Public Spending Cuts Are Not The Answer
Nov 15, 2010
The Canadian Centre For Policy Alternatives (CCPA) recently released its annual Alternative Federal Budget. In “Big Train Coming: Does Canada Really Have a Deficit and Debt Problem?,” Canadian Labour Congress Chief Economist Andrew Jackson cautions the federal government about returning to the major public spending cuts of the mid-1990s.
These cuts were part of a larger “national crusade” against deficits and rising debt. Spending cuts in Canada were indeed among the most severe of the OECD nations. Furthermore, Canada relied much more significantly on spending cuts than on tax increases in an effort to lower debt during this period. Between the mid 1990s and 2007, Canadian government spending as a share of GDP fell dramatically, and by 2007 this debt reduction had taken Canada well below the OECD average by the time the recession hit in 2008.
Jackson reviews this recent period of Canadian history in order to warn of the dangers of taking a similar approach today. Highly influential voices are now calling for a major new round of spending cuts as Canada emerges from this period of recession. And it’s very likely that much of the impact of any such reductions would fall upon public health care spending, social programs, and upon public sector workers.
In the short term, Jackson argues that it would be a huge mistake for Canada to “significantly tighten the financial screws, “ as it is far from certain that growth in private investment and exports in 2011 will be enough to offset the end of the federal government’s stimulus measures that will soon be expiring. All components of “Canada’s Action Plan” to address the recession – including Employment Insurance benefit extensions, training, and investment in public infrastructure – will end by early 2011 at the latest.
As an alternative to spending cuts, the Alternative Federal Budget proposes a variety of new sources of revenue. These include higher tax rates for the highest income earners, increased corporate income tax revenues, and an environmental tax. Of course, new and greater levels of taxation are not an economic panacea, and other means of addressing the spending side of the equation are also reviewed. These include innovations in the delivery of health care, a portion of the budget that has been growing faster than any other.
Although a new conventional wisdom is being forged around the notion that Canada must now again endure a period of deep public spending cuts to eliminate deficits and reduce debt, Jackson makes a good case that, although debt has indeed risen as a result of the recession, there will be very major human and economic costs if deficits are eliminated before a real economic recovery has been achieved.
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