Читать книгу The Canadian Century - Brian Lee Crowley - Страница 7

What happened? How was such a promising start to what was to be Canada’s century steered so quickly into the ditch?

In fact, the prosperity largely continued under Laurier’s successor, Prime Minister Sir Robert Borden,¹ who, with the exception of reciprocity with the Americans, largely pursued Laurier’s economic policies. The rapid growth in population, for example, continued right up until 1921, at which time 8.8 million people lived in the Dominion.² Under the later leadership of Laurier’s handpicked successor as leader of the Liberal Party, William Lyon Mackenzie King, Canada continued to enjoy good levels of prosperity through much of the twenties, even if the frenetic effervescence of the Laurier years had gone.

But big changes were afoot. There was the human slaughter and benighted leadership on a vast scale of the First World War. In its wake were left broken trading relationships, barriers to the movement of people, the economic dislocation of Germany, the breakup of the Austro-Hungarian Empire, and the exhaustion of Britain, whose dynamism had so contributed to Canada’s own. The Russian Revolution had let the genie of radical politics out of the bottle throughout the West, and it took the fall of the Berlin Wall more than seventy years later to put it back. This was part of a series of events that cumulatively, with the slowly gathering force of a locomotive, drove not just Canada but the entire industrialized world off course.

The big changes coming were perhaps masked at first by the return of prosperity in the decade following the end of the war.³ Then in 1929 came the Crash, and the thirties that followed brought a worldwide depression and a protectionist surge that undid much of the remarkably free

global movement of goods, services, capital, and people that had characterized the prewar years. Unemployed Canadians marched on Ottawa and queued for soup kitchens. The huge triangle of land in Alberta and Saskatchewan that the explorer and surveyor John Palliser had warned in 1863 was unsuitable for agricultural settlement had in fact been heavily settled during the Laurier years. Palliser had his revenge later when it turned out that “Palliser’s Triangle” was a major contributor to the dustbowl of the 1930s that helped drag down Canada’s economy.⁴

The Second World War, among other things, broke up this unhappy state of affairs in Canada as much as elsewhere, and the returning troops rushed into new jobs in a Canada determined to do better. Economically we entered an era of pronounced prosperity, as we reverted to a large extent to Laurier’s policies and enjoyed the energy thereby set free. Britain was finished as an imperial power and as a major market for Canada. America confronted no serious competitor as our main market, our main supplier of capital, and the main alternative destination for the skilled immigrants fleeing Europe’s postwar daze.⁵ While we still lacked an institutional framework and strong rules to bind America’s ability to run roughshod over Canada’s interests, we had a powerful shared history as allies in the recent war and were partners in the construction of the postwar order.

America sat astride the world and found in Canada a respected neighbour who shared its world view. That had to be enough for the moment, in large part because the trauma of Laurier’s defeat over free trade still lingered in the minds of the mandarins of Ottawa and the operatives of the dominant Liberal Party. Yet even in the face of this potent political bogeyman, it was only Mackenzie King’s personal objections that prevented a new reciprocity agreement being consummated in the immediate postwar era. In 1948 a deal was struck and ready for signature in both capitals; in Ottawa the Liberal caucus and the senior mandarins were on board. At the last minute, Mackenzie King’s still vivid memories of his political mentor’s political humiliation over the issue won out over economic logic.⁶

The people who ran the country were keenly aware that our success depended on remaining competitive with America on every front, and indeed we kept our tax load and our newly emergent welfare state under tight rein to ensure that neither the cost of government nor the allure of an easy dependence would distract us from building a country equal to the promise of the continent we shared. In the fifties and sixties we intentionally positioned ourselves, as Laurier had recommended, as a low-tax alternative to the US.⁷ Research comparing public spending over the three decades stretching from 1932 to 1963 show that over this period Canada remained close to the Laurier prescription. We were less inclined than the Americans to enrich social welfare but more inclined to invest in productivity-enhancing transport and communications. We spent less of our rising incomes on government; they spent more. And anticipating the critics, it is perhaps worth pointing out that the higher American defence spending does not account for the gap in favour of higher US spending: the gap between Canadian and US defence spending is considerably narrower than the one on social welfare.

From 1932 to 1963 expenditure on health, education, and transportation rose slightly more quickly in Canada than in the United States, and expenditure on defence and social welfare and total expenditure more quickly in the United States than in Canada.⁸

Louis St. Laurent, the prime minister who most embodied the era of postwar progress and freedom, entertained no doubt that Canada’s great good fortune was rooted in its inheritance of a tradition of freedom and individual responsibility—Laurier and St. Laurent were as one in their belief that our individual freedom was the cornerstone of all else and that the biggest danger to that freedom was an overweening state.

