Austerity or not seems a question we may have to answer.
Our public sector unions will argue austerity is counterproductive. It results in an increase, not a reduction in the debt-to-gross domestic product ratio. Cuts in government spending as a substantial part of GDP (in Newfoundland and Labrador) reduces GDP more than the debt, leading to no improvement in economic circumstance, not to mention nasty layoffs and wage reductions.
But austerity also lowers the need for taxation by reducing spending. Cutting spending and using the savings to pay down debt and its cost means less debt and more money for other things, like not paying for debt and providing incentive to business. Lower taxes benefit and grow the economy.
Not also means more revenue to government is required, and if government can’t borrow (our current credit rating is not too good) they must tax (us) to generate revenue. Austerity means less revenue to government is required — less tax, but also the loss of government expenditure in local and regional economies.
Our current dilemma, which is best?
I’m not an expert, but contrary to populist wisdom from local union reps citing numerous austerity studies and telling us austerity is like “throwing away masks and drinking bleach,” the C.D. Howe Institute has compiled austerity data and states “spending-based austerity plans are ... less costly than tax-based plans.” That is, a reduction in government spending (austerity) is less expensive than having to increase taxes to maintain high levels of government spending. That is, austerity can be good.
The study also says less government spending (austerity) has zero effect on productivity and business investment, leads to reductions in the debt-to-GDP ratio — good for us and the economy. Servicing the debt leads to a reduction in its cost, the cost that we all have to pay to borrow more money so that we can pay for the higher-than-the-Canadian-average wages of the public sector that works in this province.
Shucks, it’s only one study that contradicts the populist notion of local leaders that austerity is bad. Then again, it was completed by a non-profit, non-partisan Canadian research group that has the objective of creating sound economic policy, paid for by us. The same group that, in a more recent study of our current debt crises, “The Rock in a Hard Place: The Difficult Fiscal Challenges Facing Newfoundland and Labrador,” said, “ ... program spending significantly and chronically in excess of other provinces constitutes by far the largest factor explaining the province’s current fiscal challenges.”
Austerity or not? Ours is the choice. We’ve been spending like crazy and going nowhere for a while now. I say give austerity a chance.
R. James Weick
St. John’s
