in Watertown, or talk of privatizing local government services like nursing homes and home healthcare.

That same kind of anxiety just hasn’t been a factor in Ontario or Quebec.

But now there appears to be something of a backlash.  Toronto’s Conservative Party mayor announced this week that he’ll phase out more than 2,000 jobs.

PM Harper is also cutting jobs, following promises he made during the last election to bring the national budget back into balance by 2014.  Taxpayer groups are urging him to keep those pledges.

And in Ontario’s provincial debate, conservatives have been talking about wage freezes for public sector workers.

That doesn’t translate into an American-style backlash against “big government.”  There isn’t a tea party movement in Canada of any prominence, and no one is talking about shutting down the government in a clash over deficits.

And it’s important to note that when the recession began, Canada’s balance sheets were in far better shape than here in the US.

But people here are beginning to question whether Canada’s remarkable resilience during the last five years of turmoil has been too heavily based on borrowing at all levels.

And what happens if the economy darkens again?  Can Canada spend its way through another dip of the Great Recession?  And will it hurt Canada over the long term that its overall tax rates are significantly higher than in the US?

(Taxes at all levels account for 32% of GDP in Canada, compared with 26% of GDP in the US.)

So what do you think?  Has Canada been smart to apply a steady stimulus through the recession?  Or is there a wake-up coming for public sector employees there as well?

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19 Comments on “Is too much of Canada’s boom driven by big government?”

  1. Peter Hahn says:

    yes – Canada has been smart about this. Smarter than us. Canadians, in general, are better off than US citizens in general.

  2. Gary says:

    No – The wake up call is coming, and very soon,

  3. Jim Bullard says:

    Canada started out smarter by not getting into two unfunded wars and adding a Medicare prescription plan that was only partially funded at the same time as cutting taxes.

    I’ll never understand how/why “trickle down” came to be an article of economic faith with conservatives. How many of them have successfully applied a reduction of income to increase prosperity philosophy to their household budgets?

  4. Peter Hahn says:

    The Canadians run a surplus during good times so they can run a deficit during bad times. They are much more disciplined than we are (and less self-indulgent).

    We lay off thousands and thousands of public employees to solve the unemployment situation. We cut back on government spending to boost the economy. We are just dumb.

  5. Peter Hahn says:

    And Gary – yes the day of reckoning for Canada will come, but if they play their cards right, it will come when the economy is booming again when laying off public employees and raising taxes to pay off the deficit doesn’t cause so much harm.

  6. Brian Mann says:

    It’s noteworthy that people here I talk to do often bring up the wars in Afghanistan and Iraq, not so much as a moral or geopolitical question, but as an example of what they view as fiscal imprudence.

    Mounting two major wars without increasing taxes, or finding some other way to pay the bills — Canadians I talk to are baffled by that.

    –Brian, NCPR

  7. jeff says:

    Given what I read I wonder if Canada is at the crest with a trough ahead.

  8. Paul says:

    Hasn’t Canada lost soldiers fighting in Afghanistan? They are involved in that war (or at least were)?

  9. JDM says:

    I haven’t followed Canadian policy, but a quick glance shows that Harper campaigned on a balanced budget by 2014, assuming 5.6% growth, assuming US 3.5% growth.

    I don’t see the US at 3.5%. I also see some caving on promised tax cuts, and spending cuts in the Canadian ranks.

    To the extent that they make good on their promised tax cuts and balanced budget timelines, they will do “ok”. If they’re looking for a robust US economy to help them out, they may be disappointed.

    There is always a chance that Nov 2012 will see a new administration in the US, and perhaps a chance of a better situation, here.

  10. If Clapton is God, Warren Haynes is Jesus says:

    It isn’t just the two wars themselves, but also the aggregate spending on our entire gargantuan military/industrial/ congressional complex over the course of decades that’s also partly why we’re in the financial mess we’re in. The long term and ever expanding costs of our insane empire is finally coming home to roast.

    And we’re seeing the same pattern take shape with the every increasing costs and size of the “security complex.” It’s evident right here in the North Country with the presence of drones, increased federal security (DEA, Border Patrol, local and state law enforcement) etc….

    It’s only now become more evident to more people because when we can’t hire teachers, or firefighters, or extend unemployment benefits, or rebuild communities after major weather events, etc., but can do these things half way around the world in some god forsaken middle eastern or Asian country by our military and their for profit contractors, people start to wonder and connect the dots and realize they’re being taken for a ride.

