Canada’s Turn Left

It is not yet clear if the political sea change that has taken place in Canada will also be ideological. Under the leadership of Justin Trudeau, the 43-year old neophyte who has never held an executive post, the left-of-center Liberals have unseated Stephen Harper’s Conservatives with an overwhelming parliamentary majority that no poll or commentator had predicted. They will have virtually a free hand to govern.

But there are two problems. One: the Canadians have not necessarily voted in these elections, dominated by character and personal issues, for a lot more government intervention. Two: Trudeau—who has promised to preserve a big chunk of Harper’s legacy, including tax cuts, free-trade agreements and support for major oil-related projects, including the Keystone XL pipeline that has met with such resistance across the border—wants to have it both ways. His otherwise interventionist agenda is incompatible with Harper’s legacy on fiscal policy, taxes and resource-related free enterprise.

Not that Harper was a free-market champion. His rhetoric was often much bolder than his actions, hampered by the fact that he had to govern with a minority in Parliament during the first half of his tenure—and that, in the wake of the financial crisis in 2008, they were temporarily influenced by Keynesian fiscal ideas.

All in all, it is fair to credit Harper with bringing the corporate tax rate down to 15 percent, signing dozens of free trade agreements, including a major one with the European Union (none were perfect, because these types of arrangements never are), and maintaining a decorous restraint when the commodities-related downturn led to calls for massive government spending, particularly this year. (Canada has had five consecutive months of economic contraction.)

Trudeau says he will keep the corporate tax rate and the trade agreements, maintain support for the Keystone XL pipeline, and lower taxes for the middle class, a move that he will fund with a moderate tax hike affecting the richest 1 percent. In this, to some extent he keeps the recent Liberal tradition—Liberal Prime Ministers Jean Chrétien and Paul Martin also lowered the corporate tax rate. Except that his agenda hinges on a massive infrastructure-related spending plan that he calls an “investment” but which will entail an extra US$46 billion in government expenditure. He admits that this effort will generate a US$25 billion fiscal deficit during the first three years, but he promises to deliver a surplus in his fourth year.

It is easy to picture the deficit becoming structural, Trudeau’s promises to keep most taxes rates where they are thrown out the window and, unless the prices of commodities pick up, the Keynesian stimulus expanding. I would not be surprised if he ended up pressuring the central bank to lend him a monetarist help. There is no telling where these policies end.

Trudeau is commendable on some social issues, including his proposal to legalize marijuana, and he seems prudent on foreign policy issues, but his view of the economy is riddled with contradictions. It is also unclear whether he will provide the leadership that will be necessary to overcome the pressure by many left-leaning members of his party who will want to scuttle part of the Harper legacy. (He has said, with regard to the Trans-Pacific Partnership, that he will let Parliament decide.)

Whether Canada makes real progress in the years ahead will depend to a large extent on whether Justin Trudeau decides to emulate his father, the late Prime Minister Pierre Trudeau, who was infused with the big-government Zeitgeist of the 1970s, or to take Harper’s legacy one step further down the path of liberalization.