Did Jean Chrétien balance budget with tax hikes?

Finance Minister Joe Oliver's speech last week to announce balanced budget legislation was full of partisan point-making. But his lines included a new twist on the legacy of Paul Martin's deficit fight. Does it ring true?

Finance Minister Joe Oliver said '90s-era Liberals made 'some of the biggest tax hikes in Canada's history'

Then-prime minister Jean Chrétien and his finance minister, Paul Martin, make their way to the House of Commons for the 1997 budget speech. By the end of that decade, the Liberal government's budget measures had balanced the federal books. (Fred Chartrand/Canadian Press)

"Jean Chrétien balanced the budget by hiking taxes, cutting vital programs, and slashing billions in transfer payments..." 

 "[Former prime minister Pierre Trudeau's] Liberal successors prevented disaster, but the way they did it was equally dangerous: through some of the biggest tax hikes in Canada's history, accompanied by unprecedented cuts to programs and transfers."  

- Finance Minister Joe Oliver, April 8, 2015

When you're primping balanced budget legislation on the eve of an election call, it's no time to fold on your fiscal appeal.

Which is why Joe Oliver stood before Toronto's Economic Club last week, focused not only on the balanced budget in his own future, but also on how budgets were — or weren't — balanced by past governments.

It's hardly the first time a Conservative (or a New Democrat, for that matter) slammed the Paul Martin budgets of the mid-'90s for "reckless" spending cuts or balancing the federal books "on the backs of the provinces."

But the Conservatives are now knocking Jean Chrétien's Liberal government for not just cuts, but higher taxes, too. Does that ring true?

The spin

Taxes went up to balance Chrétien's budgets.

"In nominal dollar terms, taxes increased from $123 billion in 1993 to $190 billion by the end of 2003," conservative author and policy consultant (and would-be Ottawa-area Conservative candidate) Bob Plamondon wrote CBC News when we asked for his help in understanding these lines in Oliver's speech.

"Of course [Chrétien] came in just after the GST was introduced, so he had that working for him," he said.

Economist Don Drummond, who worked on tax policy at the Finance Department back then, says numbers can be picked to portray the Liberals as tax hikers.

On April 8, Finance Minister Joe Oliver used a speech to the Economic Club of Canada announce that the Harper government will table balanced budget legislation. He also told this Toronto audience that the Chretien government balanced its budget by increasing taxes. (Darren Calabrese/Canadian Press)

"An argument could be made that over the prime years of the deficit correction, the revenue-to-GDP ratio rose," he wrote in an email to CBC News. That ratio in percentage terms, Drummond said, rose to 17.8 in 1997-98 from 16.6 in 1994-95.

"But even that one percentage point rise pales relative to the three percentage [point] decline in the program spending ratio over the same three years (to 12.7 from 15.7)."

Overall revenue relative to the size of the economy was quite stable. A stronger economy boosts tax revenues.

As this deficit was reduced, the ratio of spending cuts to tax increases was about 7:1.

But tobacco taxes, to cite one example, actually went down, to fight smuggling. 

On the other hand, Canadians still pay 1995's "temporary" 10 cent/litre excise tax at gas pumps.

The counterspin

We also asked former Bank of Canada governor David Dodge, then-deputy minister of finance, about the taxing claim.

"Borders on fiction," Dodge wrote CBC News.

"The big tax hikes were made by the Mulroney government. Chrétien's government simply benefited from the robust revenue system that they inherited," he wrote.

"The key 'tax hike' was the failure to reduce the unemployment insurance premium from the elevated level they inherited from the Mulroney government," Dodge said.

Former prime minister Jean Chretien and his finance minister, Paul Martin, used both spending cuts and increased tax revenues to erase Canada's federal deficit. The ratio of spending cuts to tax increases was about 7:1. (Tom Hanson/Canadian Press)

As the economy improved and fewer Canadians collected EI (thanks, in part, to eligibility changes the Liberals made), contribution rates should have fallen according to a formula.

Martin lowered rates more slowly, pocketing extra revenue. "But the argument here is over how slowly the contribution rates declined. They were not increased," Drummond said.

'Indisputable' payroll tax

So, what tax hike did Oliver mean? 

"The Chretien/Martin Liberals were the authors of what is called 'the biggest tax hike in Canadian history' in the massive, near-doubling of [Canada Pension Plan premiums] from 5.85 per cent of pensionable earnings to 9.9 per cent of pensionable earnings," wrote spokesman Nicholas Bergamini.

"It is a payroll tax," Bergamini argued. "It was a massive tax hike on workers. Indisputable."

Joe Oliver's spokesman said that the finance minister's criticism last week referred to a sharp rise in Canada Pension Plan premiums on Jean Chrétien's watch. But that's not general revenue for the federal government: Canadians get this pension money back when they retire. (Darren Calabrese/Canadian Press)
Drummond, who joked that he spent "a good part of [his] life trying to correct the notion the CPP premium increases were a tax increase," maintains that when premiums rise, it's a pension contribution, not a tax.

"The revenues do not go into a general purpose account but rather flow back to retirees through CPP pension payments. The CPP would have been bankrupted if the premiums were not increased," he wrote. 

The final rinse

Bergamini wrote that "coupled with a series of other tax increases, along with bracket creep... [it] amounted to a huge income tax hike, year after year."

He also noted the minister qualified his statement with the word "some."

Bracket creep — when inflation pushes incomes into higher tax rates — ended in 2000 when Liberals restored full indexation to personal income tax rates. Once in surplus, Liberals made tax cuts — the final one reversed by Jim Flaherty's first budget.

The Harper government disagrees with people like Ontario Premier Kathleen Wynne, who argue CPP must be enhanced to help more Canadians in their retirement.

But payroll tax or not, if CPP premiums don't flow into general revenue, they didn't help balance the budget.


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