In summarizing the conclusion of Part 1, Rae’s NDP had left a bad impression on many NDP supporters, and the party received heat from all sides, from the private media, business community, and union workers. Their defeat in the 1995 provincial elections was assured, yet the flack they received for “causing” and “sustaining” the recession, were poorly made points and grossly inaccurate.
As explained earlier, the reasons for the recession and the numerous layoffs had more to do with macroeconomic factors and federal monetary policies, than anything the Rae government had any control over.
Rae’s misfortune would help Mike Harris’s Progressive Conservatives (PC’s) sweep into a majority in the 1995 provincial elections.
Mike Harris was sworn in on September 27, 1995 at Queens Park. There were thousands of demonstrators representing labour, student, enviroenmental, anti-poverty, and social action groups massed noisily outside, and the PC’s outlined several steps of action.
- Immediate repeal of previous NDP’s legislation that prevented strike-bound companies from hiring replacement workers
- 26% cut to provincial welfare rates
- End to employment equity programs
- Drastic reduction in staff of the Ministry of Environment
These first changes were in line with the party platform’s “Common Sense Revolution” as were others. Soon, significant public service and health-care budget cuts were announced, affecting large numbers of government and medical workers
The province’s entire system of elementary and secondary education was to be overhauled
Harris even claimed that his Conservatives were not the government, but “the people who came to fix the government.”
Previous premier’s such as Conservative Bill Davis, David Peterson, and Bob Rae, had all governed with the belief in the importance on consultation with various interest groups and stakeholders before a major reform was implemented.
In contrast to them, Harris and his advisors took an opposite view of how the province should be governed. Included in the Common Sense Revolution’s main policies, was the speedy implementation of policies, without any regard to consulting with specific groups affected by them
Naturally, this led many labour and social action groups in Toronto, to hold organized mass “days of action” protests that brought tens of thousands into the streets in 1995 and 1996, shutting down schools, government offices, and public transport.
In 1997 a two-week province-wide teachers’ political action was called in response to the government’s education reforms, which included an increased workload and mandatory testing for teachers, and a new education funding formula that reduced the amount of money available to school boards.
Employees in the provincial health-care sector, including nurses, doctors, and hospital workers, also demonstrated their frustration over a massive restructuring of the system that involved significant budget cuts and layoffs.
As the PC’s approached the end of their first term in office, there were some in the party that were concerned that the harsh approach to governing and the speed with which their controversial reforms had been implemented might jeopardize their electoral chances. But Harris remained confident in the 1999 provincial elections
Harris would point out, that under his leadership, there had been a significant increase in the creation of new jobs in Ontario with his government helping to close up the recession.
However nothing could be further from the truth, the mid to late 90’s was a period characterized with economic booms that had little to do with Ontario.
There were various macroeconomic factors that ended the recession of the early 1990s, such as a booming U.S. economy. Due to the FTA agreement, this demand stimulated Ontario for consumer goods, reduced unemployment, and boosted provincial tax revenues despite the cuts and deficit reduction measures Harris had introduced.
The Harris PC’s held power at a time of growing economic boom. Federal monetary policy began easing from 1994 onward, and the economic boom brought with it, increasing levels of employment and provincial tax revenues, which helped in reducing the deficit, and allowing his government to cut taxes.
It was not the overspending of his predecessors that actually caused the recession of the early 1990s. The Bank of Canada’s high interest rates would be to blame for that, and Harris took credit for deficit reduction and balancing the provincial budget only after most other Canadian province had already done so.
The prolonged period of prosperity in the U.S. and the low interest rates there favoured the Ontario economy.
In fact, a paper titled: Constraints on the conduct of Canadian monetary policy in the 1990s evaluated the Bank of Canada’s monetary policy’s effects on the Canadian economy.
Written in the abstract, the authors stated, “Some evidence is presented that suggests high Canadian interest rate premiums were an important factor explaining the general weakness of economic activity.”
While not everything could be attributed to the macroeconomic activity, it did present a valid concern.
The other factor for the weakness in the Ontarian economy was the high levels of spending Bob Rae had engaged in, in attempting to “fight the recession”. As explained in Part 1, this definitely did play a role in Ontario’s declining finances as well.
The paper also noted,
By 1996, however, perceptions began to change, mainly due to a substantial strengthening in public finances and a lengthening period with inflation within the announced target range. In this improved environment, the Bank was able to ease monetary conditions more assertively.
The diagram below also shows the economic performance over the years (On the federal level).
As can clearly be seen, beginning in 1992, interest rates became more laxed, and monetary policy slowly began to ease.
The authors of the paper also noted,“Although interest rates and the exchange value of the Canadian dollar both declined over the whole period, from 1992 to 1995 the decline in the MCI, 5 ½% points in real terms, was entirely through currency depreciation.”
This stimulated activity by contributing to a rapid growth in net exports – and the easing of monetary conditions during this period had its effect on output through the external channel – but it also directly raised consumer prices.
High real interest rates had persisted throughout the first half of the decade, and heightened risks – especially with respect to the longer term – were largely responsible for this.
Growing risk premiums were reflected in the depreciation of the Canadian dollar and in a steepening of the yield curve, as well as in the high overall level of rates. The paper demonstrates, that the high risk premiums were a significant factor in the weakness of economic activity.
A risk premium in interest rates implies, that investors (in the markets) demand a higher return for bearing the extra risk of investing.
And in 1994, under the direction of Gordon Thiessen, the Bank of Canada monetary policy eased even further.
1996 brought improved economic fundamentals by substantially declining the budget and external deficits, and by the fourth quarter of 1996, short-term interest rates had declined to about 3% and the MCI was at its lowest level.
The MCI is the Monetary Conditions Index, a construct that combines interest rate and exchange rate movements.
This just went to show, that monetary conditions were already clearing up for Canada by the time Rae’s term had ended.
All of this demonstrates that the conditions of the Ontario economy began to improve after the monetary policy had begun to ease. This did not come in sufficient enough time to help Rae’s NDP, but it did land the Harris PC’s in an opportune moment in Ontario’s history.
The reforms Harris implemented were drastic, and deep. And they also shaped the province of Ontario for many years after his term ended. Thus in the next few articles in the series, we will begin to look at the most profound, and most significant of these reforms.