Domestic Neo-Liberalism

Domestic Neo-Liberalism
As long as Keynesian ideas held sway, most people concerned about public
policy saw the active involvement of government in achieving goals (such
as full employment) as a legitimate function. Although the practice of
Keynesianism was less enthusiastic in Canada than in some other countries
and, certainly, proved to be imperfect (Campbell 1987), the framework was
encouraged by an international economic regime that tended to support
national economic management. Everywhere there were strong domestic
pressures for more interventionist states to provide economic stability and
social security—political goods that differentiated the postwar state from
its predecessor before the war.
By the mid-1970s the long postwar economic boom that, in reality,
had its shares of ups and downs was widely recognized as being over. A more
difficult economic environment was at hand. Two international oil crises
drove inflation higher, though in political debates rising prices were often
attributed to domestic causes. Prime among the domestic reasons advanced to explain inflation were increased wages stemming from the
power of labour under a full-employment regime. The popular interpretation of inflationary pressures became “too much money chasing too few
goods”—an explanation that overlooked the possibility that wages were
simply chasing externally induced inflation. From this point of view, wage
controls became the remedy for inflation.
Some commentators argued that a decline in profits had occurred
(Gonick 1987: 341–42; Heap 1982: 81). Others predicted capital flight—
that multinational corporations would shift their manufacturing investments to the newly industrializing centres of the Third World, where cheap
pools of labour could be readily found. The deregulation of the international monetary system with the termination of Bretton Woods also led to
instability. A process of deindustrialization, “a widespread, systematic
disinvestment in the nation’s basic productive capacity” (Bluestone and
Harrison 1982: 6), became apparent in the recession of the 1980s. Whole
sectors of the industrial heartlands of North America were dubbed
“rustbelts.” In Canada, employment in goods-producing industries fell
from 34.8 percent of the labour force in 1951 to 26.7 percent in 1981, a
Chapter Four
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80 / Paradigm Shift
pattern replicated in most other OECD nations (Economic Council of
Canada 1984: 157, Table 11-5). Accompanying these painful adjustments
was a rapid technological change as corporations strove to modernize, cut
labour costs and restore profitability.
Unemployment in
OECD countries steadily rose from about 3 percent
of the labour force in the 1950s and 1960s to much higher levels in the
1970s and 1980s (see McBride 1992). Official unemployment figures in
Canada peaked in 1983 at almost 12 percent. Economic assumptions
concerning a trade-off between unemployment and inflation proved
invalid as the two indicators rose in tandem. Inflation rates climbed steadily
during the 1970s, reaching double-digit figures and easing only after 1982
(see, for example, Ruggeri 1987: 297, Table 3). A new phenomenon,
“stagflation,” the co-existence of economic recession and high inflation,
made its appearance in public discourse.
The sense of crisis occasioned by these developments provided an
opportunity for long-standing critics of the Keynesian revolution in
economic thought to emerge from obscurity. The economics profession,
undergoing what amounted to a paradigm shift, returned to a version of
neo-classical orthodoxy of the kind that Keynes and like-minded economists had overturned, with the help of the Great Depression, two
generations earlier. The revived ideas found powerful backers, mostly in a
business sector concerned about increasing state intervention in the
economy. This coalition of neo-classical economists and corporate interests pushed right and centre political parties to a decisive break with
Keynesianism.The left, as represented by social-democratic parties, was not
long in following (see, for example, McBride 1996).
The shift of paradigms between 1975 and 1984 was far from smooth,
and other options certainly seemed to be available throughout the period.
One example was the Science Council of Canada’s advocacy of interventionist nationalism. Generally, however, these years also saw an incremental
retrenchment of public programs, efforts to minimize the public’s expectations of government, and advocacy of a reduced role for the state in the
economy and social affairs
The fiscal crisis generated by budget deficits contributed to the
questioning of the legitimacy of the Keynesian welfare state. A more
balanced assessment might have led to the conclusion that major problems
of public debt occurred after the abandonment of Keynesianism and the
adoption of neo-liberalism. Implementation of that alternative paradigm,
with its arsenal of high interest rates that cured inflation by driving the
economy into recession, led to government revenue shortfalls on the one
hand and growing expenditures on the other.
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Domestic Neo-Liberalism / 81
Nonetheless, it was the social welfare state that came to be seen as a
creator of economic distortions. While never as generous in its contributions as opponents suggested, the welfare state did to some degree modify
market outcomes.
1 As the Macdonald Commission Report put it, the
welfare state is “an embodiment of concepts of sharing which subordinates
market results … to citizenship concerns and community values” (Canada
1985, vol. 1: 45).The welfare state was not all bad news from the perspective
of capital. Its defenders argued that social welfare provisions allowed for the
creation of a much more secure, healthy and educated labour force: “A
comprehensive system of income security may therefore help improve
productivity, transform bad jobs into good ones, and hence boost economic growth” (Esping-Andersen 1983: 32). Or, as Bob Russell (2000: 41)
put it in describing New Labour in Britain and its Canadian imitators’ view
of the matter: “The welfare state is optimally an adjunct to capitalist
economic development, not an alternative to market-based failure.” Still,
the ability of the welfare state to decommodify a portion of the potential
labour force did enhance the bargaining power of labour, and under
conditions in which a fundamental reorientation of economic strategy was
on the agenda, social welfare policy became a target. Increasingly critics
depicted the welfare state as “a destabilizing influence that has indeed given
rise to a new set of economic problems” (Russell 1991: 489).
The Globalization Hypothesis
Globalization sometimes features as an explanation of the changes that
began to occur in the 1970s and have intensified since then. Sometimes the
argument depends on the interaction of economic globalization with
other factors such as “societal pluralization” (Rice and Prince 2000:
ch.1)—defined as the phenomenon of growing diversity within societies.
For others, economic and technological factors formed the centrepiece of
globalization’s influence. Economic forces, and actors such as multinational corporations, were said to have outgrown national boundaries, with
the economic basis of national autonomy eroding. Thus, “Keynesian fiscal
and monetary policy is rendered largely ineffective in open global financial
markets” (Simeon 1991: 47–48, 49). Or, as Thomas Courchene argues,
“This situation poses major concerns for national welfare states since they
were … geared to national production machines” (quoted in Simeon and
Janigan 1991: 39). Academic interpretations are matched by business
organizations’ oft-expressed view that state efforts to regulate economic
activity not only are ineffective but also act as a barrier to the economic
success of the private sector.
Ramesh Mishra (1999: 15) summarizes the full globalization hypoth
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82 / Paradigm Shift
esis as containing three elements: the greater openness of economies has
eroded national autonomy, which has been supplanted by supranational
authority; capital mobility has curtailed the state’s policy options; and the
only option for national governments is to move to a residual welfare
state—a policy of “competitive austerity.”
Mishra (1999: 24) concludes: “There seems to be no compelling logic
of globalization that requires the downsizing of government, retrenchment
of social programmes and substantial deregulation of labour markets. Such
measures are being pursued by English speaking countries but amount to
little more than old neo-liberal domestic policies now rationalized and
legitimized in the name of globalization.”
The neo-liberal agenda was one response to the perceptions in the
1970s and 1980s of economic crisis, some of which originated in the
international economy. But much of its early emphasis was domestic and
concentrated on clearing the domestic obstacles to international liberalization. In this sense globalization is as much or more of a consequence of
neo-liberalism at the national level than the reverse. Neo-liberalism has
involved political action aimed at reducing or removing impediments to
the operation of market forces, including global market forces. Various
justifications, economic and moral, have been advanced for placing
markets in this privileged position. An economic argument, for instance,
is that markets enhance competitiveness in a global economy and that
international competition has beneficial effects on efficiency in the
domestic economy. A “moral” argument is that people removed from the
discipline of the labour market lose independence and become undesirably
dependent on social programs.
The chief impediment to the free operation of markets is the state, and
a number of measures have been advanced to reduce its role. Among these
are fiscal policy, government employment, privatization, social policy,
labour-market policy and health policy.
Fiscal and Monetary Policy
The main neo-liberal themes—that government is too large, deficits
unacceptable, the tax system in need of reform, and spending priorities are
in need of revision—entered public discourse before the election of the
Mulroney government in 1984. But with that event they moved from the
status of ideas that might reluctantly be endorsed, out of crisis-driven
necessity, to the centre of policy discussions (see Wilson 1984). They have
remained at the centre despite a 1993 election in which the successful
Liberal campaign promised a different approach. In practice, the Liberal
government of Jean Chrétien adopted the neo-liberal fiscal agenda much
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Domestic Neo-Liberalism / 83
more vigorously than did its predecessor.
The government justified expenditure restraint by declaring the need
to balance the budget. Governments were ideologically committed to the
means of expenditure restraint (cutting state expenditures) rather than the
end of a balanced budget (which could also have been achieved by tax
increases). This approach was taken up because reduced expenditures
typically meant a smaller role for the state, especially in the crucial
economic and social areas.
4 The government’s primary focus, both
rhetorically and in reality, was on the expenditure side of the ledger.
According to the
Budget Plan 1995 the ratio of expenditure reductions to
tax revenue increases was projected to increase from 4.4: 1 in 1995–96 to
8.3: 1 in 1997–98. Early signs of this imbalance in successive governments’
treatment of expenditures and revenues led some observers to depict the
deficit as a “Trojan horse” for a somewhat different agenda: reduction of
the state’s role (Doern, Maslove and Prince 1988: 28).
Although expenditures, including those on personnel, bore the brunt
of neo-liberal policies, considerable evidence suggests that deficits and
rising public debt had little to do with profligate expenditures by
government. Rather, these phenomena were the product of foregone tax
revenues, high interest rates, and recessions that were partly due to the
implementation of neo-liberal economic policies. Rather than originating
in the Keynesian era, these problems flourished
after the monetarist
economic theories favoured by neo-liberal politicians took root.
A number of writers have drawn attention to the scope and impact of
the loopholes, tax breaks, and tax expenditures that led to the shortfall in
revenues after 1975 (Maslove 1981; McQuaig 1987; Ternowetsky 1987;
Wolfe 1985). Apart from this revenue shortfall, the main cause of increased
deficits was high real interest rates resulting from monetary policy
(Chorney 1988; McQuaig 1995). A Statistics Canada project—the Mimoto
study—attributed 50 percent of the increased deficit incurred between
1975–76 and 1988–89 to revenue shortfalls relative to
GDP, 44 percent to
an increase in debt charges relative to
GDP, and only 6 percent to higher
program spending relative to
GDP (McIlveen and Mimoto 1990; see also
Klein 1996).
Indeed, from negative or low positive rates in the 1970s, real interest
rates climbed under the impetus of monetarist policies to average around
6 percent in the 1980s, peaking at 9 percent in 1990. Even in the “low
interest rate era” of the late 1990s they remained in the 4 to 6 percent range
(Statistics Canada, cat. no. 11-010, 62-001). High real interest rates perform
a classic function of redistributing wealth in that they protect and even
expand the value of money—a result that particularly benefits creditors
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84 / Paradigm Shift
and the affluent, to the detriment of debtors and the less affluent. High
interest rates contributed to economic slowdown and recession in both
1981–82 and 1990–93 (McQuaig 1995: ch. 3; Krehm 1993).
Thus many of the problems associated with fiscal policy, such as the
deficit, which provided the pretext for implementing neo-liberal, expenditure-cutting and state-reducing policies, had their origins in neoliberal political choices made in the monetary policy area.
After 1984 there was a slight reduction in federal expenditures (as a
percentage of
GDP) until the recession of the early 1990s. The size of the
federal state was still greater in the early 1990s than it had been in the early
1980s, indicting the gradualism and limited impact of neo-liberalism; but
the total expenditures understate the impact of neo-liberal policies (see
Table 4.1). If program expenditures are considered in isolation from debtservicing costs, the impact is more striking. In the recession of the early
1980s, spending on programs climbed to 19.4 percent of
GDP.In the 1990s
recession this item accounted for a peak of 17.5 percent of
GDP before
falling dramatically to 12.4 percent by the end of the decade—the lowest
level for decades.
Table 4.1
Federal Budgetary Expenditures as a Percentage of
Total Expenditures(%) Prog. Expenditures(%) Public Debt(%)