The St. Laurent government’s policy could hardly have been closer in spirit and in detail to Laurier’s vision. Canada’s public finances were carefully managed to ensure regular budget surpluses to help pay down war debt. Modest expansions were made to social welfare programs, but these were kept under tight control and designed to ensure that they would not become an alternative to work for Canadians. The resistance to fashionable expansion of the size of government came not only from St. Laurent’s government, but from the provinces as well. As a result of this measured frugality, Canada enjoyed the tax advantage that was so close to the heart of Laurier’s plan, which was proving itself again in the mid-twentieth century as it had in Laurier’s day.⁹

As late as the 1957 federal election campaign, St. Laurent was still firmly committed to Laurier’s vision for Canada—and for the Liberal Party—when he said:

[A]ny idea of non-essential interference by the government is repugnant to the Liberal Party. We believe that the private citizen must be left to his own initiative whenever possible and that if some help is required for the individual, that which is afforded by the national government must encourage rather than replace the help which the community or the province with its municipalities can give.¹⁰

We were not overtaking America, but the two nations of North America were together showing the rest of the world their heels.

The twenty years of growth and dynamism we enjoyed in the immediate postwar years amply demonstrated that Laurier’s vision was not a mere product of its times but that it was a vision that stood the test of change and retained its power to inspire.

Again, however, Canadians got knocked off course—and this time the blame fell more on us than on world circumstances over which we enjoyed so very little influence.

Beginning in the mid-sixties, the confluence of many forces began to work a change in the minds of Canadians. A wave of nationalist antiAmericanism washed over Canada, fuelled in part by distaste for the Vietnam War and America’s brash assertiveness on the international stage and in part by domestic alarm over a perceived American domination of the economy.¹¹ The counterculture movement that emerged in the US found echoes around the world, including in Canada, and Marxism, feminism, and various other isms began a long march through the academic institutions. Keynesianism, a naïve faith in the ability of government officials to “manage” the economy, became almost universal among Western governments, especially since memories were still reasonably fresh of the success of central planning controls during the Second World War.¹² In the seventies, a Republican president brought in price and wage controls, the ultimate expression of confidence in government’s superiority over markets.¹³

Increasingly, government was being looked to to solve perennial social problems, such as when Washington moved in the 1960s against both racial discrimination, through the Civil Rights Act, and poverty, through the War on Poverty and the Great Society. All of these factors and more— wider access to education, the emergence of effective contraception, the growth of cities and suburbs—affected Canada as much as they did other Western societies. Over and above that, we had special factors in Canada that exacerbated these trends. For example, we had the largest baby boom in the Western world, undermining our faith in the economy to provide work for all who wanted it, just as we saw the rise of a new breed of aggressive separatist nationalism in Quebec, which unleashed a torrent of spending designed to bind Quebeckers to the federal state.¹⁴

Laurier’s belief in the rugged individualism of Canadians, and the freedom, within the rule of law, that made that individualism the source of great prosperity and social progress, seemed overtaken by events. The new zeitgeist called for an expansive state, great new social programs, and vast extension of state employment and state enterprise. Against all this Laurier had warned, and those warnings increasingly fell on deaf ears.

Government took an ever-increasing place in the economy and the lives of Canadians. Government was growing everywhere in the industrialized world, of course, but in few places like it did in Canada.¹⁵ Armies of workers were drawn into public sector work in the federal, provincial, and municipal governments while the tax burden rose, public finances deteriorated, and the national debt took off. The expansion of welfare state programs drew tens of thousands into dependence as the value of benefits rose handsomely in real terms.

By the mid-nineties, over 12 per cent of the population of the country’s largest and wealthiest province, Ontario, was on provincial social assistance. In next-door Quebec, one-fifth of the population was on some kind of public benefit, such as welfare or unemployment insurance.¹⁶ Public employment rose in Ottawa, and those increases were mirrored in the provinces.¹⁷

The share of the national economy directed by government rose from about 28 per cent in 1960 to a peak of 53 per cent in 1992.¹⁸ As we document more fully in later chapters recounting Canada’s fiscal challenges, we didn’t have a single balanced national budget between 1974 and 1998.¹⁹ Taxes, and especially deficits, rose inexorably.

