Who Killed Canada’s Education Advantage?

On October 14, 1992, at the Lower Manhattan offices of Standard & Poor’s, a sovereign debt analyst put the final touches on the company’s decision to downgrade Canada’s foreign currency debt rating from aaa to aa+. S&P’s ratings, like those of its chief competitor, Moody’s, reflect the relative risk that a long-term financial obligation (such as a corporate or government bond) will not be honoured. The higher the rating, the lower the risk. To the world at large, the difference between ratings is somewhat obscure, but a small variation can have a tremendous influence on the financial markets. If S&P or Moody’s declares your bonds to be below investment grade, then by law many pension funds and other large institutional investors are forbidden to hold them. And any decline in rating affects the interest rates for those bonds, and thus their attractiveness to investors.

S&P, which was responsible for assessing the relative risk of sovereign debt — that is, debt backed by a government treasury — noted that the downgrade reflected “the progressive deterioration in Canada’s current account deficit in recent years, a consequent sharp increase in its already sizable external debt burden, and the prospect of only a moderate improvement in the balance of payments in the medium term.” Simply put, Canada had burgeoning federal and provincial budget deficits, and a growing mountain of debt, and it showed no signs of improvement on these fronts. Sitting cozily in a New York skyscraper, S&P’s analysts could not have known the ripple effect the new rating would have.

For Canada, it was the proverbial butterfly flapping its wings in the Amazon and causing a tornado in Texas. It started a wave that spilled through an influential think tank, to Canada’s federal government, to the provinces, most notably Ontario. Among its most significant and yet least appreciated consequences was an unprecedented disinvestment in public education, which destroyed a historical competitive advantage in the space of a decade. We now find ourselves dangerously unprepared to prosper in the modern economy. And if we’re going to fix the problem, it will help to understand how we created it.

In 1992, education wasn’t on many Canadians’ radar screens. Our national attention was focused on debt and deficits. Things were getting desperate. Under Pierre Trudeau’s leadership, the federal deficit had ballooned from $1 billion in 1971 to $33 billion in 1984. Despite the concern expressed by Brian Mulroney’s Progressive Conservative government, and new debt-fighting measures like the profoundly unpopular goods and services tax, annual budget deficits remained standard practice. By 1992–93, the deficit had tipped over the $40-billion mark. When S&P downgraded Canada’s rating, the federal and provincial governments owed $665 billion between them, about $300 billion of which was foreign debt. The total amounted to over 96 percent of the country’s gross domestic product.

It was a bad time to be in poor fiscal shape. By 1991, the world economy had fallen into a sharp recession. The downturn was particularly difficult for Canada. gdp fell by 3.1 percent in a single year. Unemployment spiked from 7.5 percent in 1989 to 11.2 in 1992. Recovery was proving to be slow and painful. And now alarm bells were ringing about our deficit. As one of the most stable and prosperous democracies on the face of the planet, Canada had long enjoyed a pristine triple-A bond rating, giving it access to the cheapest foreign debt in the world. While the S&P downgrade was minor, it still sent a shudder through Canadian economists.

The first ripple washed over the C. D. Howe Institute, one of Canada’s pre-eminent economic policy think tanks. Honouring the Canadian tradition of paying more attention to folks outside the country than within it, the institute published a major report in February 1993, substantially spurred by the S&P downgrade. Normally, a report on Canadian fiscal policy from a group of economists might be expected to attract little mainstream notice, but this one was different, in both tone and impact. Avoiding a Crisis captured the attention of the media and the public, and provided an impetus for the transformation of Canada’s fiscal policy, helping make “deficit” a dirty word. “Huge deficits and rapidly growing debts,” the authors warned, “have brought the country to the threshold of a fiscal crisis.” They suggested that among the effects of unconstrained deficit spending was the very real possibility that foreign lenders might soon decide Canada was no longer creditworthy.

The furor over the Howe report was ultimately knocked off the front pages by even bigger news: the resignation of Prime Minister Brian Mulroney. His departure, and the subsequent sweeping electoral rebuke to the federal Progressive Conservatives, set the stage for further ripple effects, particularly the emergence of new ideologues on the left and right, all of whom would use the downgrade and the Howe report as a platform upon which to make their reputations.

Enter Jean Chrétien, the little guy from Shawinigan, and his no-nonsense economic fixer, Finance Minister Paul Martin. And at the provincial level emerged such populists as Ralph Klein, already in office as Alberta’s premier; and Mike Harris, soon to be Ontario’s premier. Martin and Harris proved to be the key actors, however unwittingly, in the decline of Canada’s education infrastructure.

The ripple effect that began at S&P hit the federal government first. Martin was an ex-businessman with unimpeachable bona fides; his father had served as a cabinet minister under four Liberal prime ministers, and Martin himself had worked as an aide to politico Maurice Strong when they were both at Power Corp., before making his personal fortune at Canada Steamship Lines. First elected to Parliament in 1988, he moved from the Opposition benches to the plum Finance post after the October 1993 election.

Martin’s reputation as finance minister bears no resemblance to the Mr. Dithers persona later pinned on him as prime minister. He was known as a determined, decisive politician, disinclined to entertain views from bureaucrats who questioned his approach. Polished, thoughtful, and urbane, he gave the public the sense that he was both well connected and well read — a little wonkish, perhaps, but with ideas backed up by his success in the private sector. Behind closed doors, he could be nakedly ambitious, combative, and utterly unyielding. He was an internationalist from the start, and cared deeply about Canada’s standing on the world stage. So foreign investors mattered to him a great deal. It is no surprise, then, that he took full advantage of the opportunity afforded him by S&P and the C. D. Howe Institute to make his name as the man who slew the deficit.