    Canada, on the other hand, spends far, far less on their military and has for decades. Their economy isn’t shackled by an ever growing beast which provides little return on investment and grows unabated over the course of decades. Thus leaving them with the resources to invest in their economy in a way that actually provides a real return on that investment.

  11. dave says:

    Yes, Canada has sent troops and has otherwise participated in the Afghanistan War.

    No, they are not the primary funders of it and have not spent anything even close to what we have… which was the point.

  12. Alan says:

    We spend about 1/3 the US does on our military – 1.5% of GDP v. 4.5%. http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

    We are entering into a cycle of naval ship construction and jet purchases which will boost that but I think that is a bit besides the point. There is no question that the money is accounted for ahead of the deal, no credit card purchases. And our brand of conservatives may even consider more stimulus if needed: http://www.reuters.com/article/2011/11/25/us-economy-flaherty-idUSTRE7AO18U20111125

    My take away is that we are less ideological, see government as a tool and not a beast to be feared in itself. Our constitution offers “peace, order and good government” rather than “life, liberty and the pursuit of happiness.” Sounds duller but it works.

  13. Walker says:

    Clapton says “Canada, on the other hand, spends far, far less on their military…”

    EVERYONE spends far less on their military. We come real near outspending the rest of the world COMBINED.

    Sorry for the all caps– we need markup for boldface or underlining.

    Sure wish we had listened to our Republican war hero President Dwight D. Eisenhower when he warned of the danger of the Military Industrial Complex in 1961:

    “This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

    “We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together.”

  14. If Clapton is God, Warren Haynes is Jesus says:

    Walker,

    A little known tidbit about that speech. The initial version which President Eisenhower later revised, included “Congressional” in the phrase “Military/Industrial Complex.” He removed this addition after further consideration as he didn’t want to offend the members of congress as at the time he needed their support for a particular piece of legislation he hoped to pass through congress. He felt congressional members where also a part of and beholden to this ever growing complex within our gov’t. This tidbit was brought to lite some time ago by his daughter while being interviewed on Bill Maher on his HBO show “Real Time.”

  15. Mervel says:

    They have a lot higher taxes than we do and have had for many many decades. They have missed some of the fast growth and still lose many of their best and brightest to our technology centers. The trade off though I think is some stability and more social cohesiveness than we have.

    It is a trade off I think most Canadians accept as a good deal. Canada is not the US with different economic policies, they are a different country with a different mindset.

    I don’t think much of what works there would work in the US, but certainly not having two unpaid for massive wars over the past decade and a cheaper health care system have helped them out a lot.

    We could learn some things from them in that regard. The problem is that Canada cannot effectively defend itself, its military is too small for a country that size; they don’t get involved because they don’t have the ability to get involved in conflicts around the globe; they basically relies on the US for their national security interests.

  16. Walker says:

    “They have missed some of the fast growth…” That “fast growth” was a bubble. Missing it is what made them miss the crash that followed. They “missed it” by virtue of sound banking policy.

    “The problem is that Canada cannot effectively defend itself, its military is too small for a country that size…”

    Says who? Who’s planning on attacking Canada?

    “…they don’t get involved because they don’t have the ability to get involved in conflicts around the globe…”

    You say that like it’s a bad thing.

    As to your middle two paragraphs, I agree with you.

  17. scratchy says:

    The issue should be more be efficient and effective government and less about big vs. small government. in ny we dont have efficient or effective government. the same is true nationally, with our excessive defense budget. canadian government seems to provide a better value for its citizens.

  18. Mervel says:

    The long term growth of Canada over the past 50 years has lagged the United States, which is what I meant, you are correct it is a good thing to have missed some of the extremes of these bubbles.

    As far as Defense goes it is just a structural benefit of having your defense supplied for you by the US. If the US was not here they would have been defeated by Japan for example, they would not have been able to defend themselves against the Soviet Union who would have indeed aggressively pushed into the Canadian Pacific. They don’t carry their share of their defense needs. If the US was attacked they would not be able to help us, they can’t really help anyone militarily.

    That is not really their fault if the US was in the same position they would do the same. But it does explain some benefits of being Canada.

  19. Mervel says:

    Let me add that the US needs to wind down our own empire and the military machine required to defend and manage that empire. But I also think other countries will need to get serious about their own defense.

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