By contrast, America was a paragon of economic virtue, even though it too indulged in some expansion of the state. Over the same period, 1960 to 1996, the share of the national economy devoted to government also grew, and from the same starting point. But where they upped their spending by six percentage points, to 34 per cent of GDP, we nearly doubled ours.²⁰ Their national debt grew, but it went from being a little higher than ours to somewhat less—despite Vietnam, the Great Society, and the same percentage of national income spent on tax-financed health care as in Canada.²¹

Protectionism became something of a vogue as we threw up barriers to foreign investment and foreign cultural products like music, television, and magazines.²² Unemployment became a national preoccupation, and after having kept even with US unemployment rates for decades, we began a long-term divergence of our rates that saw a larger share of Canadians than Americans consistently out of work.²³

We slammed the door on immigration in many of the years of these lost decades, sometimes admitting as few as 71,000 people (1961)—a far cry from the 282,164 admitted at the postwar peak in 1957.²⁴ Taxes became uncompetitive compared to the US,²⁵ and we obsessed about brain drains to the south. Our standard of living in 1960—almost identical to the Americans’—slowed its growth, creating a gap that, by 1992, had reached about 22 per cent as a result of poor productivity growth, high taxes, and high deficits that crowded out private sector investment.²⁶

The foreign investment controls introduced during this period merit a little further attention for the absolute reversal of policy they signal. The 1972 Foreign Investment Review Act, the product of a minority Parliament where Pierre Trudeau’s Liberals were dependent on a virulently economically nationalist NDP for their survival, was a radical departure for Canada. As political scientist John Fayerweather noted in 1974:

There have been virtually no general restrictions or even government administrative processes to impede new investors. Until the mid-fifties, the general tenor of Canadian attitudes was to encourage maximum inflows of foreign capital.²⁷

Indeed we saw how the Laurier years had been ones of massive flows of capital into Canada. These flows were dwarfed by the St. Laurent years. The fifties saw the largest inflow of American capital in Canadian history up to that date.²⁸ For noted Canadian historian Michael Bliss, this phenomenon is easily explained: “American investors poured money into what was perceived as a friendly neighbouring nation, culturally indistinguishable from the U.S., rich in raw materials waiting to be processed to enrich the continental economy.”²⁹ Clearly, the postwar relationship between the Canadian government and American investors was reciprocal—government was eager to attract huge levels of investment, and investors were equally as eager to invest in Canada.

This was regarded as a virtuous circle in the early postwar years, just as it had been regarded by Laurier and all the political leaders in between: “Until the mid-1950s, there was virtual unanimity in Canada that foreign direct investment created a net benefit for Canada.”³⁰ In the seventies a modish economic nationalism made us skittish about foreign capital and investment, even though there was little evidence that we were any more reliant on that capital than we had been previously, and even less evidence that our traditional openness to foreign investment had been anything but beneficial, on balance, for Canada.

The actual degree to which foreign investment was obstructed is the subject of some controversy. Not many deals were actually blocked. On the other hand, the review process was long and cumbersome, and the simple fact of its existence created the kind of potentially costly uncertainty that business shies away from. Economist Harry Johnson passionately argued the line that Laurier, a proud Canadian nationalist, would have taken when he said in 1977 that “Canadian nationalism as it has developed in recent years has been diverting Canada into a narrow and garbage-cluttered cul-de-sac.”³¹

In other words, we abandoned almost every tenet of Laurier’s plan, and we paid a heavy price.

Still reeling from reciprocity’s defeat in 1911, the political class shied away from any suggestion of broaching a broad-based trade agreement with the United States, but we were still mindful of the dangers to the Canadian economy posed by the possibility of American unilateralism, such as Richard Nixon’s aggressive action against foreign trade. His 1971 New Economic Policy put paid to the notion that Canada could escape being the target of unilateral US trade action because of some ill-defined “special relationship,” thanks to which we nice Canadians could always resort to special pleading to be excused from a protectionist spanking really intended for nasty foreigners across the seas. Nixon had Canada squarely in his sights. Canada had enjoyed a long-term trade surplus with the US, and Nixon most emphatically decided to include us in his surprise protectionist program. An across-the-board 10 per cent tariff was slapped on Canadian imports. Ottawa was shocked. Washington didn’t care.³²

With a comprehensive agreement off the table, Canada was thrown back on three strategies. One, which predated the shock administered by Nixonomics, was to negotiate more modest sectoral agreements with the US, such as the Auto Pact signed by Lester Pearson and Lyndon Johnson in 1965, which essentially created managed trade between our two countries in auto production and assembly.³³

In 1959, following the cancellation of the Canadian Avro Arrow fighter plane project, we worked out a Defence Production Sharing Agreement. This seemed a sensible alternative to the Arrow’s go-it-alone approach when we couldn’t supply a market on the scale needed to produce complete defence systems at a competitive price; specialization for Canadian producers within a common continental defence equipment industry seemed a more efficient option, giving Canada a better bang for its buck. Gaining access to the US market by essentially being treated as domestic US suppliers paid off handsomely. In its first year alone, the agreement generated about $200 million in new revenues for Canadian suppliers of defence-related equipment.³⁴

A third such agreement dealt with agricultural machinery.³⁵ But such agreements were few and far between, and being limited in scope didn’t offer the kind of room for favourable trade-offs that a more comprehensive agreement would have done.

