Flaherty’s Time as Finance Minister Expires Amid ClashesTheophilos Argitis and Andrew Mayeda
Jim Flaherty was welcomed into the exclusive club of Group of Seven finance ministers eight years ago at Moscow’s landmark Hotel National with an inside joke.
“What are your two best days as finance minister?” he was asked by Gordon Brown, then the U.K. finance chief. “Your first day and the day you leave.”
That day has come for Flaherty, 64, who said yesterday he’s resigning as Canada’s third-longest serving finance minister, almost 3,000 days after being named to the post by Prime Minister Stephen Harper. He was replaced by Joe Oliver, 73, a former investment banker who had been Canada’s natural resources minister.
Flaherty’s longevity was built with an aggressive tax-cut agenda and a pragmatic turn toward deficit financing after the 2008 financial crisis. His tenure ends amid clashes with his own government on tax policy and as he struggles to overcome a debilitating skin disease.
Yesterday’s resignation followed a rare policy split with Harper and came a month after Flaherty told reporters he intended to stay in the job. One day after releasing a fiscal plan that projected almost C$45 billion ($40 billion) in surpluses, Flaherty said he didn’t think it would be a good idea to use the funds for family-income splitting, one of the Conservative’s central campaign pledges in the 2011 election.
While Flaherty attended a meeting of Group of 20 officials in Australia a week later, Harper would contradict his finance minister by telling lawmakers that giving families the ability to split their incomes for tax purposes was good policy.
“The reality is if the minister of finance disagrees with the prime minister, the minister of finance usually loses,” said Nik Nanos, head of Nanos Research Group, an Ottawa-based polling company.
There were other times when Flaherty veered from government policy. At the Sydney G-20 meeting, he opposed including language in the final communique on International Monetary Fund support for Ukraine, even as Harper became one of the staunchest supporters of that country’s new government, according to a person familiar with the debate who asked not to be identified because the meetings weren’t public.
Flaherty’s criticism of U.S. monetary policy -- so-called quantitative easing -- was also at odds with both the Bank of Canada and his own government’s position on the matter.
Flaherty’s relationship with Harper was forged during the administration’s two minority administrations, from 2006 through the 2011 election. Within 21 months, Flaherty and Harper implemented measures to cut taxes by C$190 billion over five years and increased spending at the third fastest pace in the previous three decades.
The two men would go on to engineer fiscal plans that would shrink federal taxes as a share of GDP to the lowest in at least 50 years, including a two percentage point cut in the federal government’s sales tax and lowering corporate tax rates to the lowest in the G-7, even as spending grew.
During the global economic crisis in 2008 and 2009, Flaherty and Harper put aside their wariness of deficits to implement one of the most far-reaching episodes of Canadian government stimulus since World War II, relying on spending and state guarantees to the banking system to support the economy. As the recovery took hold, Flaherty and Harper turned their attention to returning the country’s budget to balance.
Their policies have produced results. Canada’s economy outperformed the G-7 average in all but one year under Flaherty, allowing the country to increase its clout within global institutions. Canada has been co-leading a key working group in the Group of 20 and former Bank of Canada Governor Mark Carney was appointed to lead the Financial Stability Board in 2011.
“Canada stood literally and figuratively at the top of the world given its economic and financial performance,” Carney, now Bank of England governor, said in an e-mailed statement yesterday. “Much of that was down to Jim Flaherty, my colleague and friend.”
Flaherty loosened rules surrounding mortgage insurance early in his time as finance minister, only to tighten them again repeatedly as Canadians, spurred by low interest rates, took on record debts as a share of income.
He also angered some investors by backtracking on a pledge not to tax high-yielding income trusts, and failed to bring about a single national securities regulator for Canada, leaving the country alone in the G-7 without one.
During Flaherty’s tenure, the Canadian dollar appreciated 3.1 percent against the U.S. dollar and set a record high in 2008. Canada’s benchmark Standard & Poor’s/TSX Composite Index fell 5.1 percent since Flaherty became finance minister on Feb. 6, 2006, beating the S&P 500, which fell 10.2 percent over that period. His record has helped the governing Conservatives build a reputation as strong stewards of the economy.
The loonie, as the Canadian dollar is called for the aquatic bird on the C$1 coin, fell 0.4 percent to C$1.1183 per U.S. dollar at 10:47 a.m. in Toronto. One Canadian dollar buys 89.42 U.S. cents. Canada’s benchmark 10-year government bond fell, with yields climbing 2 basis points or 0.02 percentage point, to 2.42 percent.
The government’s strategy for the 2015 election “is built around sound fiscal stewardship and the assertion that the Conservatives are the least risky choice when it comes to guiding the economy,” Nanos said. “Now one of the key architects of that brand is retiring.”
Christopher Ragan, an economics professor at McGill University in Montreal who has worked at the finance department and Bank of Canada during the past decade, said “Flaherty demonstrated the flexibility required for a pretty serious fiscal conservative to implement a significant fiscal stimulus.”
The return to fiscal balance required “a combination of difficult decisions, and he should be applauded for his leadership,” Ragan said.
Flaherty should be credited for introducing fiscal stimulus measures to support the economy “when the world was unraveling,” said Murray Edwards, chairman of Calgary-based Canadian Natural Resources Ltd., Canada’s largest heavy oil producer.
“History will judge Minister Flaherty like it judged Paul Martin and Michael Wilson, recent finance ministers of stature,” Edwards said in a telephone interview. “He did a good job of steering the ship of Canada, on its financial side, through both calm seas and challenging seas.”
Investment Industry Association of Canada President and CEO Ian Russell said Flaherty is “going to go down in history as one of the most effective ministers of finance we’ve ever had, and that’s a pretty illustrious group to be in.”
“He’s made Canada a much more competitive place to do business by moving corporate tax rates steadily lower,” Russell said. “That was a consistent focus on making our corporate tax system more competitive.”
Tom Mulcair, leader of Canada’s main opposition New Democratic Party, said in a statement yesterday that “despite our disagreements about the best way to manage Canada’s economy, I have always respected Mr. Flaherty’s commitment to serving our country.”
Flaherty, in an interview to discuss his record, cited the development of the country’s “brand” as one of his most lasting legacies.
“The Canadian brand is strong. I don’t think it’s ever been stronger in my lifetime,” Flaherty said in an October 2012 interview in Tokyo, on the sidelines of International Monetary Fund meetings. “It means we’re influential in the G-7, in the G-20.”
Yet, Flaherty’s own personal brand begun to wane over the past 18 months as he struggled with a rare skin disease that was treated with strong steroids. At times he labored to move, walking slowly and with difficulty. His staff reduced his public appearances. Nigel Wright, Harper’s former chief of staff, confronted Flaherty about his appearance last year following a Bloomberg TV interview, according to a person familiar with the matter who asked not to be named because the talks were private.
At a G-20 gathering in Moscow in July, Flaherty was bedridden for three days because of illness, missing the entire meeting and forcing his deputy, Jean Boivin, to take part in the “family photo.” At a G-20 meeting in Washington last October, his criticism of quantitative easing contradicted support Harper had given to the same policy a month earlier at a separate meeting of G-20 leaders.
Still, if longevity is an indicator of success, and it is to Flaherty, he’s had more of it than most. He became dean of the G-7 finance ministers and outlasted two U.K. Chancellors of the Exchequer, three U.S. treasury secretaries, and 11 Japanese counterparts.
“Survival matters,” Flaherty said in the 2012 interview.