Jim Flaherty's 'No. 1 legacy' was handling of financial crisis

In the end, Jim Flaherty leaves with job No. 1 unfulfilled.

It has long been known by insiders that Flaherty, the only finance minister Prime Minister Stephen Harper has ever had, was headed for the private sector.

But not until he accomplished his main objective of the last few years — balancing the budget.

• Jim Flaherty, federal finance minister, leaves cabinet
• Read Jim Flaherty's statement
• Read Stephen Harper's statement on Flaherty's resignation

The importance Flaherty attached to reaching the finish line was clear not only by the number of times he repeated it, but how prickly he was in 2006 when anyone suggested he had left the Ontario government in deficit.

That shortfall was on his successor's watch, he would insist, not his.

And in the release issued Tuesday, Flaherty returned to the theme: "There is no doubt that Canada's budget will be balanced in 2015," he said. "Canada's fiscal position is the envy of the developed world."

Analysts agree history won't hold the fact he didn't finish the job against him, as the government is likely to return to balance sometime later this year, or early next. With a projected deficit of $2.9 billion and a contingency reserve of $3 billion, the budget in essence is already balanced, they note.

Steady during financial crisis

The lasting legacy of Flaherty's eight years at the helm of second most important job in the government will almost certainly be his handling of the greatest financial and economic crisis the world has seen in seven decades, when a banking collapse on Wall Street in the fall of 2008 set off a chain of events that sent the world reeling.

Flaherty stayed calm and projected an air of confidence, said Ian Lee of the Sprott School of Business at Carleton University.

"His No. 1 legacy is when the U.S. was going over the cliff, and 100-year-old banks were falling, Jim Flaherty kept the ship of state called Canada on an even keel," he said.

Many will argue that Flaherty inherited a strong set of cards and that his handling of the crisis was far from perfect. Thanks to his predecessor, Liberal finance minister Paul Martin, the federal books were in surplus when the crisis hit, despite Flaherty's revenue-draining tax cuts. And unlike America, Canada did not experience a banking crisis.

But Lee says what the finance minister did do still made a difference. As financial markets were freezing, Flaherty interceded by buying up billions of dollars of government-backed mortgages, helping to sustain lending and borrowing in the country.

"I thought that was brilliant because it didn't change the net exposure of government of Canada, but it sent a message to private markets, to the capital markets, to the currency markets, 'We're standing behind these six banks, don't mess with the capital markets, because we're going to do everything we have to do."'

Economist Christopher Ragan of McGill University says the subsequent decision to pump billions of dollars into the economy through stimulus spending in the January 2009 budget would have been difficult for Flaherty, a fiscal conservative.

Known as hard-nosed — he was a leading minister in the Mike Harris government of Ontario — running a $56-billion deficit, bailing out the auto sector and borrowing money to spend like a Liberal — was not what he came to Ottawa to do.

But Ragan said Flaherty was right in going against his instincts, backstopping the economy at a time of collapse in world demand for Canadian exports, leading to massive job losses in the country.

The result, notes Royal Bank chief economist Craig Wright, is that Canada's slump was the shallowest among the G7 and the recovery came quickest and was the strongest. By July of 2009, the economy had halted its slide and begun churning out new net jobs.

Flaherty received international recognition for his efforts. He was named finance minister of the year by Euromoney magazine, as well as earning respect at international fora like the G7 and G20.

Reining in costs

But Flaherty is no borrow-and-spend politician and showed his true colours in later years, said Ragan, when he set the course for eliminating the deficit with a series of cost-cutting measures that trimmed the size of the public service and kept a tight rein on spending.

There were controversies and missteps along the way.

In his first year, Flaherty backed away from a campaign pledge by placing a tax on income trusts, something that still rankles investors.

He agreed to fulfill a campaign promise to cut the GST to five per cent from seven, to the annoyance of many economists who consider the value-added tax one of the most efficient.

He also held the pen for the disastrous economic update report of November 2008, at a time the world was imploding, that seemed to suggest the government was not taking the crisis seriously enough and was unprepared to take extraordinary measures to rescue the economy.

Less than two months later, Flaherty introduced a major stimulus budget — but not before the just-elected minority government nearly toppled.

His No. 1 legacy is when the U.S. was going over the cliff, and 100-year-old banks were falling, Jim Flaherty kept the ship of state called Canada on an even keel.- Ian Lee, Sprott School of Business

Economists also praise him for intervening four times to curb Canadians' appetite for borrowing to buy real estate, although critics point out he had stoked the fires in the first place by relaxing mortgage rules.

Of late, the minister butted heads with some of his colleagues in cabinet — and perhaps the prime minister — over his qualms about proceeding with another expensive campaign pledge that would introduce income splitting for families once the budget is in balance.

Flaherty appears to have lost that battle, but government sources insist the difference of opinion had no bearing on the decision announced Tuesday.

Medical ailments

What may have played a role is a serious skin ailment called bullous pemphigoid that required him to take a powerful steroid-based medication. The changes to Flaherty's appearance have at times been stark, including a bloated face and neck.

It is not known how the disease and medication have affected his stamina, but the 64-year-old Flaherty has of late cut down his schedule, as well as his contact with the media. Last July, Flaherty took to his sick bed during a G20 conference in Moscow, missing two days of meetings.

In his public statement Tuesday, Flaherty said he was "on the road to a full recovery" and that his decision to leave politics was not related to his health.

Flaherty leaves as Canada's third-longest serving finance minister and according to Bank of Montreal chief economist Doug Porter, "one of Canada's most important."