Under our second strategy, we were enthusiastic supporters of multilateral trade negotiations, looking to the General Agreement on Trade and Tariffs (GATT) and its successors to help discipline the US tendency to go it alone by dangling the prospect of improved access to world markets and not just Canadian ones. Like the sectoral trade agreements, these international agreements were useful, and throughout the period international trade grew consistently faster than domestic economies.

The third Canadian strategy was to seek to diversify trade away from the United States and toward other markets. This policy was an abject failure. Many Canadian governments came to office in the postwar years bubbling with enthusiasm for the unexploited or underexploited foreign markets that would reduce our reliance on American customers and vulnerability to American politicians. China, and to some extent India, plays that role in Canada today.

After the shock of Nixon’s New Economic Policy, however, the pursuit of such diversified markets became a matter of high policy known grandiloquently as the Third Option, the other two options being the dysfunctional status quo or an unpalatably closer embrace of the US, a set of choices designed to make the Third Option appear highly attractive.³⁶ Talks were opened on special trading relationships with the European Community and Japan, for example, and Prime Minister Trudeau cultivated leaders of emerging economies around the world. These efforts foundered on the same shoals as all their predecessors: governments don’t actually make trade decisions; companies do. And Canadian exporters were closely bound up with American markets. One acute observer of the time summed up the results with devastating accuracy: “Every Canadian government after 1945 hoped to diversify trade and every one left office with an increase in the proportion of trade with the Americans.”³⁷

Channelling Laurier’s spirit, historian Michael Bliss dismissed all these efforts in the sixties and seventies as naïve attempts to deny Canada’s real economic circumstances:

The Galbraithian world of controlled markets, planning systems, and perpetual profits was a fantasy. Canadian governments’ confidence in their ability to anticipate the future and shape economic events was pathetically absurd.³⁸

One reason that Bliss’s verdict on these lost decades may seem harsh, but is in fact quite justified, is that the policy of these years was based on an increasingly outmoded view. The truth of the matter was that it was becoming more and more misplaced to think of the Canadian and US economies as separate national economies. We had many highly integrated industries, such as autos, defence, and agricultural machinery, operating on both sides of the border as if the continent were a single economic entity. Autos and other manufacturing industries, however, weren’t the only industries that were increasingly integrated across the international border. Our natural resources fed US production, for example, which was powered by our electricity, our oil, and our natural gas. To an ever-growing extent, we did not make products exclusively within our national borders and then trade those finished products with each other. Different pieces of complex production processes took place on both sides of the border; we traded less and less in the classical sense, and instead more and more we made things together. “Shifting” Canadian exports to other nations implied that Canadian exports were constituted of finished products we could sell to whomever we wanted, a naïve and dangerously outdated understanding of the unique degree of continental integration we were already achieving.³⁹

Dawn of the Redemptive Decade

Slowly, groggily, Canada began to question the wisdom of the new course it had charted for itself, but once roused, Canadians began to demand change, and change they got. In fact, there is a decade during which Canada clearly changed course, beginning with the free trade election in 1988 and ending with Paul Martin’s tabling of the 1997–98 budget, the first balanced budget in Ottawa in a generation. We call this the Redemptive Decade. Canadians and their leaders took bold steps to resolve problems that had been festering within the body politic for years. Actions that just a few short years before were conventionally viewed as “unthinkable” became not only thinkable but doable. And the country began to redeem itself, to return to Laurier’s path of discipline and virtue after a long and uncharacteristic detour through self-indulgence.

Later chapters will lay out the blood, sweat, toil, and tears we expended to reduce our welfare dependence and put our public finances and tax burden on a sounder footing—or at least give them a strong push in that direction. But these were the last elements of our partial restoration of Laurier’s plan for Canada. Others came earlier.

For example, we finally realized the limits of incremental trade deals with the United States in specific sectors, such as autos, especially as we began to see how signally we had failed to shift our trade to other nations. We could not beat the Americans—in large part because “beating them” implied being on a different economic team, which increasingly we were not—so we had to join them.