Source: Public Accounts (various years); Budget Papers.
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Domestic Neo-Liberalism / 85
Government Employment
Another indicator of the shrinking state is the number of people employed
by it (see Table 4.2).
The reduction in government employment has been concentrated at
the federal and crown corporation (government business enterprises)
levels, which is where the state’s role in the economy and society has been
most reduced. Employment at the provincial/territorial level has declined
less, and at the municipal level it even increased in the 1990–99 period. To
some extent, however, the statistics covering the entire decade understate
employment impacts at those two levels, because provincial/territorial
employment in 1992 reached a high for the decade (from which it had
declined 7 percent by 1999), and municipal employment peaked in 1994
(after which it had declined by almost 2 percent by 1999). Total government employment declined by 5 percent over the decade, but by 7 percent
after its 1992 peak.
But the impact of downsizing was most dramatic at the levels of federal
and government business enterprises. The decline in employment in the
federal government in particular—19 percent—illustrates the shrinking
impact of the central government.
Table 4.2
State Employment, 1990–99

Year Federal
Govt. Total
Business Public
Enterprises Sector

1990 406,336 1,387,076 869,170 2,662,582 364,773 3,027,355
1991 415,387 1,401,733 888,733 2,705,853 350,927 3,056,779
1992 411,278 1,409,252 904,250 2,724,780 338,454 3,063,235
1993 404,734 1,397,171 909,991 2,711,896 325,581 3,037,477
1994 394,106 1,375,802 909,161 2,679,069 323,622 3,002,690
1995 371,053 1,370,443 907,405 2,648,900 308,935 2,957,835
1996 356,099 1,335,090 907,147 2,598,335 272,828 2,871,163
1997 337,713 1,315,126 891,483 2,544,322 258,426 2,802,748
1998 330,981 1,314,617 891,560 2,537,188 260,903 2,798,061
1999 330,003 1,312,806 893,709 2,536,519 262,451 2,798,970
% change -19 -5.5 +3 -5 -28 -7.5
* Federal government employment figures include military personnel.
Source: Statistics Canada, Cansim various.
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86 / Paradigm Shift
Privatization and Deregulation
In seeking to roll back the boundaries of the state, neo-liberals in Canada,
like elsewhere, have targeted Crown corporations and state regulatory
activity (Laux 1991: 289–91). Some analysts argue that the attack has been
less rapid and extensive in Canada than elsewhere, perhaps because of the
initially small size of the public sector (Bank of Canada 1997: 28). To some
extent Canadian neo-liberals were impeded because in this case their
doctrines ran counter to a well-established national tradition of public
enterprise (Hardin 1989; Smith 1990: 40). Reliance on public enterprise
is an historically important Canadian cultural characteristic (Hardin 1989:
104; Stanbury 1988: 120). The public enterprise tradition, which predates
Confederation, was the product of necessity in that the state undertook
works considered to be beyond the capacity of the private sector and for
much of the country’s history encountered little ideological resistance in
doing so (Taylor: 1991: 97–100).
Despite this long tradition, in recent decades governments have
privatized an impressive range of Crown corporations in what can only be
described as a sustained attack (see Tables 4.3 and 4.4).
Indeed, much of the employment decline in the government business
enterprises sector in the 1980s was the result of privatization, although
other factors (efficiency drives, for example) have also had an effect on
employment (see Table 4.5). Again, federal privatization has been in the
Table 4.3
Largest Privatizations of Federal Crown Corporations

Name Sector Year Sale proceeds $m
CNR transport 1995 2,079
Air Canada
oil and gas
Teleglobe telecommunications 1987 441
Corporation financial 1987 365
International manufacturing 1991 161
de Havilland
TOTAL 1986–96 7,218

Source: Bank of Canada 1997: 30–31.
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Domestic Neo-Liberalism / 87
vanguard of this decline. Possibly because there is so little left at the federal
level, the big initiatives in the future are expected to come through
provincial privatizations, especially of utilities. In addition to the cases of
outright privatization, other forms of partial or creeping privatization are
prominent in both federal and provincial jurisdictions. Apart from the
Canada Communication Group, formerly the Queen’s Printer, most of the
federal government’s plans for privitization after the mid-1990s involved
commercialization and joint public-private-sector ventures in areas such
as weather services, food inspection, space technology and defence supply
(Finance Canada 1995).
Commercializing the Public Sector
Beginning in the 1990s the federal government started to contract out
service delivery to private firms (Bank of Canada 1997; McFettridge
1997)—the upkeep of national parks in 1997, and the earlier system of
franchising Canada Post outlets, for example. An increased use of contractors came in some core areas of federal jurisdiction, such as employment
insurance—with an especially huge increase in contracting out after the
new generation of labour-market development agreements came into
effect in the late 1990s (interview, public-sector union official, April 1998).
Table 4.4
Largest Privatizations of Provincial and Municipal Crown Corporations

