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Federal Politics
Election 2015

Canada's Harsh 'Austerity' Policies Started with Liberals

Don't make Harper the face of slashed supports for workers. It's a two-decade tradition.

Michal Rozworski 25 Aug

A version of this article first appeared in Jacobin. Michal Rozworski is a Vancouver-based researcher and writer. He blogs at Political Eh-conomy

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The campaigning Stephen Harper boasts that his tough austerity policies saved the Canadian economy. Lost in the rhetoric are two important facts. As most economists will tell you today, austerity measures are lousy ways to expand jobs and investment. And Harper's Conservatives were just carrying on the work of their austerity embracing Liberal predecessors.

In his 1994 budget speech, Paul Martin -- then Canada's finance minister, later the prime minister -- encapsulated the Liberal message:

"It is now time for government to get its fiscal house in order. For years, governments have been promising more than they can deliver, and delivering more than they can afford. That has to end. We are ending it...Over the next three years, for every one dollar raised in new revenues we will cut five dollars in government expenditures."

The subsequent austerity drive was one of the most severe in the global north, and remains the foundation for the right's strategy of death by a thousand cuts carried on by Harper Conservatives.

Taking this longer view of the political economy of Canadian austerity -- and the nature of Harper's conservatism -- isn't just crucial to making sense of the present. It provides more stable ground to fight for a less austere future.

The first round of Liberal cutbacks were quick and deep. A greater share of government expenditures redirected towards debt repayment created additional false scarcity of funds for direct spending. Spending on federal government programs and transfers to provinces, cities, and individuals fell by over five per cent of GDP from 1993 to the turn of the millennium. Spending growth did not just slow: absolute expenditures decreased.

Reduced fiscal transfers to provinces put the squeeze on local governments. Since the 1990s, Canada has seen provincial governments -- not just governed by Liberals and Conservatives, but also by New Democrats -- impose austerity further down the line. Since provinces are responsible for many basics like health, education, and welfare benefits, shrinking transfers have further eroded the working class's social wage. Privatizations, workfare schemes, tuition increases -- all were applied (unevenly) across the country.

Overall, the sharp turn to austerity created a more punitive welfare state. While Canada's economic growth in the mid to late '90s fed off that in the U.S., the character of its reforms was also in line with the Clintonite agenda. There was a similar push to create conditions for business expansion even less encumbered by working class demands. A major strategy was an attack on the social wage -- public spending on goods, services and income supports for people in Canada.

Depressed wages, rising personal debt

One major social program that is the responsibility of Canada's federal government -- and provides a good example of the transformations wrought by austerity -- is unemployment insurance.

The Liberals ate into the real value of benefits and made eligibility requirements more restrictive. While just over 80 per cent of Canada's unemployed received jobless benefits during the early 1990s, this percentage fell to about 45 per cent by the early 2000s. Most unemployed workers no longer received any benefits. Alongside curtailed access, the dollar amounts of benefits were frozen, making them more difficult to survive on with each passing year.

When workers know they are less likely to get state support, they are also less willing to go out on a limb to demand wage increases, form a union, or otherwise try to better their working conditions. Changes to unemployment insurance were part of a reorientation towards more flexible labour markets and a lower social wage. Business was helped directly, too: their unemployment insurance contributions fell by over a third.

The OECD's measure of real unit labor costs grew at an average rate of just 0.5 per cent per year between 1993 and 1999 and 2.1 per cent in the first decade of the 2000s, both down from an average of 6.6 per cent over the previous two decades.

Decreased labour costs were reflected in stagnant real wages for most workers throughout the '90s and 2000s. The depreciating Canadian dollar further cut into wages with higher prices for imported consumption goods. Finally, the social wage provided by public programs and transfers fell under Martin's austerity budgets.

How was austerity mitigated once the '90s boom ran out of steam? In short, debt and housing wealth. The fall in government borrowing as a result of Liberal deficit-fighting was offset by a rise in household borrowing, reducing the public debt but increasing private debts. (Rolling back the welfare state means more people borrow to stay afloat and spend more on basic services.)