No politician was willing to call down upon his or her head the kind of repudiation that Laurier had endured on the issue, so progress was cautious and measured. We employed that handy standby called upon by all Canadian governments that hope to provoke change without taking responsibility for it—Pierre Trudeau appointed former federal finance minister Donald Macdonald to head a royal commission on Canada’s economic prospects. After years of research and hearings, the Macdonald Commission delivered itself of a report, the content of which is now largely forgotten—except for the seemingly revolutionary recommendation to launch free trade talks with the Americans. The sentence from the Macdonald Commission’s report that summed up that document’s virtual repudiation of twenty years of poor policy was: “the message is that there is less and less place to hide [in the global marketplace].”⁴⁰

While he would not deliver his report until the government that had commissioned it was long gone from office, Donald Macdonald let the cat out of the bag in an interview with William Johnson of the Globe and Mail: free trade with the US was going to be on the table.⁴¹ His fellow Liberal, and the prime minister who appointed him, Pierre Trudeau, did not share Macdonald’s enthusiasm. Even Trudeau understood that the old hiding places were offering less and less shelter, however, and had plans for expanding sectoral free trade agreements with the US—reciprocity in bite-sized pieces.⁴²

Trudeau soon passed from the scene, and the Liberal government was defeated by the resurgent Conservatives under Brian Mulroney, who showed no interest during his 1983 Tory leadership campaign in opening free trade talks with the Americans. In his remarks on the subject he conflated two contradictory ideas: namely, that Canada is vulnerable to US unilateralism when it is in the Americans’ interest and that the proper response to this threat is to refuse to negotiate an agreement with them that might limit the threat:

Now there’s a real honey—free trade with the Americans! Free trade with the Americans is like sleeping with an elephant. It’s terrific until the elephant twitches, and if the elephant rolls over, you’re a dead man. I’ll tell you when he’s going to roll over—he’s going to roll over in times of economic depression and they’re going to crank up the plants in Georgia and North Carolina and Ohio and they’re going to be shutting them down here. That’s why free trade was decided on in the election of 1911. It affects Canadian sovereignty, and we’ll have none of it, not during the leadership campaigns, nor at any other times.⁴³

But the Macdonald Commission recommendation became the idea that would not die, and the protectionist proclivities of the US Congress toward Japan, among other successful trading nations, breathed new life into the Nixonomics nightmare.

A debilitating recession gripped the economies of Canada and the US by late 1981. In both countries, unemployment levels rose steadily and economic output declined substantially. In addition, the Tokyo Round of multilateral trade discussions, which began in the mid-1970s, was concluded in 1979, to very mixed reviews. Although it helped bring down customs duties, for example, a number of seemingly intractable problems were left unresolved.⁴⁴

In this context of economic and legal uncertainty, protectionist forces in the United States advanced an increasingly salient message that beguiled a far wider audience. Indeed, a steady increase in the US trade deficit provoked widespread despondency with multilateralism in general and the world trading system in particular. Early on, therefore, the Reagan administration—under strong pressure from a Congress determined to halt what was perceived as the unfair trading practices of America’s major trading partners—was politically obliged to introduce a series of aggressive measures designed to curb imports despite Reagan’s own free-trading instincts. While the US trade actions largely targeted Japan, the threat of sweeping import duties and quotas produced significant alarm in Canada. For the first time in decades, both business and government were forced to reassess the value to Canada of secure and enhanced access to the US market.⁴⁵

As the country’s economic prospects continued to darken relative to those of our southern neighbour, and the need to expose complacent Canadian business to the bracing shock of some continental competition became undeniable, Mulroney and the business establishment came to embrace free trade. An agreement was reasonably quickly struck with the sympathetic administration of Ronald Reagan and endorsed by a Congress by then in a rather different mood than in its most aggressive Japan-bashing days. Now they were imbued with the optimism of the president and buoyed by what seemed to be a resurgence of American power. It also helped that Canada, in the eyes of American policymakers, was not Japan but instead a friendly and trusted neighbour who seemed much less threatening.

Free trade was not to be an easy sell at home, however. Just as in 1911, and in earlier elections where free trade had been a central issue, feelings ran high. The parties might have reversed their respective positions—the Tories in favour of free trade, the Liberals opposed—but otherwise the script had been used before.

In June 1988, John Turner “took almost everyone by surprise” when he announced that he had instructed his senators not to allow the passage of the facilitating legislation until the Canadian people had been given a chance to vote on the issue.⁴⁶ The government could not postpone matters to 1989 if free trade was to be implemented on schedule in January. Therefore, on September 30, Prime Minister Mulroney called on the governor general and proposed an election for November 21.

