When Chrétien came into office he inherited an array of economic difficulties that had cost the Conservatives the 1993 election. Facing slow growth, high unemployment, and an out-of-control budget deficit, Chrétien sought to revive the economy by bringing social spending under control. Under a program of strict austerity measures, his government managed to bring the budget deficit close to zero, keep inflation in check, and spur economic growth. However, the unemployment rate barely fell, remaining at 9.5% by the time Chrétien called the 1997 election. Because of his poor showing in so many provinces, Chrétien promised to change his focus. Responding to Conservative voters along the East Coast, who have felt the effects of cuts in social programs but have not benefited from economic growth, he promised to spend more money for job creation and social programs.
By far the biggest problem that Chrétien has had to face during his tenure has been the increasing regional fragmentation that threatens to split the country in two. At issue is the province of Quebec, whose secessionist Bloc Québécois was the official opposition party until mid-1997. Outnumbered more than two to one by English speakers, Francophone Québécois have long sought constitutional recognition as a "distinct society" within the Canadian federation. Amidst complaints of being treated as second-class citizens, Quebec has twice since 1980 held a referendum to decide on the question of leaving Canada and becoming an independent country. In 1995 the province came within a small margin of voting for secession, as the federalists (those who support unity) won with only 50.6% of the vote. Chrétien, from Quebec but adamantly opposed to a split, only began to vigorously campaign against secession when it appeared that the federalists might lose. In the end, it was the Anglophone vote which tipped the balance. Lucien Bouchard, who led the secessionist movement and is currently premier of Quebec, has vowed to continue the fight for an independent Quebec, promising another referendum in the years to come. However, Chrétien has moved to thwart a renewed fight by working to provide the constitutional recognition that Quebec has sought.
The consequence of this longstanding conflict has been a backlash, especially in the Western provinces, resulting in the success of the Reform Party. Drawing the bulk of its support from British Columbia and Alberta, Reform politicians have expressed resentment toward Quebec, questioning its demands for special treatment. Led by John Reynolds, the Reform Party has said it would be willing to let Quebec go rather than give it special recognition and preferences. With Reform now the official opposition in parliament, there is concern that Manning will galvanize nationalist sentiment in Quebec, further exacerbating what has been called the "balkanization" of Canada.
In addition to the difficulties of regional fragmentation, Chrétien has also had to address the grievances of Canada's Native American population. In the face of increasing economic expansion, many tribes have protested that they are being disregarded, and several have turned to militant tactics to make their grievances known. Adopting a more traditional conception of land ownership and usage, many groups are questioning the idea that "Canadian" is their only identity. In 1999, the government established a new territory, known as Nunavut, whose population of 25,000 is 85% Inuit.