What will they run on now?

Stimulus spending didn’t exactly spark the recovery, writes John Geddes, leaving the Harper government in a bit of a bind

090914_recessionPredicting the defining issue of a federal campaign is notoriously tricky. Old political hands will tell you elections always end up turning on the question of leadership. But leaders need something to talk about—that’s why they invented platforms. A well-crafted one can sometimes set the agenda, the way Stephen Harper managed to do in his last two campaigns with easy-to-understand pledges aimed at middle-income voters. Often factors beyond a politician’s control take over, the way the fresh memory of the sponsorship scandal blighted Paul Martin’s first run as Liberal leader. Perhaps the only time an election’s core concern is thought to be obvious going in is when the economy is in the tank.

Now, though, with speculation about a fall election heating up, even the formerly safe bet that this campaign would be all about the recession looks uncertain. Only a few months ago, just about everybody in Ottawa’s political set thought Harper had slipped in under the wire by winning last fall’s election just before Canadians realized that the financial meltdown of 2008 was the prelude to a full-blown recession. But with only a minority, there was no way he could dodge having to run this year or next on how his Tories managed through the slump.

Or could he? Listen to Liberal Leader Michael Ignatieff spelling out exactly what he wants voters to base their next choice on. “The ballot question,” Ignatieff said as his caucus girded for battle at a summer’s-end meeting in Sudbury, Ont., “is, ‘Who is best placed to lead Canada into the economy of tomorrow?’ ” That’s a far cry from, say, “Who can best lead Canada out of its current economic miseries?” Or, “Who screwed things up here in the first place?” The clear implication of Ignatieff’s ballot question is that Liberals no longer believe voters can be counted on to punish Harper for leading Canada into hard times.

History suggests this is an unusual concession. After all, Brian Mulroney’s landslide Tory win in 1984 came on the heels of the painful 1981-82 recession, and Jean Chrétien’s annihilation of the Conservatives in 1993 followed the 1990-1992 economic downturn. In fact, every recession since 1960 has been followed by the party in power either being reduced from majority to minority or thrown out altogether. Ignatieff’s decision to run on his vision for the future, rather than Harper’s handling of the present, suggests Liberals believe that the political ramifications of the 2009 recession are different.

And they might be onto something there. Don Drummond, TD Bank Financial Group’s chief economist, and a former long-time federal Finance official, senses a certain relief over the fact the recession didn’t pack quite the wallop doomsayers had predicted. In terms of the numbers economists use to measure a shrinking economy, Drummond told Maclean’s this year’s slump turned out to be “a garden-variety deep recession—a little lighter than the early ’80s and a bit deeper than the early ’90s.” Those two recessions cost the parties unlucky enough to rule through them dearly. The difference now is that many Canadians were braced for far worse. “If you put aside the numbers, there were many, many who were expecting Armageddon—all the references to the return of Great Depression,” Drummond says. “So I would say that in most respects it turned out to be lighter than many had feared.”

But judging the recession less severe than the horrific worst-case scenarios is not the same as crediting the Tories with skilfully steering through it. Memories of the government’s sluggish reaction to the souring economy in 2008 will linger. Harper declared during last fall’s campaign that the danger of a recession had already passed. After winning the election, the Tories tabled an economic update that dared dream of continuing federal surpluses—a forecast that proved laughable when Finance Minister Jim Flaherty had to switch this year to projecting a $50-billion deficit. The Tories signed on to coordinated international emergency measures—low interest rates, steps to spur bank lending, and stimulus spending—widely credited with easing and shortening what might have been a much more severe downturn.

That does not mean, however, that the Conservatives will be able to run on a convincing case that their centrepiece program—infrastructure spending—did the trick. Pressed by all the opposition parties, supported by an international consensus, the Tories touted a $12-billion infrastructure program over two years as the engine of their recovery plan. The government won’t release fresh analysis of that plan’s progress until a report slated for release late this month. But the best publicly available data shows no gush of government spending on actual new construction in the three months leading up to the easing of the recession over the summer.

Those numbers are tucked away in so-called national accounts data released by Statistics Canada late last month. Spending in April, May and June by all levels of government on buildings like schools, hospitals and office towers rose by 2.4 per cent to about $4.5 billion, about half the rate of increase in the same period a year earlier. And spending in the same spring quarter on engineering projects like bridges, roads and sewers increased 3.8 per cent to $6.6 billion, a significant jump, but again well below the 7.4 per cent rise in the same quarter of 2008.

In other words, government spending on infrastructure in the spring after Flaherty announced his big stimulus push, just before the sprouting of the summer recovery, didn’t noticably charge ahead. Rushing billions out the door is hard to do. Drummond wasn’t surprised. “People selectively choose to ignore the history,” he said. “We have always had the experience that fiscal stimulus has kicked in later than people would have hoped for. If you go back to the mid-1980s, we did exactly the same thing. When the money started to flow, the economy had started to recover on its own.”