Mulroney’s election call precipitated one of the most emotionally charged campaigns in Canada’s history.

In the months leading up to the election, the NDP’s vociferous opposition to the agreement had contributed to that party’s growing support in the polls. As the campaign commenced, Turner was determined to recapture potential voters who opposed free trade, and therefore, “It was the Liberals who gave it a higher profile once the campaign began.”⁴⁷ By turning free trade into “the fight of [his] life,” Turner plunged into the campaign with more zeal and passion than he had shown during his previous four years in opposition.⁴⁸ In one dramatic confrontation, he accused Mulroney of repudiating Canada’s independence: “I happen to believe that you have sold us out.” Ignoring Mulroney’s reprimand and repeated interruptions, Turner, as historian Stephen Azzi eloquently points out, “found the words to tap into English Canada’s perennial fear of falling into Uncle Sam’s grasping hand”:

We built a country East and West and North. We built it on an infrastructure that deliberately resisted the continental pressure of the United States. For 120 years we’ve done it. With one signature of a pen, you’ve reversed that, thrown us into the north–south influence of the United States and will reduce us, I am sure, to a colony of the United States, because when the economic levers go, the political independence is sure to follow.⁴⁹

The Mulroney Tories—and not John Turner’s Liberals—won the election, however, and were able to use their parliamentary majority to pass the enabling legislation. Free trade was now a reality.

The agreement was not perfect, and in particular has proven frustratingly weak in its ability to put limits on America’s unilateralist instincts. Still, it has proven a boon to the Canadian economy, and the higher degree of certainty that it introduced in Canadian business decision-making vis-à-vis US markets is reflected in subsequent significant increases in cross-border trade.⁵⁰

Three-quarters of a century after his bitter defeat over this very issue, the building block that had always eluded Laurier in his plan for Canada was finally put in place.

In tandem with the drive for free trade, the Mulroney Tories pursued another Laurier tenet: tax reform, both for efficiency’s sake and to regain lost competitiveness with the United States.

Laurier, we recall, wanted to avoid taxes and tariffs being higher in Canada than in the US, while also reforming the tariff to be less damaging in its effects on the Canadian economy.

While the structure of taxes evolved significantly over the intervening decades, the principles that Laurier sought to preserve and promote could not have been more apposite to the situation confronting Canada.

By the mid-eighties, federal revenues came chiefly from three sources: the manufacturers’ sales tax, the personal income tax, and the corporate income tax.⁵¹ Each was in severe need of reform.⁵²

On the income tax front, Ottawa had allowed both corporate and personal tax loads to become uncompetitive compared with rates in the United States, and because of President Reagan’s proposed tax reforms, that lack of competitiveness risked becoming acute if Ottawa did not act.

Regarding personal income taxes, Ottawa saw that the Reagan tax reforms were going to cut taxes by at least 30 per cent across the board.⁵³ Such a policy was in line with the advice many economists and the Department of Finance had been giving for years⁵⁴—and that Laurier would instinctively have understood was right. Income taxes, especially ones that are highly progressive—i.e., where the tax rate on your income rises steeply as your income grows—fall most heavily on three highly valuable factors: effort, entrepreneurship, and productivity. As you work harder, and earn more as a consequence, your tax burden doesn’t rise in lockstep with your income. It increases faster than your income. If the country’s top rates are too high, then the reward for working harder and longer falls below what is needed to sustain that extra effort. As any economist will tell you, if you tax something, you’ll get less of it. And in Laurier’s plan, what Canada needed was more effort, more hard work, more risk-taking, more people striving to build the country, not less.

The finance minister at the time, Michael Wilson, didn’t need much convincing that if the top rate on personal income had fallen to 28 per cent in the United States, Canada could not long attract and keep its most talented workers with top rates of over 50 per cent.⁵⁵ Accordingly, the 1987 federal budget outlined comprehensive personal tax reform, reducing the number of brackets to three from ten and lowering the marginal rates significantly.

Wilson’s legislation to put these changes into effect, Bill C-139, broadened the tax base for personal income while reducing the tax rates. In the place of the traditional tax exemptions, the new regime relied on tax credits while getting rid of a number of personal income tax deductions.⁵⁶

The situation was similar in the corporate income tax field. Economists were increasingly coming to the view that heavy taxation of corporate profits was undesirable because, among other things, it suppressed investment, left less money available for wages, reduced income for pension plans workers would rely on for their retirement, and caused multinational companies to try to report as much of their income in low-tax countries as possible. The 1986 US Tax Reform Act put US corporate taxes on the same reform track as personal income taxes. Canada was compelled to follow suit, and for exactly the reasons that Laurier believed were decisive: we live in a competitive world, especially vis-à-vis the US, and we could never allow our tax rates to rise above theirs without paying a painful price. In fact, given the other disadvantages Canada faced, having lower rates than the US was almost compulsory.