Name Sector Year Sale
proceeds $m

Alberta Government

Manitoba Telephone Systems
Nova Scotia
Power Corporation electricity generation
Alberta Energy
Edmonton Telephones
Potash Corp.
of Saskatchewan
oil and gas
oil and gas
oil and gas
Vencap Equities Alberta financial

1975–96 6,657
Source: Bank of Canada 1997: 30–31.
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88 / Paradigm Shift
The switch included work that was formerly central to the employment
service, such as counselling and assessment of clients, and the contractors
performed little or no monitoring or quality control over the work. The
next stage of contracting out was to be that of “non-decision functions of
Employment Insurance” benefits (
HRDC 1997), which would include the
receipt and review of applications, handling routine enquiries, verification
of records of employment, and issuing cheques. In the space of a decade,
one union official argued, the ethos of Human Resources Development
had altered from that of helping people find work and improving
economic conditions through developing the expertise of working Canadians, to a simple routine of cost-saving and processing individuals so that
they would remain on the books for as short a period as possible.
This increased use of contracting out of services achieves two neoliberal goals. Although the state continues to provide funds, it transfers the
delivery of services and the profit-making opportunities associated with
that function to the private sector. This move, among other things, enables
a competitive market to insinuate itself within the state structure (Shields
and Evans 1998: 77).
Some provincial governments introduced competitive bidding for
services such as highway maintenance and computer support. Municipal
garbage collection and snow removal have also been contracted out. The
usual rationale for such measures is to increase efficiency and achieve costsavings. The Canadian Union of Public Employees (
CUPE 2000) has
documented the growth of partial privatization in a number of areas,
including health and education, and links the measures to deteriorating
services without, in most cases, compensatory gains in efficiency.
Table 4.5
Government Business Enterprises Employment: Selected Years

Federal Provincial/Territorial Total Government
Business Enterprises
1981 225,115 170,910 439,231

