The Price Of Austerity

Standard · Posted by himelfarb on January 16, 2012 · 57 Comments 

Austerity, we have been told repeatedly by pundits and political leaders, is the defining issue in these uncertain times, the solution to our economic challenges.

We have been given fair warning that the next federal budget will be first about cuts – cuts to government even as we continue to cut taxes. We can expect the same from most provincial budgets.

This, we are told, is what must be done. Austerity is not simply the best way, the argument goes, but the only way, and not just for us but for our friends and allies. Canada has become the champion of austerity.

Politically, it is a pretty potent argument to make. It builds on our internationally recognized success in the 90s in balancing the budget and reducing debt (which unquestionably made us more resilient during the tough times that followed, though with equally undeniable costs to health and social programs, among other things). It draws on a powerful thread that runs through our history – one of pragmatism and frugality. It feeds off our growing disenchantment with government, but also the serious troubles we are seeing elsewhere, in Greece for example. And in this uncertain time, we are told that we have no choice. Austerity is the answer.

Opposition voices are reluctant to offer alternatives for fear of being seen as fiscally imprudent or as stuck in the past, defending “big government”.  And so, presented with no options, we come to believe that in fact there are none.

A good rule of thumb for public policy is that when we are told that there is no alternative, that usually means the opposite: that not only is there an alternative but it is probably one that we would prefer if it were offered.

We do indeed have choices – better choices. Of course we have to be prudent as we dig out of current deficits, partly a result of wise government action to mitigate the worst consequences of the global recession. But this is not the 1990s. Our situation is not dire. Canada is not Greece.

1) This is not the 90s and we are not Greece

Before the 1990s assault on the deficit, about one-third of every tax dollar was going to service the federal debt and dire warnings were circulating that Canada was at risk of hitting a debt wall and falling into 3rd world status with respect to global capital. So we cut.  But the thing is, the global economy was pretty strong and getting stronger. We were contracting; others were spending. As it turns out, economic growth – along with real sacrifice – was crucial in balancing the budget and exceeding all reduction targets. And it didn’t hurt that taxes then were higher.  So deficits turned to surpluses – more quickly than anyone expected – and those tax-fueled surpluses were quickly bringing down our debt.

Today, our level of debt is still the envy of others. But now the global economy is slowing and the future is less certain, less promising than in the 1990s; the recession lingers like a bad cold. Even here in Canada, and we have been pretty lucky, we continue to shed good jobs and, like everywhere else, our markets can expect to be battered by continued volatility. This is not the 1990s. Neither the fiscal urgency nor the economic conditions are the same.

And most important, we ought to understand how we got back into deficit and increasing debt in the first place, at least at the federal level. It was just a few years ago that we were running surpluses year after year. In the year that the current federal government took the reins, the surplus was at $16 billion. Clearly program spending was not putting us at risk. That surplus meant that we would have great resilience in the face of economic downturns – times when we inevitably spend more and lose revenue. It also meant that the federal government would be able to help the provinces, especially those hardest hit and that we would have fiscal room to manage the stresses of an aging population in a way that would be intergenerationally fair.

So what happened? Certainly part of the answer is that we are paying off the costs of stimulus spending made necessary during the recession. But that spending stopped – earlier than some would have hoped –  and so, even with moderate growth, we should be able to return to balance with a bit of prudence and without draconian measures.  If we want to.

But recession spending is not really the culprit. Our big problem is that our revenues as a percentage of GDP are far lower than they were in the 1990s, not just because of recession and slow recovery. In many respects our current and future fiscal challenges at the federal level are self-induced, the result of a succession of unaffordable tax cuts. Just think of the tens of billions annually taken out of our budgets since 2000 – and particularly more recently – in reduced income taxes, capital gains taxes, corporate taxes, and the GST, not to mention the long list of boutique tax “benefits” that amount to little more than tax cuts disproportionately benefiting those who need help least.

So our fiscal situation is not dire, at least not at the federal level.   We are still reaping the benefits from the 1990s decade of sacrifice, and the challenges we do have are largely self-inflicted.   And if we chose to get here, we can choose to get out.

2) Austerity is not fiscally prudent

Let me be clear that I share in the broad consensus that we must be fiscally prudent.   But let’s pause on what fiscal prudence really means: It means spending wisely, reducing waste, collecting sufficient taxes to pay for the public goods and services we want, and keeping debt coming down, at least during reasonably good times.

Of course there is always room to cut and we have important choices to make on our priorities.   I, for one, believe that we probably and understandably overbuilt our security apparatus after 9/11 and that in particular deserves a close look.