Divisive housing boom

As in many parts of the world, including the U.S. and the U.K., Canada's housing sector took off after the 2000 bust. This divided the working class. For those who owned homes, housing became a crutch, a valuable asset to borrow against or downsize, making up for the lower social wage and stagnant incomes left after the '90s expansion. For those who did not own a home, rising prices and rents became a further source of daily struggle.

The federal Liberal governments of the 1990s ended the mission of directly providing public housing, capping funding and offloading responsibilities onto Canada's provincial governments. The number of new units of social housing built sunk from around 20,000 in 1993 to under 2,000 in 1998.

New financial products were the wave of the future to which the Liberals harnessed their housing strategy. This included the commercialization of the Canada Mortgage Housing Corporation, greater access to mortgage finance, and increased competition. All of these moves helped lay the foundation for the coming rise in housing prices and greater working-class stratification.

At the same time, those whose private wealth multiplied and ended up on the "winning" side of the housing disparity could be convinced to support austerity policies, even as that same austerity ate away at shared public wealth.

Interestingly, while the acceleration in house prices and personal indebtedness was similar in Canada to that in the U.S. and the U.K., Canada did not implement the same degree of financial deregulation. Without the economic and political clout of a big financial centre like New York City or London, Canadian regulators were able to exercise some control over the financial sector, while still allowing for a stable and very profitable banking oligopoly.

House prices, asset values, and debt levels continue to climb in Canada with only a small hiccup during the 2008–9 global crisis. Since 2000, growth in the value of housing assets has consistently outpaced the growth of the economy.

But rather than idly speculate how big Canada's housing bubble is and when it will burst, it's far more interesting to further explore the role played by housing in sustaining Canadian austerity and to consider its effect on a possible broad-based working class politics.

Myth of 'expansionary austerity'

The 1990s in Canada are often held up as an example of "expansionary austerity" -- austerity that is not only accompanied by but also causes growth. If this sounds a bit nuts, it is. In fact, even economists from the International Monetary Fund have thoroughly debunked the idea: growth that occurs during most bouts of "expansionary austerity," including Canada during the Liberal-led '90s, would happened anyway.

Indeed, crediting austerity for sparking Canada's 1990s growth ignores several factors: first, Canada benefited from strong U.S. expansion, especially given the strength of export growth; greater integration through NAFTA only solidified how closely Canada followed the U.S. boom of the mid- to late '90s. Second, fiscal austerity was accompanied by an aggressive monetary loosening that resulted in low interest rates and a depreciation of the exchange rate; alongside more flexible labor policies, these improved profits, investment, and growth. Resource booms also played a role in driving wage growth and reducing unemployment in some regions.

But hawkers of austerity around the world continue to cite 1990s Canada as model case. Within Canada itself, the '90s is still mythologized, especially when all the major parties engage in the "fiscal stewardship" game during election campaigns.

Around 2000, the Liberals switched their focus to returning the "fruits of austerity" to the public, and the Conservatives continued this practice. While working-class incomes were padded to soften the blow of a falling social wage, the gains went disproportionately to the wealthy: there were tax reductions across the board, including cuts to taxes on corporations, top incomes, and capital gains. Between 1993 and 2011, after-tax incomes for the top quintile grew three times as quickly as they did for the bottom quintile (and nearly twice as quickly as the middle quintiles).

At the same time that politicians shifted to cutting taxes, the spending to GDP ratio stabilized: it is comparable today to what it was in 2000. Similarly, per capita federal government transfers to individuals (pensions, unemployment benefits, child benefits) in real terms are today just below the high point that occurred right before the Liberals came to power.

The making of a consensus

The austerity implemented by the Liberals, starting with the 1994 budget, helped shift the political consensus sharply to the right. The Conservatives, riding a wave of public resentment against the Liberals due to corruption scandals, were first elected to a minority government in 2006. After five years of governing with the tacit support of the Liberals, the Conservative Party finally gained a majority in 2011.

Austerity under Stephen Harper is less interesting, partly because the task has been easier. The Conservatives have been happy to keep the ship sailing in the same direction. Far more striking is how easily the party was able to implement a short bout of Keynesian countercyclical policy in the immediate aftermath of the 2008–9 crisis.

