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Wednesday, May 18, 2011

Economy, Economy, Economy

For any government, the state of the economy is of paramount importance. But it is even more so for the Harper government over the next four years. After all, it is its perceived competence in that matter that drove Torontonians to give it a majority.

The Conservative economic and fiscal platform was basically: we'll make sure the recovery continues; this will eliminate most of the deficit, and we'll make some not-too-painful cuts to eliminate the rest.

Whether the recovery continues or not is, alas, largely outside the incoming government's control. Obviously, Canada has little impact on international factors such as the U.S. recovery. But even on the domestic front, most of the story has already been determined, and we're just waiting to see how things play out.

Indeed, on macroeconomic issues, a government's performance often depends more on the previous government's actions than on its own. For example, Mulroney's poor showing had much to do with Trudeau's economic mismanagement, while foundations of the Liberal success in the 90s were laid by the Tories with the GST and FTA. Similarly, the continued success of the Canadian economy under Harper was mostly a product of Chrétien and Martin's sound policies and Canadians' sacrifices in the 90s.

In many ways, over the next four years, we will find out how good the Tories' management of the economy has been over the past five years. We will have a better sense of whether:
- the government's stimulus plan succeeded in producing a sustainable recovery;
- the Tories spent outside the country's means prior to the recession;
- there is a housing bubble which the Tories should have tried to prevent.

How these issues play out will have a direct impact on Canadians' well-being and on the government's agenda. If there is no housing bubble, the recovery is sustained, and past spending increases were reasonable, then the Conservatives can deliver on their plan to balance the budget with moderate cuts that most Canadians won't notice. However, if we find out that there is a housing bubble (through it bursting), if the recovery runs out of steam, or if the spending growth of the good times was excessive, then the government will have to introduce unpopular measures, show up to the 2015 election with a deficit, or both.

Barring major events in Québec or a major scandal, the Conservatives' fate in the 2015 election may have already been largely determined.

The same cannot be said of the Liberals and the NDP. Obviously, if the economy does well, they have little chance of winning power in 2015. But the NDP can durably squeeze out the Grits if they manage to establish economic credibility over the next four years. Conversely, if the NDP fails to do so, then the Grits could regain the position of government-in-waiting if they get their act together. Of course, since the election, both parties' performances have ranged from disappointing to laughable...

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