Reasons why Flaherty was both a great and not-so-great finance minister

OTTAWA – History will judge Jim Flaherty highly.

Economists in the private sector and in academia agree that the impish lawyer from Main Street — working-class Whitby, not tony Rosedale — should be judged as one of the most important and best finance ministers in the country’s history.

Being Canada’s third-longest serving finance minister made him notable; navigating one of the most serious financial crises of the past six decades — and reaching calmer waters ahead of his peers — puts him in elite company.

But no one who held the role for eight years, most of them in a minority government, could avoid the odd slip-up — and Flaherty was no exception.

Based on interviews with private-sector economists and academics, here are the Top 5 reasons Flaherty should be considered among Canada’s best three finance ministers of the post-Second World War era, as well as his five most glaring missteps.

Handling of the 2008-09 crisis. Canada’s recession was shallower than in other G7 nations, and the recovery came faster and stronger, thanks in part to Canada’s stronger fundamentals — robust banks and a government in surplus. Natural resources helped to cushion the blow; others in the G7 were commodity importers.

Following a snap budget in January 2009, Canada was able to get its stimulus money out quicker than most countries, say analysts. And Flaherty was true to his word that the stimulus would be temporary, targeted and timely. Despite outstretched hands, the spending was phased out after two years.

The mortgage buy-back scheme. In October 2008, Flaherty announced the Canada Mortgage and Housing Corporation would buy up to $25 billion in insured mortgages from banks, giving them a badly needed cash infusion. Flaherty also made sure it was not a gift — the banks would need to pay a fee to get the mortgage assets off their books — and Ottawa eventually realized a tidy profit.

“It sent a signal to the capital markets, the hedge fund operators, the speculators: ‘We are backing the Big Six, don’t sell our banks short, we are going to back them up come hell or high water,'” said Ian Lee, a professor at the Sprott School of Business at Carleton University in Ottawa.

New tax on income trusts. In October 2006, the rookie finance minister shocked markets — and broke a Conservative campaign commitment — when he clamping down on income trusts, at the time a popular corporate tax-avoidance tool. The move remains controversial, but most economists say Flaherty was right to do it.

“It wasn’t just the hit on government revenues; far more important was the impact it was having on management decisions, because income trusts had to distribute all their taxable income to investors and they stymied themselves on cash flow,” said Jack Mintz, one of Canada’s leading economists who served on the government’s Economic Advisory Panel during the crisis. With no cash reserves, many would have been bankrupted by the 2008-09 recession, he said.

Decreasing the size of government. Economists credit Flaherty with sticking to his guns and “taking the punch bowl” away once the gloom of the crisis lifted in 2011, and moving toward a balanced budget. Not only has Ottawa held the line on spending and cut the size of the public service, but it has also begun tackling the demographic crunch, effectively setting back to the retirement age to 67 years.

Tax reform. From corporate tax cuts begun under the Liberals to sales tax harmonization with provinces, from the introduction of tax free savings accounts to the Working Income Tax refundable credit for low-wage employees and the federal disability tax credit, Flaherty has been active on the tax front. With a few notable exceptions, economists give most of his measures high marks — although corporate tax cuts and shrinking government remain controversial; union economist Erin Weir would count them among his worst moves.

Experts say Flaherty’s Finance resume contains a few head-scratchers as well.

Cutting the GST. RBC chief economist Craig Wright calls it a simple case of politics overriding policy. To economists, all taxes are bad, but value-added taxes like the GST are among the least damaging. Income taxes at the personal and corporate level discourage effort and risk-taking, which are vital to a healthy economy; sales taxes do not.

Boutique tax credits. What’s with all the tax credits for children’s fitness, arts courses, tradespersons’ tools, even volunteer firefighters, to mention but a few? They complicate tax filing, while sticking the government’s nose in the choices people make. It almost smacks of “social engineering,” said Doug Porter, chief economist with BMO Capital Markets.

The 2008 economic update. Possibly Flaherty’s most embarrassing misstep. He predicted slow growth in 2009 but not a recession, and had no measures to combat the coming catastrophe. To top it off, he inserted a campaign donation change that nearly brought down the government. It was bad policy that introduced political instability at a time of economic uncertainty, said Porter. He reversed course in January.

Relaxing mortgage rules. Before Flaherty began tightening mortgage requirements in 2010, he was busy following the U.S. lead in relaxing them to the point where homebuyers could obtain mortgages at zero money down with a 40-year amortization period. It needlessly inflamed an already hot market.

That phone call to the Bank of Montreal. The infamous call prompted the bank to announce last spring it would not extend its 2.99 per cent five-year mortgage rate offer, but many wondered why Flaherty thought he was better suited to decide interest rates than the banks. And it smacked of a veiled threat to financial institutions. Even NDP Leader Tom Mulcair felt uncomfortable defending the free market, against a Conservative finance minister who was interfering with it.