1985 215,044 157,869 420,091
1990 154,327 159,876 364,773
1995 135,763 126,371 308,935
2000 89,534 124,176 260,966
% change
1981–2000 -60 -27 -40.5
Source: Cansim D466042,D466397,D466490 (1 Aug. 2000).
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Domestic Neo-Liberalism / 89
Social Policy
The establishment of the Canadian version of a Keynesian welfare state was
largely complete by 1971. Almost immediately the edifice came under
attack. Some programs, such as unemployment insurance, were reduced in
generosity during the 1970s (McBride 1992: ch. 6), but, for the most part,
the main features of the welfare state remained in place when the neoliberal Mulroney Conservatives took office in 1984.
The precise impact of the Mulroney government on existing programs was a matter of debate in the 1980s and early 1990s. The prevailing
view was that change was incremental and consisted of erosion rather than
outright dismantling (Banting 1987: 213). In retrospect it appears that
incrementalism and “stealth” over a protracted period produced fundamental change. The very means of implementing changes in social
programs indicated a cautious approach on the part of Canadian neoliberals. Common techniques included transforming universal into selective programs, tightening eligibility requirements, and imposition of
ceilings on program costs—or, alternatively, attempting to make programs
self-financing or subject to “clawbacks” over a certain benefit level (Houle
1990). Stephen Phillips (2000: 5–6) notes that in 1979 universal programs
paid out 43 percent of income security benefits, and by 1993, 0 percent.
Benefits paid in social insurance programs increased; but the most dramatic
increase, from 14.2 percent of total income security benefits to 43 percent,
came in selective or targeted programs (see also MacDonald 1999).
Economic initiatives such as the free-trade agreement also played a
part, perhaps, in permitting neo-liberal social policy to be introduced
“through the back door” (Mishra 1990: 99; Hurtig 1991: ch. 22). But
caution was deemed necessary because of continued public support for
social programs. The Liberal Party’s election campaign in 1993 seemed to
recognize the deep-rooted attachment of Canadians to social programs
and widespread fears about those programs being under threat (Liberal
Party 1993). Again, however, once the Liberals were in office, their
implementation of neo-liberal prescriptions proved more energetic even
than that of the preceding government.
The 1995 federal budget marked a fundamental shift in the role of the
federal state in Canada. This was the point at which erosion of social
programs ended and demolition began. Prior to the budget one prominent
journalist commented: “All manner of rhetoric will be used to mask
Ottawa’s decline: ‘reinventing government’, ‘flexible federalism’, ‘modernizing Canada’.… The essence of the matter, however, is this: the shrinking
of the federal government, attempted by the Conservatives under the guise
of fiscal restraint and constitutional reform, will now be accelerated by the
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90 / Paradigm Shift
Liberals through non-constitutional means” (Jeffrey Simpson, Globe and
27 Jan. 1995). Others defined the budget as an “epiphany in fiscal
federalism and national social policy” (Prince 1999: 176) or as the end of
an era: “It is now clear that the Minister of Reconstruction’s White Paper
on Employment and Income of 1945 can be regarded as one bookend on
a particular period in Canadian history, and Paul Martin’s February [1995]
budget as the other” (Kroeger 1996: 21).
The case for 1995 as the termination point of the Keynesian welfare
state rests on the primacy of deficit reduction over maintenance of the
social safety net. The determination to reduce the deficit through spending
reductions in the social policy area quickly resulted in declining federal
transfers to provinces and a fundamental redesign of the unemployment
benefit system. The reduced federal commitment to social programs was
accomplished not only by eroding transfer payments but also by diminished federal conditions attached to the funds transferred. The major
change occurred in 1996 with the introduction of the Canada Health and
Social Transfer (
From 1977 to 1996 the federal government had provided funding in
two social policy areas—post-secondary education and health care—
under a financial arrangement known as Established Programs Financing
EPF). Funding for social assistance and welfare was transferred under the
Canada Assistance Plan (
CAP). EPF, introduced in 1977, replaced earlier
cost-sharing arrangements that had split health and post-secondary education costs on a fifty-fifty basis. The new formula was a block funding
arrangement in which the federal contribution was partly cash and partly
tax points transferred to the provinces. Its effect was to decentralize funds
and therefore political power over these policy areas. It represented a
substantial, and historical, devolution of power from the federal to the
provincial governments (Taylor 1987: 435).
EPF, increases in the federal contribution were tied to the
growth of
GNP and population rather than, as previously, to increased real
costs. Under the “six and five” anti-inflation program, the government
EPF payments for post-secondary education. It imposed further
ceilings on
EPF in 1986, 1990–91, and 1991–92; and the 1991 budget
extended the freeze until 1994–95, after which it was to revert to the
constraint of
GNP growth minus 3 percent (Canadian Council on Social
Development 1990; Wilson 1991: 70–71). The Canadian Council on
Social Development (1990: 2) analyzed the effect of these measures:
Since the money raised by the tax points continues to grow—it
is not limited—all reductions in the growth of the block fund
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Domestic Neo-Liberalism / 91
come out of the federal cash transfers. This means that the cash
portion of federal block funding shrinks over time.… Federal cash
to the provinces for medicare and higher education will shrink …
to zero by about 2004 under Bill C-69.… Less and less federal
money for medicare and colleges and universities puts the financial burden of these programs squarely on the shoulders of the
provinces, and he who pays the piper calls the tune. The federal
government’s ability to influence national standards or guidelines
will diminish.
In 1996 the
EPF and the Canada Assistance Plan (CAP), which had also
been subject to ceilings during the 1990s, were rolled into the Canada
Health and Social Transfer, a single block funding scheme. The
removed most remaining federal conditions attached to the transfers. No
matching expenditures were required of provinces, as had been the case, for
example, under
CAP.The new scheme eliminated the other conditions
attached to
CAP, with the exception of a prohibition on residency
requirements. The
CHST contained no conditions as far as post-secondary
education was concerned, and federal enforcement mechanisms were
either diminished or less direct than formerly. Moreover, “welfare,”
traditionally less well regarded in public opinion than either education or
health, came into the same funding pool, which placed it at a competitive
disadvantage (MacDonald 1999: 77).
Funding reductions under the
CHST added to those that had occurred
under the earlier funding mechanisms (see Table 4.6). Social policy
advocates regarded the erosion of the cash component of the transfer,
which fell by 33 percent between 1993 and 1998, as the key indicator. As
cash transfers went down, the argument ran, so too did Ottawa’s ability to
insist on national standards. The federal agenda in this area was certainly
driven by the Finance Department, and fiscal motives enjoyed priority.
However, as Ken Battle and Sherri Torjman (1996: 64) also point out, the
government approach also fitted into a constitutional agenda of decentralization: “Ottawa is seeking ways of ‘renewing’ itself and its relationship with
the provinces—especially in light of the Québec referendum which
threatens to break up the country. The Canada Health and Social Transfer
has high symbolic value in that it represents a move by the federal
government to retreat from provincial territory.” The abrogation of the
federal capacity to sustain national standards thus had a rationale beyond
that of fiscal restraint.
With the return of budget surpluses in the later 1990s, and the
approach of another election, the federal government made moves to
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92 / Paradigm Shift
restore some of the funding cuts and repair some of the damage inflicted
on social programs. Michael J. Prince terms this the “reparation agenda,”
but notes that it stopped well short of restoring programs to their original
levels of financial support. Moreover, reflecting on the period 1980 to 2000
he identifies a “general trend” of “cuts to programs, and challenges to their
legitimacy as well as that of their clients.… Some federal social programs
are relatively intact and untouched by retrenchment and dismantling, but
many programs have been altered in fundamental ways” (Prince 1999:
189). This assessment can serve as a general verdict on the fate of social
programs under neo-liberal hegemony. Indeed, some analysts have depicted the fiscal surplus, which was to finance the restoration agenda, as
having been largely disbursed to tax cuts and debt repayment, with only
a very small proportion truly representing new spending on programs
(Stanford 2000). In addition, efforts to decentralize and privatize delivery
continued (Russell 2000).
The government’s approach to social policy had predictable results
including the growth of various types of inequality (Yalnizyan 1998: 127).
For example, focusing on market incomes (wages, salaries, self-employment and investment income) of families with children under eighteen,
Armine Yalnizyan notes that in 1973 the top 10 percent of such families
earned an average income twenty-one times higher than those at the
bottom. By 1996, “still near the peak of the business cycle in [the 1990s],
Table 4.6
Canada Health and Social Transfer (
CHST) (in $billions)

