No love for downward shove

Opinion

Hey there, time traveller!
This article was published 11/02/2017 (2832 days ago), so information in it may no longer be current.

Here comes the “downward shove.”

It may not be familiar to a lot of people, but economists use this term to describe what happens to an economy when governments stop spending.

In slow or no-growth economies, a government’s capacity to maintain or even increase spending becomes increasingly important. And that is not just the opinion of left-wing economists and think tanks; economic experts from across the political spectrum tend to agree that austerity is not a good policy when the economy is stagnant.

Back in 2012, just a couple of years past the global recession, the federal Conservative government was getting ready to dish out some tough budgetary love in the form of job and spending cuts. Unfortunately, those plans collided with an unexpected slowdown in the economy. For a few months, Canada’s economy officially shrunk, causing economists to warn that a second recession might be in the cards.

As former prime minister Stephen Harper and finance minister Jim Flaherty prepared to wield their knives, BMO chief economist Doug Porter wrote a widely publicized briefing note that cautioned the federal government from cutting too deeply, too quickly. “We would simply ask… to what end?” he wrote in January 2012.

“The markets are not exactly braying for deeper restraint from Canada… Meantime, growth has slowed — our call of a 2 per cent GDP rise this year is on the optimistic side of consensus — and hardly needs another downward shove from even deeper restraint than the already formidable tightening expected from the provinces this year.”

That was then, but it could also be used now to describe fiscal policy in provinces such as Manitoba. After assuring voters he would not turn to austerity solve his deficit problems, Premier Brian Pallister has shown a newfound lust for spending and job cuts. It’s a policy that could very well provide that downward shove to the economy.

For Pallister, austerity has gone from “unlikely” during last year’s election, to a “possibility” just after he got elected, to a “need” after his first truncated budget, and more recently a “must” as he readies his government for its second budget.

The government has cancelled more than $1 billion in health-related infrastructure, laid off dozens of senior managers, cut tens of millions of dollars from the highways budget, and cancelled a number of high-profile projects such as the proposed Manitoba Liquor & Lotteries downtown headquarters.

More recently, we have seen public school funding cut back to a one per cent increase, which is really a cut when you take inflation into account, while Manitoba Hydro has announced plans to eliminate 900 jobs and other Crown corporations have been told to cut management ranks by 15 per cent. Meanwhile, the province has served notice to public-sector unions that it may table wage and benefit control legislation with this spring’s budget.

Will all this balance the budget? The provincial treasury has not realized the savings from all of the austerity measures, but it is important to note the deficit has continued to rise over the past fiscal year despite a lot of belt tightening. So, for the time being, we are enduring a lot of austerity without a clear sense it will actually reduce the deficit.

On the other hand, there is a good likelihood it will shrink the economy. Austerity measures introduced to date will eliminate hundreds of millions of dollars in economic activity.

The job cuts at Manitoba Hydro alone will take $65 million out of the economy on an annual basis. Cuts to infrastructure spending are even more problematic from an economic perspective; $1 invested in infrastructure typically produces $5 in economic activity. The $50-million cut in the highways budget has the potential to eliminate up to a quarter of a billion dollars in economic activity.

Why would Pallister run the risk of dampening an already sluggish economy with austerity?

When asked about whether he is concerned about the downward pressure his austerity policies may have on the provincial economy, Pallister has done an excellent job of avoiding a direct answer. He has talked about the unfairness of shackling future generations with a growing deficit, and the threat of another credit rating downgrade. That happened twice – in July 2015 and July 2016 – and another downgrade would likely increase the government’s cost of borrowing. The more money paid out to service the debt, the less is available to pay for programs.

Pallister is also no doubt concerned about the likelihood of enormous, unbudgeted expenditures from a flood or forest-fire event.

Snowfall across southern Manitoba and eastern Saskatchewan has been significant this winter. Given that the soil had a high moisture content before winter set in, this is setting the stage for significant flooding and hundreds of millions of dollars in costs related to flood mitigation and infrastructure erosion. Remember, the province hasn’t been able to afford all of the repairs and flood-fighting improvements identified after the last significant flood event in 2012.

Combine all those factors, and there is a case for some drastic action. And given that the premier is fundamentally opposed to any kind of tax increase, austerity is the only option left.

However, it may prove to be mathematically impossible to erase the province’s deficit solely by cutting jobs and spending. At some point, Pallister is going to need a boost in revenue. Pallister will have to ensure that whatever he does to tackle the deficit doesn’t inadvertently make the hole he is trying to climb out of any deeper.

The full extent of the premier’s new-found appetite for austerity will come this spring when he delivers his second provincial budget and lays all his cards on the table. During last year’s election, Pallister argued a balanced approach of smaller spending increases and measures to spur economic growth would eventually help Manitoba overcome deficit financing

Let’s hope the premier still believes in a balanced approach. Otherwise, he and his government will be responsible for the aforementioned downward shove that turns a precarious economic situation into a full-blown economic crisis.

dan.lett@freepress.mb.ca