The austerity consensus was strong enough that, given the risks to the incomes and assets of the capitalist class, a spike in public spending (largely on one-off projects) was brought in without significant opposition from elites. In a way, this only shows how neoliberalism has no new ideas for dealing with the crises it creates, resorting to Keynesian remedies that are abandoned once accumulation is reassured.

As Canada's financial sector survived, commodity prices continued to boom, and global contagion was limited by the efforts of central banks, the Conservative expansionary program proved to be extremely short term, largely confined to one budget cycle. Elites gambled that they didn't have to worry about a temporary increase becoming the seed of something larger, and they were right -- the year after the stimulus was passed, the Conservatives were returned with a majority and spending fell back to record lows. Canada's austerity had shown itself adaptable to circumstances.

Slow motion austerity

Since the crisis, the Conservatives have returned to the pattern of slow motion austerity, most recently paying out dividends to elites via additional tax cuts and regulatory changes that further distribute gains to top income earners.

Political opposition is slowly rebuilding, but the working class remains weak and largely unorganized. There are divisions between public and private sector workers, between those who have gained from housing wealth and those who haven't, between an older organized base and new generations of low-wage service workers who have never known a higher social wage.

Meanwhile, austerity complemented and bolstered profit margins for two decades, punctuated only by the two most recent crises in 2000 and 2008–9. Profit rates recovered quickly from the bottom of the 1990–92 recession, bouncing back to their pre-recession high within a few short years.

They haven't really looked back since, despite the changing fortunes of the U.S. economy and a significant period of Canadian dollar appreciation in the 2000s. One important change, however, is that economic growth and attendant profit growth in Canada after 2000 has been driven much more by domestic consumption than by exports. To what extent this may be a source of future weakness remains to be seen.

Today, the electoral arena is composed of parties broadly committed to cutting spending over raising revenues, continued austerity over any significant move to expand the social wage, and capital over workers. The Conservatives have been able to escape strong critique because of the lack of organization in the face of this consensus on austerity. They are once again the favoured party of elites, retaking the crown of the largest recipient of political contributions from the Liberals.

The Conservatives have also deftly exploited social fault lines. They have stoked fear to chip away at civil liberties, played to their right-wing base by scapegoating migrant workers and attacking environmentalists.

It bears repeating that neoliberalism doesn't just mean that state expenditures are cut -- austerity is aimed at specific expenditures and particular groups. Alongside the cuts to the social wage, some state spending has been redirected. The Conservatives have increased spending on the military and the security apparatus. War and terrorism have been used to increase the size of security and surveillance forces and divert attention from domestic political economy when convenient. And public investment is increasingly beholden to private management and capture, in particular through the use of "public-private partnerships."

Depersonalizing politics

In the same way that Harper is not the source of everything wrong with Canada today, Martin was not the source of the pain of austerity during the 1990s. It's time to depersonalize our politics and return to political economy. While both Martin and Harper undoubtedly left a personal mark, they are both part of larger and longer shifts in economic and political power.

The Canadian experience is unique in its particulars, but also representative of much that has transpired in the United States and elsewhere. An austerity consensus carries the day. It is hard to imagine sizeable increases in social spending. When they are made, promises that might benefit the many and return some of the lost social wage to the broad majority of workers have to be bought off with new concessions to the few.

There is now more than one generation that has grown up with austerity and little else. Despite, or perhaps because of this, the youngest generation today is more inclined towards left politics than any other. Yet the space for even modest social-democratic politics has rarely been narrower. This opening and closure exist side-by-side in contradiction. To make the contradiction a productive one, we need an honest appraisal of political forces and how power operates: a political economy of the present.

Upon this foundation, we can create a political space that rekindles the imagination -- one that has less risk of falling into a mythologized, and wholly false, vision of the 1990s. Going back further, we also need to come up with more than simple nostalgia for the postwar prosperity, whose contradictions created the lumbering monster that still chews at our horizons.

Stopping and reversing austerity in Canada, as anywhere, requires an honest assessment of the forces allied in its favour. A consensus that has emerged over decades will not be broken easily. While putting a single man's face to it may be useful to start the conversation, we will need to go further, examining the systemic challenges that prevent a parting with austerity -- whether the slow-simmering kind Canadians are now experiencing, or sharper variants.  [Tyee]

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