Cash Tax Transfers Total

* CAP = Canada Assistance Plan. EPF = Established Program Financing
CHST = Canada Health and Social Transfer
*** projection
Source: <http: //>.
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Domestic Neo-Liberalism / 93
and so presumably a ‘good’ time for reducing disparities—the top 10%
made 314 times as much as the families in the bottom 10%” (Yalnizyan
1998: 45). She explains this astonishing statistic by noting that almost threequarters of low-income families still did not have any work, and hence
market income, while in 1973 almost two-thirds of low-income families
had at least some work. Until the mid-1990s,Yalnizyan argues, government
intervention—programs, taxation, income transfers—tended to stabilize
after-tax income, notwithstanding the severe increase in market-income
inequality. But, she notes, recent changes in the tax and transfer systems
were about to change that situation dramatically.
Support for this view comes from recent Statistics Canada data. A study
of family income finds that after tax-income in 1998 had risen and now
exceeded, by 1.7 percent, average after-tax income in the prerecession
peak year of 1989. In itself this speaks volumes about the impact of neoliberal policies on incomes. Most pertinent is the observation that income
inequality increased during the second half of the 1990s. The study notes
that in the early part of the decade, “Taxes and transfers held the ratio of
highest-to-lowest after-tax incomes at just under five to one. During the
second half of the 1990s, as transfers declined, the ratio widened from about
4.8 to one in 1994 to 5.4 to one in 1998” (Statistics Canada,
The Daily 12
June 2000: 4). A Vanier Institute (2001) study attributes the slight increase
in family incomes in the late 1990s almost entirely to an increase in the
number of hours worked rather than to increased hourly wages. Average
incomes for unattached individuals, who made up one-third of all
households in Canada, were down by 2.6 percent over the decade from
1989, with much of decline being concentrated among young adults. For
families, 60 percent experienced an after-tax real income decline in the
1990s. The poorest 20 percent of families (average income in 1998—
$17,662) had the biggest decline—5.2 percent; the richest 20 percent
(average income in 1998—$96,175) experienced a 6.6 percent increase
(Vanier Institute 2001: 7–8).
Table 4.7
Income inequality in the 1990s

