Why it’s time to press the ‘pause’ button on austerity

October 13, 2010

Yesterday’s Update on Economic and Fiscal Projections indicates the federal government plans to forge ahead with austerity measures despite acknowledging that Canada’s economic recovery is ‘fragile’.

In the update, the government claims Canadian jobs are almost back to where we started prior to the 2008-09 recession, leaving government with the task of eliminating its deficit.

Not so fast.  Full-time jobs are not at the level they were before recession hit Canada in October 2008. The jobs created during the recession were primarily temporary and part-time, replacing 211,000 permanent full-time jobs that were lost in the heat of recession. 

That’s not a stable job recovery.

The hard reality is that Canada’s private sector, which should be the engine of job growth, has been in stuck in neutral for some time.  Even with significant stimulus spending peaking in summer 2010, inflation hasn’t risen, economic growth is tepid, and unemployment levels haven’t dropped significantly.

These indicators should be a red flag to any government considering austerity measures. Instead of cutting stimulus and government spending, why not extend it until Canada is truly back to where we started: About 6% unemployment and a stable full-time job recovery?

The economic update reveals a glaring disconnect between the federal government’s stated goals of focusing on “jobs and growth” and its austerity agenda, which could do more harm than good.

During a steep recession, the government managed to spend billions on security for the Olympics and G-20 meetings, fund new jails, escalate military spending to new heights and dispense a massive corporate tax cut.  The willing to spend on some things, but not others, is there. It’s a question of priorities rather than a question of whether it’s time for a round of austerity.

Let’s look at the facts:

Canada has, by far, the lowest debt load of the G7 countries. 

Our debt load is so low that Canada could run up another $475 billion dollars in debt and still beat Germany (which has the second lowest debt-to-GDP ratio at 62%). 

To boot, KPMG already ranks Canada second only to Mexico as the most tax-competitive country to do business and our corporate taxes are still declining. 

In light of this evidence, and a ‘fragile’ economic recovery that even the Finance Minister admits, it remains unclear why there would be a rush is to kill stimulus spending and start cutting services. At most, we’d eliminate the deficit a year or two early. We’d continue to give businesses an expensive tax cut while regular Canadians find it harder to get a job and are stuck with inadequate Employment Insurance provisions.

In terms of projections, the government does not appear to be particularly open to changing course if the economy degrades and we enter a double dip scenario.  While the government did round down private sector average GDP projections by 0.5%, this seems more like a number from a hat than proactive planning. 

It’s important to be clear about the reality of the fragile recovery and equally important for our governments to remain nimble.

  • The government has bent slightly since the March 2010 budget on only two issues:   It will provide a short reprieve for the scheduled increases in EI premiums. This is a clear benefit for businesses and those already employed, although it does nothing to help the unemployed.  The extension of EI benefits for a longer period and with fewer hoops to jump through would help the actual unemployed, those worst hit by the recession.  Unfortunately there is no action there.
  • The second policy change is the potential continuation of provincial health and social transfers at their present escalators after the current agreements expire.  Previous budgets had suggested provincial transfers might be cut after their term expires.  The government has least now included these costs in their projections even though they haven’t officially committed to implementing them.

Far more government action will be needed in the months to come, to avoid a double-dip recession and to ensure the job recovery is a real one. On both fronts, austerity isn’t the answer – especially when the world economy is not yet out of the woods.