He assigns much more credit for the recovery now underway to monetary policy, not just low interest rates, but also the “whole arsenal” of steps taken internationally to make sure bank lending didn’t stay frozen. That doesn’t mean, he adds, that Ottawa should cancel the remaining bulk of its planned stimulus spending, which will translate into real construction work through the rest of this year and well into 2010. “As long as it’s sensible,” Drummond said, “we need it at any rate.”

Flaherty is determined to push ahead with the spending. “We agreed that we are not out of the woods,” he said after meeting with G20 finance ministers in London last week. “We must all remain focused on fully implementing our stimulus packages.” Far from trumpeting a return to good times, the finance minister alluded to the danger of the dreaded double-dip recession. “I would be cautious about talking about early stages of recovery,” he said. “We’re being very cautious because we fear going back into recession.”

But if the stimulus plan didn’t exactly save the economy this year, it did help put Flaherty in the bind he’s currently wrestling against. On one side, he’s under pressure to keep pumping life into the economic rebound. On the other, since he has now presided over the government’s plunge from surpluses to record-setting deficits, he’s expected to lay out a plan for a return to balanced books, presumably without taking his foot off the politically popular infrastructure-spending accelerator any time soon. His task is made all the more daunting by the way the Harper government hiked spending substantially every year since winning power in 2006—even before embarking on the multibillion-dollar stimulus program—all while reducing taxes, especially the GST, which alone cost Ottawa about $10 billion a year in revenues.

Harper and Flaherty have set themselves stringent limits on how they might go about wrestling the government back into the black. In a radio interview last week, Harper sketched the outlook this way: “We’re confident that if we restrain spending growth as we have laid out once the recession is over, without tax increases, in the next four to five years we should move back into surplus position.” The big question then, is where that spending restraint will hit. Flaherty vows not to reduce transfers to individuals or provinces. As a former Ontario provincial finance minister, he often rails against how the Liberals balanced the federal books in the 1990s by cutting payments to provinces for health and education. In fact, Flaherty introduced an automatic escalator policy back in 2007 that promises to boost the main federal transfers to the provinces by three per cent a year.

Asked how he could possibly reduce federal spending enough to eliminate deficits without touching payments to people or provinces, and without raising taxes, Flaherty said he would target other federal programs. But is there enough left to cut if so much of the budget is deemed sacrosanct? Drummond, who was a Finance official for 23 years before jumping to the private sector, is skeptical. He said finding sufficient cuts in the supposedly less sensitive corners of the federal budget will be an extraordinarily tall order.

In order for rising tax revenues in a healthy economy to wipe out deficits in about five years, Drummond estimates overall spending growth will have to be held to two per cent a year. But he figures fully half of all federal outlays—transfers to seniors and provinces, along with defence spending—are bound to grow at a combined rate of about five per cent a year. No politician will dare touch them. That means spending on the remaining half of federal activities would have to actually shrink by one per cent a year. “I went through a lot of expenditure reduction exercises,” Drummond said, “and trust me, it’s not easy to get spending going down.” Even harder today because, under both Liberals and Tories, federal spending has typically ramped up at six to eight per cent a year, ever since Jean Chrétien’s government balanced the books in 1997-98.

Flaherty isn’t alone in vowing to somehow end deficits entirely by curbing spending. “We’ve inherited a $50-billion hole from Mr. Harper,” Ignatieff said last week. “We will clean it up without raising taxes.” How exactly? “Wait and see,” was all he’d say. Ignatieff is partly staking his claim to voters’ memories of how Chrétien, with Paul Martin as his finance minister, managed to turn deficit-slaying into a political winner a decade ago.

But he’s also trying to emphasize a different kind of economic message altogether. “Stephen Harper didn’t see a recession coming last fall,” Ignatieff said in the main speech in Sudbury, where he served notice that his Liberals will try to defeat the government and force an election as soon as possible. “Now he’s missing something bigger. What we’re going through is more than a recession—it’s a fundamental restructuring of the global economy.”

Polls suggest Ignatieff might have little choice but to ask voters to look to the future, since they show little sign of being inclined to punish Harper for the hardships of the present. Recent polls show the Liberals at best running about even with the Tories; some have them well behind. Early this week, a Strategic Counsel poll put the Liberals five points back, at 30 per cent of national support, compared to the Conservatives’ 35 per cent. If that edge holds up, Harper will be in a strong position when it comes to bargaining with the NDP or Bloc Québécois for the support in the House he’d need to thwart the expected Liberal bid to defeat his government this month or next.

That the governing party appears to be enjoying a polling lead is remarkable at a time when the latest unemployment figures show joblessness at a 10-year high of 8.7 per cent. Then again, those new unemployment numbers also show that the economy created more jobs than it shed in August. The private sector added 49,200 employees, after 11 straight months of subtracting workers. When it comes to perceptions of the economy, everything is relative: Canadians who were warned to brace for a depression might well shrug off Drummond’s “garden-variety deep recession.” Which leaves politicians who were only a few months ago planning for a recession-driven election plotting unexpected strategies for a far less predictable campaign.