Market Income
Top 20 %
After-tax and Transfers Bottom 20%
Top 20%
Bottom 20%

1998 45.2 3.1 38.8 7.1
Source: Statistics Canada,The Daily, 12 June, 2000
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94 / Paradigm Shift
While economic and income growth picked up in the late 1990s, the
overall picture remained inferior to the postwar Keynesian years. Growth
in real disposable income per capita was 1.3 percent in the 1980s and 0.1
percent in the 1990s (though 2.3 percent in the 1997–June 2000 period).
This finding compares to figures of 2.2 percent for the 1950s, 3.0 percent
for the 1960s, and 4.2 percent for the 1970s (Maxwell 2001: 6).
Behind these income statistics is a job market that delivers a deteriorating stock of jobs. Mike Burke and John Shields (1999) term this the “hour
glass” job market, in which significant groups of the population are
excluded from employment opportunities, and considerable polarization
exists—not just in incomes, but in security of employment and vulnerability to the economic cycle—among those who do manage to find
From time to time studies identify ways in which globalization, or more
correctly international agreements such as
NAFTA,is having an impact on
the Canadian health-care system. Such effects include creeping privatization, primarily through the contracting out of services (
CCPA Monitor July/
August 1995: 5), and Bill C-22, which anticipated
NAFTA provisions on
intellectual property rights (Fuller 1996: 18). Under Bill C-22 patent
protection for name brand drugs was originally extended from four to ten
years. In 1993 the protection was extended to twenty years. The result has
been rapidly escalating pharmaceutical costs. Some provincial health plans
reduced coverage in order to contain costs (
CCPA Monitor March 1995: 9).
There is also what Burke (2000: 180–81) terms the discourse of efficiency,
which is linked in business rhetoric to globalization. When applied to the
health-care sector this discourse promotes markets, decentralization and
Although international conditioning frameworks do have a demonstrable effect, domestic sources, notably the dominance of the neo-liberal
paradigm, have been responsible for most of the changes. As with social
policy and services generally, it may be that the full effect of the
international influences lies in the future.
Earlier funding changes, such as the 1977 change to block funding in
the form of Established Programs Financing (
EPF), with minimal conditions attached, had the predictable effect of increasing provincial variations
in medical coverage and billing practices. In 1984 the federal government
responded by passing the Canada Health Act, which reaffirmed the
conditions stipulated in the 1967 Medical Care Act—universal coverage,
accessibility, portability, comprehensiveness and public administration—
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Domestic Neo-Liberalism / 95
and provided that federal funds would be withheld, on a dollar for dollar
basis, for every dollar of extra billing or hospital user fees that provinces
permitted. Reflecting on the experience since 1984, Susan Silver (1996:
77) comments that the “‘stick’ of the
CHA has been effective as long as the
federal government has the political will and the financial means to enforce
The Mulroney Conservative government was constrained from making substantial changes to medicare by the Liberal decision to pass a new
Canada Health Act just before the 1984 election and by the immense
popularity of the program (Weller 1996: 130). The Conservatives were
forced to vote for the Liberal measure or face the prospect of it becoming
the main issue in the election. Having voted for it, they were bound by its
provisions as long as medicare itself retained its public support. This same
constraint also applied to the Liberal successor, though perhaps to a
diminishing extent.
Although rhetorically committed to the principles of the Canada
Health Act, the Chrétien government undermined the federal government’s ability to sustain national standards in the health field. The declining
cash portion of federal transfers for health care purposes (see Table 4.5)
reduced the federal capacity to oppose user fees, private health clinics, the
delisting of covered services, and the variety of other means by which the
market is being allowed to creep into a system previously based on quite
different principles.
The decline in the public portion of the total health bill (from a normal
level of 75 or 76 percent to 69.8 percent in 1997) could be used as an
indicator of “passive privatization,” characterized as “a generalized retreat
of the state from the provision of health care services and an enlargement
of the health space occupied by the private sector” (Burke 2000: 182). As
Burke (183–85) notes, such indicators are but part of an ongoing and
intense commodification of the health system. In a careful analysis of the
determinants of the increased private share of health-care costs in Canada,
Livio Di Matteo (2000) concludes that the decline in real per capita health
transfers from the federal government has eroded the public share in public
health expenditures, a factor combined with the effects of changes in the
distribution of income. In particular, “Those in the top 20 percent of the
income distribution appear to have a preference for greater private health
expenditures,” Di Matteo (2000: 108) points out, referring to the group
that under the neo-liberal paradigm has done rather well in terms of
income share.
The retention of a cash component to
CHST transfers, announced in
the 1996 budget, did appear to ensure continued federal authority.
Questions continued to be posed, however, about whether the federal
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96 / Paradigm Shift
government retained the political will to perform this function.
One leading health policy analyst concluded that the Liberal Party’s
political will was being exercised in an entirely different direction:
The Liberals have done an about face.… A government elected on
the plank of preserving medicare is governing in a manner that
will undermine and then destroy it. The end result for the
Canadian health care system will be its eventual return to the
private, profit-making market. That will inevitability lead to
precisely what the Liberal Party itself said it would in the 1993
election campaign, namely a two-tiered, inequitable system—one
that will be far more expensive and less efficient than the current
one, and yet will suffer from most of the same problems. (Weller
1996: 143)
Even though the Liberals reached an agreement with the provinces to
transfer an additional $23.5 billion over five years for health care, concerns
about the nature of their commitment to a public health-care system
remained. Reports of the new federal-provincial health deal emphasized
that the money came with few strings attached (
Globe and Mail 12 Sept.
2000). Given the recent Alberta legislation, Bill 11, which extended private,
for-profit health care and may have also exposed Canada’s hospital sector
to the provisions of
NAFTA and the GATS (see Evans et al. 2000), this is a
remarkable omission.
(Un)Employment Insurance and Labour-Market Policy
Reduced spending on social support has been accompanied by an
increased emphasis on “active” measures that would enable individuals to
enter or re-enter the labour market rather than remain dependent on social
assistance. As social policy’s star waned, that of labour-market policy waxed,
at least rhetorically. That area entered the process of being transferred from
the federal to provincial level, and there it is likely to function, using
policies such as workfare (Rehnby and McBride 1997), chiefly as a social
control adjunct to residual social programs.
The evolution of Canadian labour-market policy falls into four broad
periods. First came a period of rather limited activity, lasting until the mid-
1960s. Next was a period of increased state intervention, in which
programs multiplied, which lasted through the late 1980s. From the late
