Restraint now is worse than wrong, it's dangerous

NUPGE's national secretary-treasurer says Canada’s debt is much lower than most countries – nowhere near to being a serious problem – and there is a lot of proof that government spending cuts are the wrong approach.

By Larry Brown
National Secretary-Treasurer
National Union of Public and General Employees (NUPGE)

Ottawa (7 Sept. 2010) - There seems to be a remarkable consensus in Canada, among government leaders of almost every political stripe, that now is the time to attack government deficits and the main way to do so is by slashing spending.

This consensus is remarkable because it is so glibly and commonly asserted and yet it is so fundamentally wrong-headed, even dangerous.

The argument that Canada has to cut government spending to avoid an unbearable debt load is way off base from the start. Canada’s debt is way lower than most countries and nowhere near to being a serious problem.

By the year 2010, the economic powerhouse, Germany, will have a total debt burden of over 80% of GDP, while Canada’s total debt burden will be just over 30%. The other G7 countries have a much, much higher current and projected debt burden than both Canada and Germany.

On top of that, the notion that the way to attack deficits is by slashing spending would be wrong-headed under almost any circumstances, given that what we have in Canada is clearly not a government spending problem but a government income problem. Our governments wisely spent extra money on stimulus to address the biggest financial crisis since the Dirty Thirties but most of that was not basic or ongoing spending.

Classic misdirection

The ongoing, basic problem is that Canada’s governments have slashed their tax revenue by giving tax break after tax break to large corporations and wealthy individuals. To fix that problem by cutting government spending, which means cutting public services that people rely on and cutting the jobs and incomes of public sector workers, is a classic case of misdirection.

But to take the ‘slash and burn’ approach now is worse than simply wrong-headed. It’s also a dangerously misguided idea.

We could figure that out easily enough – the world is increasingly nervous about the state of the global economy, with fears that the Great Recession is still lurking, ready to flatten our economies once again. The U.S., our biggest trading partner, is considering a new round of stimulus spending because their economy is so shaky.

Canada’s growth rate has itself flattened to an unimpressive level and there are real fears that this will get worse before it gets better. There is nothing in the figures to give hope to the unemployed; the unemployment rate increased to 8.0% in July. Almost 150,000 permanent employee jobs were lost in a month and there are some 1.5 million workers still unemployed – up more than 350,000 from before the recession.

How can anyone think this is a time to cut back on the government’s role?

International agencies don’t think so. The International Monetary Fund (IMF) states that "as a general strategy, most advanced economies should not tighten fiscal policies before 2011, because tightening sooner could undermine the recovery." The International Labour Organization (ILO) warns that "a premature fiscal retrenchment could damage growth and lead to even larger deficits and debts."

Devastating results elsewhere

But there is an even easier way to decide that this is not the time for drastic cuts. We can simply look at countries where this approach has been followed and measure the economic devastation that has resulted:

• Ireland was among the first countries to slash government spending – with a drastic austerity program. The government cut wages for teachers, nurses and public sector workers. The result of this austerity? Record unemployment, now at over 13%, rising government debt, even shrinking private sector investment. Leading economists are telling the government that the cuts risk killing consumer demand and economic growth. Gross domestic product (GDP) has plummeted.
• Greece, a famous example of the problems caused by tax cuts and insufficient government revenue, was forced by the financial markets to chop away at government spending. The result? Greece’s unemployment has jumped by a record amount from 8.5% to 12.5%. The Greek economy has shrunk by 4% in one year and the recession in Greece is projected to last longer than elsewhere. Even the IMF predicts years of high unemployment and slow growth. Those factors will guarantee that the government’s revenue will be stagnant, so government debt will stay high and will actually increase from 115% of GDP to 149% of GDP by 2013.
• Latvia was forced by the IMF to make major cuts in government spending. The result? The country has experienced its worst two year economic downturn ever. GDP shrunk by over 25%. Unemployment is at over 22%. Cuts to education will harm the economy over the longer term. Government debt has increased, not decreased.
• Romania, more or less, is the same picture. The IMF imposed severe restraint in government spending, with cuts to public wages and pensions, and the economy collapsed, shrinking by 7.1% in 2009. It is now predicted to contract by as much as 0.5% this year.
• Britain has announced what are described as the harshest cuts in a generation and most observers expect that the result will be a major set-back to the economy, much slower growth and, if that holds true, the result will be higher government debt because of lower revenues from taxation.

Not a new phenomenon

This is not a new picture, not just responses to the Great Recession. Argentina was forced down the same road almost a decade ago. By following this kind of austerity model, the government nearly wrecked the economy and it wasn’t until their government abandoned that model and began to use government spending to bolster the economy that things turned around; the result was many years of high growth levels. It is interesting that Argentina has said that the conditions imposed on Greece are doomed to failure, a lesson learned from bitter experience.

It’s quite simple, really. If an economy is shrinking, government revenues will also shrink, and restraint in government spending is one way to lessen economic growth. If you went to the doctor because you were starving, would you accept a prescription for appetite suppressants?

Would anyone willingly take medicine if nine out of ten of the patients who have taken it have gotten seriously ill? Not likely. So why would we take an economic medicine that is almost always the cause of a serious economic crisis? Could it be the triumph of ideology over experience?

NUPGE

The National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good. NUPGE