In putting his tax reform package forward, Michael Wilson sounded a Laurier-like note:

Statutory corporate tax rates in Canada are above those in the United States and other countries, and without early implementation of significant reductions in Canada the gap would widen. If the gap between Canada and U.S. rates were not narrowed, considerable income-earning activities would shift to the United States. The gap would also encourage firms with operations in both countries to arrange their operations so as to allocate more of their taxable income outside Canada. The result of such shifts would be less economic activity in Canada and a significant erosion of our corporate tax revenues. The proposed reduction in Canadian statutory tax rates is designed to avoid these results.⁵⁷

Of course, these reforms were only a down payment on what would come later, because while they reduced the gap between the tax burden borne by American and Canadian workers and companies, they did not eliminate it, and still less did they restore Laurier’s ideal: a gap in favour of Canadian workers and companies. Still, just as Laurier had to be content in the early days with tariff reform rather than the free trade in which he so fervently believed, the movement was in the right direction, even if the way station fell far short of the cherished final destination.

Perhaps even more important than this early down payment on income tax reform was the wholesale reform of federal sales tax that Michael Wilson engineered.

The chief sales tax at the federal level was the manufacturers’ sales tax (MST). A more foolish and damaging tax it would be hard to conceive. The MST was a tax that applied only to manufacturing, and even within that narrow field, taxed some activities but not others. Companies could organize themselves and their activities in such a way as to blunt or even escape much of the tax—practically a textbook definition of a poorly designed tax. Because the tax could be largely avoided with a little effort and imagination, Ottawa found its revenues from this source to be declining over the years.⁵⁸

Yet leaving aside the misleadingly named MST, sales taxes per se have increasingly won approval from economists and policy thinkers because, if you are going to levy taxes, a well-designed tax on consumption is one of the least damaging. Unlike income taxes, which discourage work and effort and success, consumption taxes do not distort incentives to do these highly desirable things. And where saving is taxed—by the income tax and capital gains tax, which capture a part of the returns to savers—but consumption is not (i.e. when there is no sales tax), the absence of the sales tax also creates incentives for people to spend rather than save. Finally, a broadly based tax with few or no exemptions, and set at a low rate, means that the revenue is more reliable than under an MST-type tax, cause companies cannot escape the tax by artificial reorganization of their activities.

The highly courageous decision was therefore made by the Mulroney Tories to eliminate the MST and to replace it with the goods and services tax (GST). Unlike the MST, the GST was to be a “flow-through tax”: when businesses bought raw materials or machinery or advertising or telecommunications services, the tax they paid on those “inputs” was credited against the GST they collected from the consumers of their goods or services. The hidden 13.5 per cent MST, applied to a narrow range of goods, was abolished and replaced with a much more transparent and easy-toad-minister tax, applied to a wide range of goods and services but at the much lower rate of 7 per cent. The balance between saving and consuming was at least partially restored.

All of these good things were purchased, however, at a significant political cost. Because the new GST was so transparent and obvious, people had something quite concrete on which to focus their dislike of taxation, whereas the MST had been hidden and therefore called forth little popular agitation for its abolition. And it did not help that the introduction of the GST coincided with both a significant recession and a rise in the value of the Canadian dollar. A well-designed visible tax, even if it was replacing a badly designed invisible one, could only become a lightning rod for general economic discontent, and cross-border shopping with valuable Canadian dollars became an effective kind of tax protest.

The GST became a major money spinner for the federal government, although it was quickly forgotten that it replaced the revenue from the MST. The reception the tax received might well have been more positive had the government been able to follow through on their original plan to make it the centrepiece of a larger tax reform package that reduced income taxes and shifted the tax burden onto consumption, a highly desirable rebalancing of the tax load.⁵⁹ Unfortunately, the economic circumstances of the time, including the government’s own inability to keep its spending under control, forced Ottawa to put off the planned reductions in personal income taxes until much later.

The GST was so politically unpopular that there is little doubt that, like Laurier’s reciprocity proposal, it helped sink the party that brought it in. But the victorious Liberals of Jean Chrétien, once in office, quickly dumped their platform commitment to axe the tax, choosing instead to set in motion the other half of the sales tax reform that was necessary.