1980s to the mid-1990s, an attempt was made to create neo-corporatist
training institutions in the name of achieving a high-skills, high-valueadded competitive economy. That period has largely been succeeded by
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Domestic Neo-Liberalism / 97
the current approach of labour-market deregulation and devolution.
Throughout the earlier periods the active components of labourmarket policy were underpinned by a relatively generous system of
unemployment insurance—one that was often criticized for its generosity
and passivity.
6 In 1996 the federal government announced its withdrawal
from the training sphere and began a radical restructuring of the renamed
employment insurance system along with the transfer of responsibility for
active employment measures to the provinces.
That transfer consisted of a variety of programs funded through the
Employment Insurance account. The clientele who could access them was
for the first time extended to include people not currently drawing
benefits from the unemployment insurance account. Such measures would
include wage subsidies, temporary income supplements, support for selfemployment initiatives, partnerships for job creation and, where provinces
requested, skills loans and grants. Provinces that assumed responsibility for
delivery of active measures could also opt to take over the delivery of labour
market services—screening, counselling, placement—from the federal
government. The federal government was to withdraw from labourmarket training over a three-year period, or sooner if provinces wanted. It
would no longer be involved in purchase of training, funding apprenticeships, co-op education, workplace-based training or project-based training
HRDC 1996a, 1996b).
Some $2 billion would be available for active measures directed to
claimants and some former claimants of unemployment insurance. If
coverage rates had remained constant, the pool of clients to be served by
the devolved programs would expand. Given an actual decline in coverage,
however, the pool would shrink, though without providing any great fiscal
advantage to the provinces. Those individuals not covered by
EI would
require provincial social assistance, and a declining pool might stimulate
future reductions in federal funding.
Three types of active measure were to be transferred to the provinces
immediately: targeted wage subsidies, to aid employers in hiring, and thus
providing on-the-job experience; self-employment assistance to help
individuals start their own businesses; and job-creation partnerships with
provinces, the private sector and communities. Two other programs were
to be pretested: targeted earnings—wage top-ups to encourage the
unemployed to accept low-paid jobs; and skills loans and grants, which
would be implemented only with the consent of a province. Under this
program funds would be made available so that individuals could choose
the form of training best suited to them. This approach rests on the
observation, disputed by some provincial officials (interview, B.C. official,
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98 / Paradigm Shift
March 1998) that better results, defined as end-of-program employment,
are obtained when people share in the costs of the training they receive
HRDC 1996c: 17–18).
Despite the asymmetrical arrangements that are emerging as a result
of devolution to the provinces, some common neo-liberal principles run
through the new labour-market development agreements. For example,
they typically contain language committing the governments to reduce
dependency on public assistance, and they elicit a commitment, on the part
of those who do receive assistance under employment benefits and support
measures, to take primary responsibility for identifying their own employment needs and locating services necessary to meet those needs. This
approach includes, if appropriate, sharing the cost of such assistance (see,
for example, the Canada–British Columbia Agreement on Labour Market
Development 3.1.h).
Indeed, the “results”-based orientation of the Employment Insurance
Act consists precisely of these targets and, measured by these standards,
achieved early success. Reporting to the minister on the first year of
experience with the new act, the Canada Employment Insurance Commission showed that income benefits had declined by 8.4 percent, the
number of initial claimants had dropped by 14.5 percent, and there had
been an increase in the number of clients receiving short-term interventions such as information and counselling and a decrease in those receiving
longer-term interventions such as training. As a result, “average costs per
participant in Employment Benefits and Support measures declined from
$7300 to $3900,” or by 46.6 percent (
HRDC 1998: ii–iii).
The federal authorities retained a limited range of labour-market
policy responsibilities—employment insurance benefits, provision of a
national system of labour-market information and exchange, support for
interprovincial sectoral development and developing responses to national
economic crises, and jurisdiction over a one-time Transitional Jobs Fund
HRDC 1996b: 1). But these reforms completed a long-term trend to
ending federal Consolidated Revenue funding for employment measures.
Any future federal money for these purposes will come from the employment insurance account. On current evidence, many of the services that
remain will be contracted out.
The federal government also restructured the unemployment insurance system (HRDC 1995). The program had already ceased to be generous
by international standards. The 1996 changes to the system (see
1996b) included calculating qualification periods in terms of hours
worked rather than weeks worked. The department claimed that this
would be more equitable for part-time workers and women workers in
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Domestic Neo-Liberalism / 99
particular, and that it reflected the labour-market reality of increasing parttime work. Other changes reduced the benefit replacement rate for repeat
claimants and introduced a supplement for low-income family claimants,
increased the clawback of benefits from high-income earners and reduced
premiums and maximum insurable earnings.
Coverage declined sharply. A Canadian Labour Congress (1999) study
based on Statistics Canada data shows that in 1997 the percentage of
unemployed workers covered by UI was less than half of what it had been
in 1989—36 percent as compared to 74 percent. Women, whose coverage
had declined from 70 percent in 1987 to 31 percent in 1997,
8 and young
people—55 percent to 15 percent—were particularly hard hit (see Table
The primary reason for declining coverage seems to be that the
number of weekly hours required to qualify jumped from fifteen to thirtyfive, with an immediate impact on part-time workers. Women were
overrepresented among this group. Young people were also hurt by the
change in regulations. In their case an additional factor was the tripling of
the total hours required to qualify for benefits, from 300 to 910 hours for
new entrants.
A government study (Applied Research Branch, Strategic Policy,
HRDC 1998) estimates the decline in the beneficiaries to unemployed ratio
at almost 50 percent in the 1989–97 period (83 percent to 42 percent). The
report attributes just under half of the decline to policy and program
changes. The rest is due to labour-market changes such as increased longterm unemployment. The effects were to increase the number of
“exhaustees,” produce more unemployed people who lacked previous
work experience, and increase the number of people who were “selfemployed.”
In addition to the coverage issue, benefits are of shorter duration and
the benefit rate has fallen steadily from 66.6 percent to 55 percent (under
the new system repeat claimants can receive as little as 52 percent). The
Table 4.8
Percentage of Unemployed Receiving Unemployment Benefits
1989 1990 1991 1992 1993 1994 1995 1996 1997 % change

