Harper on Canada's Economy: It's All Good

At about the two-thirds mark of Prime Minister Stephen Harper's stump speeches—after he lambastes rivals for forcing unnecessary elections and rolls out a list of initiatives that have been put at risk by the opposition—Canada's Conservative leader breaks into poetry. "A sea of troubles is lapping at our shores," Harper tells his audiences, borrowing a phrase from Hamlet's famous soliloquy to warn Canadians of the sufferings they may face should his party lose power in the May 2 vote. "Disaster in the Pacific, chaos in the Middle East, debt problems in Europe, and, of course, some very serious challenges just south of our border. Canada is the closest thing the world has to an island of security and stability."

Though that last bit's not Shakespeare, it works for Harper. The 51-year-old is seeking reelection by running on the country's stellar economic record: the fastest recovery with the lowest budget deficits among the Group of Seven nations, and the first to recoup all jobs lost in the recession. Polls show the Conservatives are favorites.

So why are some economists so unimpressed? "We were extremely lucky," said Stephen Gordon, a professor at Université Laval in Quebec City. "We were lucky that our banking system just happened to be indestructible." Canada's banks were never enmeshed in the subprime crisis because the country's banking rules limited their ability to invest in risky assets. Other economists say Harper's political objectives often get in the way of good economics. According to Christopher Ragan, an economics professor at McGill University in Montreal and former adviser to the central bank and Finance Dept.: "They are not always guided by the desire to make good policy."

The list of economists' complaints is long. Harper doles out too many tiny credits and deductions that complicate the tax code—some 20 such measures since taking power in 2006, double the number of the previous five years, according to the Finance Dept.'s tax expenditure reports. Early in his administration Harper reduced sales taxes, missing an opportunity to lower costly personal income taxes that discourage savings and investment.

The Conservative leader has often used government money to pick winners. His 2009 stimulus package included the creation of a new development agency to provide grants to businesses in Ontario. One of his key campaign pledges is for a C$4.2 billion ($4.3 billion) loan guarantee for an electricity venture in Atlantic Canada that Hydro-Québec says will distort the market. Not only has Harper done little to lift barriers to foreign direct investment, among the most restrictive in the industrialized world, he is the first Canadian Prime Minister to reject a foreign corporate takeover in more than two decades. "They are pretty interventionist," says McGill's Ragan. Since taking power Harper has increased program expenditures by 40 percent, to C$245 billion.

Economists, including Ragan, do give Harper kudos for some decisions. In 2006 he eliminated tax breaks for companies that used special investment vehicles, and in 2007 he cut corporate income taxes aggressively. His 2009 stimulus plan was among the largest in the G-20. Ragan, co-author of the most widely used economics textbook in Canada, grades Harper an 8 out of 10 for short-term management and 5 out of 10 for "long-term economic thinking." Canada's potential economic growth won't be much greater than 2 percent a year beyond 2011 because of low increases in productivity and an aging workforce, Bank of Canada Governor Mark J. Carney said last year. "We can choose to be the proverbial frog in the pot of heating water, but that story does not end well," says Ragan.

A major concern for Harper that economists don't share, of course, is political survival. He's never held a majority of seats in Canada's House of Commons, and has had to line up opposition backing for every piece of legislation.

In the course of navigating the politics, Harper has developed a brand of conservatism that Queen's University economist Thomas J. Courchene calls "small government, and lots of it." A favorite tool is tax measures aimed at specific groups such as families and small business owners. His last budget, which wasn't passed, included C$35 million in tax credits for volunteer firefighters over three years. The conservatives have also chosen environmental regulation instead of a carbon tax that would fuel government revenue, which would encourage more spending. Harper prefers consumer protection rules to opening the banks and phone companies to foreign ownership and competition, which would galvanize critics. While avoiding wholesale changes to federal programs, Harper has refrained from introducing new ones. His tax cuts have reduced the federal take to its lowest as a share of gross domestic product since at least 1961, even as he piles on the tax legislation.

Harper's backers say they are just being pragmatic. "We can be suicidal about this and lose the next election and we'll have no influence at all," says Goldy Hyder, a Conservative strategist and general manager at Hill & Knowlton Canada in Ottawa. "Or we need to put a certain amount of water in our wine." As Harper explained to Bloomberg in a September 2008 interview, "I know that we often live in what we call the world of second best."

The bottom line: Harper may win his third election by combining conservative principles with populism, even though his economic record is mixed.

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