Paul Martin, Chrétien’s finance minister, was given the job of finding some credible way of claiming that the Liberals had an “alternative” to the GST. The alternative he came up with was one that had been part of the original plan that the department of finance had put together for the GST but had fallen by the wayside in the face of the new tax’s disastrous public reception: “harmonization,” or the rolling of provincial sales taxes (PST) and the GST into a single tax, the harmonized sales tax (HST).⁶⁰ In fact this was not an alternative to the GST at all; rather, it was an attempt to bring up to date the extremely archaic and damaging provincial sales taxes, putting them on a modernized footing like the GST’s.

Provincial sales taxes, like the old MST, were a tax that fell hard and damagingly on business. Every time a business bought something it needed for its production process, whether machinery or fuel or even restaurant meals for its workers, it paid a tax that had to be passed on to consumers in the final price, unless it got a specific exemption or credit. That put them at a disadvantage with competitors like Europeans, whose value-added tax (VAT) was a flow-through tax like the GST, or Americans, who generally faced much lower sales tax rates. PSTs were also levied on a unique mix of goods in each province and on a different mix than the federal GST. Each province had to pay for its own collection and verification machinery, although most of the cost of administering the tax fell on business, and businesses had to keep track of two different tax bases, tax rates, and audit and inspection requirements. It was all an expensive and counterproductive nightmare.

Martin was able to convince three provinces—Nova Scotia, New Brunswick, and Newfoundland—to agree to abolish their PST and simply tack the provincial consumption tax onto the federal GST, resulting in those three provinces in a combined HST rate of 15 per cent, composed of a 7 per cent federal tax and an 8 per cent provincial tax. Businesses in those provinces now had a flow-through tax that improved their competitiveness; Ottawa paid for all the administration and enforcement cost, removing that cost from provincial budgets; and Ottawa also gave the three provinces about $1 billion to help with the difficult politics of transition from the old regime to the new.⁶¹

Reflexively autonomist Quebec naturally decided not to harmonize with the federal tax but to do its own reform on similar lines, and to demand a higher payment from Ottawa to compensate the province for its administrative and transition costs. Four provinces were now essentially harmonized—five if you count Alberta, which is harmonized by the simple expedient of having no PST to harmonize.

Subsequent research shows that the promise of the HST has been amply realized: the lower costs that business faces are in fact passed on to consumers, and businesses invest more in productivity-enhancing equipment.⁶² But the politics of provinces throwing in their lot with an unpopular federal tax have been so toxic that it is only now, twenty years after the original GST reform, that the logjam is really breaking and Ontario and British Columbia have agreed to sign on, leaving Saskatchewan, Manitoba, and PEI all clearly mulling how to make the move politically palatable to their own voters.

In summary, by the early 1990s, we were halfway through the Redemptive Decade and several key elements of Laurier’s plan—the plan that would trigger the Canadian century—were in place. Reciprocity in trade with the Americans had finally been achieved within the context of a world where tariffs and other barriers to trade were falling. The free trade that Laurier believed in so passionately was increasingly carrying the day. Canada was engaging America directly and courageously, as Laurier had in his time, and seeking to put some restriction on Washington’s poorly mastered urges to punish people who are good at selling to Americans, something Canadians are very, very good at.

Putting the tax structure on a sound footing was well under way, but while some modest progress was made on tax rates, the total tax load and tax structure remained uncompetitive with the tax regime in the US. That in turn was driven by the fact that the Canadian state remained bloated compared to the limited government that Laurier thought would unleash the creativity and entrepreneurialism of Canadians. Politicians were unwilling to impose on Canadian taxpayers and voters the kind of taxes necessary to pay the full cost of the services governments were providing, so to the heavy tax load had to be added the burgeoning debt. And against Laurier’s firm advice, Canada had opened the taps on social welfare spending, drawing large numbers of people into dependence on the state and unable to contribute their energy and intelligence to the Canadian economy. America was also headed in a similar direction, but its progress was much slower than Canada’s. The inevitable arithmetic was that Canada, relatively speaking, was losing ground all the time vis-à-vis the United States, whereas Laurier’s advice to us had been always to keep ahead of the behemoth if we wanted to prosper. Free trade and tax reform were welcome reversions to the Laurier advice, but on most other fronts, Sir Wilfrid was still spinning at high speed in his grave.

The next chapters explain how we completed the Redemptive Decade, brought peace to Laurier’s ghost, and reversed course so remarkably that the Canadian century Laurier believed was rightfully ours is visible on the horizon—and only a hundred years later than Sir Wilfrid predicted.