Men 77 77 72 63 59 52 47 44 39 -49
Women 70 69 63 58 52 47 40 37 31 -55
All 74 73 68 61 56 50 44 41 36 -52

Source: Canadian Labour Congress 1999.
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100 / Paradigm Shift
changes not only continue a long-standing process of dismantling the 1971
employment insurance system
9 but also further reduce the individual
security formerly provided by the system.
In fitting with the “reparation agenda,” in September 2000 the Liberal
government announced the reversal of several of its 1996 reforms to the
unemployment insurance system. These included removal of penalties for
seasonal workers with repeat claims and an extension of the limit at which
benefits are clawed back to $48,000 from $39,000 (
Globe and Mail 29 Sept.
Made in Canada
Retrenchment of the state has been a chief characteristic of national
politics over the last two decades. While the global context—and the
rhetoric surrounding the need to be competitive and efficient in a global
economy—may have had some bearing on the direction of policy, the
available evidence indicates that the causation has been domestic. This
tendency may be due to the dominance of neo-liberal policy prescriptions
and/or the increased strength of business relative to labour, as power
resource theory might suggest.
10 In either event it is not necessary to look
beyond national borders for an explanation. Significantly, as the federal
deficit came under control and a surplus emerged, speculation grew about
how the government might make use of the “fiscal dividend.” With an
election in the offing there were signs that federal purse strings were
loosening—which only seems to confirm that social policy has been
driven by domestic rather than global factors.
1. But only to some degree: Leo Panitch has referred to welfare’s redistributive
effects as “socialism in one class” (cited in Leys 1980: 52), because the transfers
are largely “from younger, employed workers, to retired, unemployed workers,
workers’ widows and one-parent families.”
2. For a somewhat sceptical view of the claims of “strong” versions of globalization theory, see Evans, McBride and Shields 2000.
3. For a fuller, though still incomplete account of neo-liberal policy measures, see
McBride and Shields 1997, and the contributions to Burke, Mooers and
Shields 2000.
4. As Gamble (1988) points out in his analysis of Thatcherism, the neo-liberal
state was far from uniformly weak.
5. For an overview of monetarism, see McBride 1992: ch. 3.
6. For a review and rebuttal of literature suggesting that the unemployment
insurance system acted as a disincentive to work and hence raised the
unemployment rate, see Jackson 1995: 3–9; see also McBride 1992: ch. 6.
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Domestic Neo-Liberalism / 101
7. Since, at the time of the Charlottetown Accord, the federal authorities
contemplated transferring unemployment insurance to the provinces (interview, former
HRDC official, July 1996), it is possible that further devolution
will occur. Indeed, the posture of
HRDC with respect to contracting out of
functions would seem well suited to preparing the ground for this eventuality.
Such a trajectory has been made more likely by the major shift towards radical
decentralization of federalism favoured by Ontario, traditionally an upholder
of a strong role for Ottawa. An Ontario position paper on the constitution
called for unemployment insurance to be run jointly by the federal and
provincial governments or by the provinces alone (
Globe and Mail 16 Aug.
8. The
CLC’s figures refer only to women on lay-off and do not include those on
maternity leave.
9. See McBride 1992: ch. 6 for details of earlier rounds of restrictions.
10.For a test and partial confirmation of power resource theory in the social
policy area, see S. Phillips 1999.
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