And make no mistake, the costly plan to build more prisons and penitentiaries – unjustified by the evidence – either increases our debt or diverts money from priority services such as health and education.

As for waste, it is probably time to look at the layers of bureaucratic control and oversight that make government less innovative and efficient – and arguably less accountable and transparent.   But as our Parliamentary Budget Officer repeatedly reminds us, the numbers here don’t add up; we will not balance the books on efficiencies and cuts to operating budgets.

Yes, government has become too central, authoritarian and remote from our everyday lives. We have a big job to do to close the gap between citizens and their governments. And there are no doubt savings to be had here.  But these are not primarily fiscal issues nor will austerity be the answer to our fiscal challenges.

Today’s austerity, however, is not primarily about fiscal prudence. If it were it wouldn’t be proceeding in tandem with large, unaffordable and unnecessary tax cuts for the most affluent among us.  These tax cuts make deeper program cuts inevitable.

The persistent emphasis on low taxes and cuts to services and public goods  looks more like ideology masquerading as fiscal common sense. In this light, austerity seems rather to be about cutting back the state and rolling out the free market agenda. Less public, more private; less collective, more individual.  It is, in other words, the fulfillment of the neoliberal counter-revolution rather than an economic plan for the future.

We know that some pretty smart economists, Paul Krugman and Joseph Stiglitz for two, have taken on the austerity agenda and tax-cutting neoliberal ideology that underpins it. They argue that this is in fact the time for spending, the time for investments in education and infrastructure and for putting money in the hands of those in greatest need. They argue that the consequences of premature austerity could match what we saw in the 1930s, that in any case, this strategy will not yield the growth and opportunities we need. And, they add, it is also about time to stop the tax cuts and to start increasing taxes on those who can afford it. (And in the U.S., a growing number of rich Americans are calling on their government to raise their taxes.)

Frankly we don’t have to try to weave our way through the debates among economists to be worried about the consequences of austerity. A recent report from the (not-left-leaning) IMF has surveyed the international evidence and has concluded that government spending cuts do not, at least in the short-term, create jobs and growth but do create very significant costs to society, the economy and quality of life for the majority.

3) The consequences will fall most heavily on those who can bear them least

What does the IMF report tell us? The benefits of austerity cannot be seen but its negative consequences can, and these fall most heavily on the people who can bear them least. Specifically, the authors show that austerity, especially when it cannot be offset by significant lowering of interest, brings with it increases in unemployment  – particularly enduring unemployment –  suppression of wages for the majority, and deepening income inequality.

So, as we dig out, we ought to make sure that we are not stripping away the very tools necessary to withstand future shocks and to create jobs and opportunities now and for the future.  We ought to make sure that we are not hollowing out the country, allowing the erosion of those things that give meaning to our shared citizenship and that should be a source of comparative advantage going forward. And we ought to make sure that we are not undermining our ability to invest in those things that will make us stronger and greener for the future.

Austerity will take us down the wrong track.  It is not fiscally prudent.  It is not an economic plan so much as a surrender to the market.  And its costs will be heavy for the most vulnerable certainly, but for us all. So let’s reject the politics of inevitability and look at the choices we have and what the evidence tells us about what works best for the majority, not just for the few, and for the future, not just for now.

We need to have the debate – and the starting point cannot be some assumption about the inevitability of austerity. In fact, it ought not to be about big government versus small government. It ought to be focused on what will work to enhance the quality of life for most Canadians and what will make Canada more resilient for future generations.  It ought to be a debate about what challenges, what problems, most urgently cry out for our collective attention and action.  The preoccupation with austerity should not blind us to what really matters for our collective well-being.

I, for one, would propose that inequality, not austerity, be the defining issue for us now. Income inequality is growing fast in Canada and even the traditional deniers are coming on board. The gap is simply too big, the risks too high to ignore. Indeed, extreme inequality will continue to grow in an agenda dominated by austerity and tax cuts, an agenda that reduces our capacity for mutual aid and for collective solutions to our major challenges – our low productivity, climate change and environmental deterioration, and declining political participation.

Of course we ought to be fiscally prudent and that means asking of each cut and each expenditure, including every tax cut:  will this help reduce inequality or will it make things worse?

Let’s make inequality in all of its manifestations – child poverty, the reemergence of elderly poverty, the squeeze on working Canadians and students, and the excessive incomes at the top – a national priority.

We can afford the investments. We cannot afford to ignore the threat.

Filed under Harnessing the global economy, Improving public institutions, Post featured on front page · Tagged with austerity, budget cuts, fiscal prudence, global recession, IMF, Joseph Stiglitz, neoliberalism, Paul Krugman