A decade of big-government economic vision: The rise and fall of Trudeau’s big-spending, big-government economics
When Prime Minister Justin Trudeau stood in front of his residence on Monday to announce his resignation, he spoke of his efforts to “get the economy ready for the future” and to make sure it was “working for everyone and not just a few.”
It was a familiar refrain, dating back to Mr. Trudeau’s landslide victory in 2015. From the get-go, his economic vision focused on redistributing wealth, tackling climate change, and expanding Canada’s work force through immigration and increased participation of women, youth and minorities – with a heavy dose of deficit spending and government hires to support those efforts.
But a decade on, economic metrics suggest Mr. Trudeau’s experiment failed to produce sustainable growth and Canadians are reeling from an affordability crisis. His brand of progressive economics has lost its lustre, not just in Canada, but in advanced economies around the world.
Punished by high inflation and housing costs, voters are increasingly prioritizing pocketbook issues over visions of an inclusive and green economy. Right-wing politicians are gaining power across Europe and in the United States on promises to cut taxes, reduce the size of government and slash immigration and environmental programs. Canada will likely become the newest example later this year if Conservative Leader Pierre Poilievre maintains his lead in the polls.
Mr. Trudeau’s political demise – which happened gradually, then suddenly with the resignation of his finance minister and stalwart ally, Chrystia Freeland – appears to signal the end of a certain big-government economic vision, at least for now.
He is one of many incumbent leaders around the world to be knocked out by the surge in inflation that started during the COVID-19 pandemic. But he leaves a legacy as a leader who emphasized wealth redistribution over economic growth, and big announcements over follow-through.
And while Mr. Trudeau steered Canada’s economy through the pandemic and helped secure continental free trade during the first U.S. presidency of Donald Trump, declining productivity and falling living standards – gross domestic product per capita has declined for six consecutive quarters – leave the country vulnerable in the face of a potential trade war with the U.S.
“In their first term, they didn’t do badly,” former Bank of Canada governor David Dodge said in an interview. “But they certainly failed in the second and third terms. And they failed primarily because they didn’t get the balance between growth and distribution. And that’s a failure in planning, but it was equally a failure in execution.”
The Trudeau government notched up a number of economic policy successes in its early years, including expanding the Canada Pension Plan and introducing the Canada Child Benefit, which helped reduce the country’s child poverty rate from 14.5 per cent in 2015 to 9.9 per cent in 2022.
It also attempted something of a growth agenda in its first term, with then-finance minister Bill Morneau appointing an Advisory Council on Economic Growth composed of business people and academics. Out of it came a series of initiatives aimed at attracting foreign investment and using government spending to attract private capital. These included the Infrastructure Bank, Invest in Canada and the Canadian Business Growth Fund.
These were good initiatives, said Dominic Barton, chair of mining giant Rio Tinto and Canada’s former ambassador to China, who chaired Mr. Morneau’s task force in 2016 and 2017. The problem, however, was the delivery.
“The pieces are there, but the scaling hasn’t been there,” Mr. Barton said in an interview. The government never put the required resources into these programs and failed to match them with a deregulatory push to make Canada’s business environment more friendly, he said. And over time, the government’s engagement with the business community waned.
A crucial achievement of the Trudeau government came in its first term, when it renegotiated the North American Free Trade Agreement with a belligerent Mr. Trump, who had threatened to scrap the deal altogether. The resulting pact, the United States-Mexico-Canada Agreement, kept American and Mexican markets open to Canadian businesses – although this is once again under threat with Mr. Trump’s return to the White House.
Everything changed with the onset of the pandemic in early 2020. The government’s swift rollout of support programs helped the economy through a generational crisis, although the surge in government borrowing to pay for the emergency pushed the national debt sharply higher, from around $700-billion in 2019 to almost $1.2-trillion by 2022. In hindsight, support programs were too generous and the government was slow to roll them back.
When inflation took off in 2021 and 2022 – hitting a four-decade high of 8.1 per cent in June, 2022 – high spending became a political liability.
Most economists think that the rise in inflation was mainly driven by a combination of global supply chain disruptions, shifting consumer-spending patterns through the pandemic and a surge in commodity prices following Russia’s invasion of Ukraine.
“The entire world went through a brutal pandemic, which led to inflation globally. So, I don’t think we can really pin that, and the big run-up in interest rates, on the Canadian government,” Douglas Porter, chief economist at Bank of Montreal, said at an event in Toronto on Thursday.
But government support cheques also added to inflationary demand. And Mr. Trudeau and his team were slow to realize that inflation was a problem they couldn’t leave to the Bank of Canada alone. His government ran large deficits long after the central bank began raising interest rates to curb inflation. In 2023, Bank of Canada Governor Tiff Macklem took the unusual step of saying that government spending, at the federal and provincial levels, was rowing in the opposite direction from monetary policy.
“We’ve lost our fiscal rectitude and discipline over the past 10 years, and that may well be one of the biggest changes or legacies of the past 10 years,” Mr. Porter said.
Perhaps the government’s most astonishing failure was its approach to immigration. As pandemic lockdowns waned, the government opened the doors to temporary foreign workers and international students, leading to the fastest population growth since 1957.
The Trudeau government argued over the years that high immigration would boost economic growth by counterbalancing aging demographics and filling job vacancies. McGill University associate economics professor Christopher Ragan said he opposed that philosophy while he served on Mr. Morneau’s economic growth council.
“I think they didn’t think very well and smartly about growth,” Prof. Ragan said. “And that led them down this hopeful and naive path that, ‘Oh, we’ll open the gates for immigration and that’ll be our growth strategy.’ And I think that has failed miserably.”
High immigration has grown the economy and helped the country avoid a recession during the Bank of Canada’s rate-hiking cycle. But the government failed to promote per capita growth and instead further eroded housing affordability. Mr. Trudeau eventually conceded his government “didn’t get the balance quite right” on immigration in recent years. It has since trimmed its immigration targets to freeze population growth over the next two years.
It’s unclear whether key pillars of the Trudeau legacy will last beyond the Liberals’ time in office. Mr. Poilievre hasn’t said whether he will keep in place social programs such as child care and dental care. On the clean economy, Mr. Poilievre has been mum on electric-vehicle subsidies for automakers and the slew of investment credits brought in by the Trudeau government to stay competitive with the U.S.
The cost of living now dominates as the top priority for Canadians, eclipsing other issues such as climate change. Voters who brought Mr. Trudeau to power on the promise to put a price on pollution have endorsed Mr. Poilievre’s top promise to “axe” the carbon tax.
Abacus Data CEO David Coletto said Canadians’ priorities have shifted and Mr. Poilievre has effectively tapped into the scarcity mindset that has taken hold amidst an affordability crunch. Prof. Ragan believes Canadians may one day come to regret turning their backs on carbon pricing.
Rob Gillezeau, an assistant professor of economic analysis and policy at the University of Toronto and former chief economist for the NDP, said the collapse of economic mobility in his view was the largest failure of this government.
“The fact that if you are coming up in the country now, you do not have any real hope of having the same living standard that your parents had. That is a fundamental shift in the nature of the country, and it has happened entirely under the life of this federal government,” he said.
This article was first reported by The Globe and Mail
