The Irrational Fear of Austerity

Activists, students, and public sector workers joined together last Halloween in Montreal and paraded through the streets ghoulish effigies of Quebec Premier Philippe Couillard and Finance Minister Carlos Leitao wielding bloodstained chainsaws to express their disdain for the Parti Liberal du Quebec’s (PLQ) 2014-15 budget. These protests painted a grim picture of the province’s future if the cuts were executed.

Several months later, Quebec’s economy is still functioning and blood is not running through the streets. Protesters have reorganized en masse, however, in an attempt to revitalize the 2012 Maple Spring protests and unions and student groups voted for strikes in the next several weeks. Much of the grievances come in response to cuts to education and the passage of the controversial Bill 3, which reformed public sector pensions to the relative detriment of pensioners.

The PLQ’s approval ratings have fallen sharply once the electorate felt the reality of their budget. Opposition parties, ranging from Coalition Avenir Quebec on the right and Quebec Solidaire on the left, have been taking advantage of the situation by volleying criticisms toward the Couillard government. Nevertheless, Leitao seems to be holding fast to his plan by emphasizing a stable investment environment, productivity growth, and tax reform as the path toward fiscal solvency. The PLQ promised to balance the budget for 2015-16 without raising taxes on Quebecers and their plan appears to focus on cutting evenly across the board, thereby spreading the pain around, while holding the line on spending in the coming years. Following their projections, growth-fuelled revenue should outpace spending growth, which would eliminate the deficit.

Protestors demand an end to or reduction in the cuts to social services and various groups have been pushing for to increase corporate and top-tier personal income tax rates, reduce business subsidies, and eliminate corruption. Lastly, they would like an end to dubious and frivolous spending. In any case, as illustrated recently in a Fraser Institute study, Quebec’s debt is a mammoth problem and it is only growing scarier. Public debt per capita and the province’s debt-to-GDP ratio, for instance, are the highest among all Canadian provinces. Indeed, it is a struggle to find another subnational government in a poorer fiscal state.

Boasting an unusually large debt burden can be disastrous: interest rates, for example, may rise unexpectedly and such a development could jeopardize scarce public funds. As a matter of common sense, Quebec should begin reducing its public debt burden. William Watson even considers the “Grecification” of the beleaguered province to be a possibility.

Considering that Quebec already has some of the highest tax rates in North America, spending control is evidently where the bulk of reform must happen. What is a government to do?

Protestors in Quebec have a right to feel frustrated. Quebecers have grown accustomed to generous social services as government after government spent beyond its means, and thus, they have never had to reap the consequences of such uneconomic behaviour. Provincial governments have also resoundingly mismanaged fiscal matters and corruption is widespread. Naturally, those protesting in the streets have begun looking toward the top percentile of the income distribution to bear the responsibility of balancing the budget. Yet, one wonders if these protesters have an alternative budget in mind that would not require raising taxes to crippling levels.

Much of Quebec’s austerity would have been rendered unnecessary of increases to tuition, daycare, and other government services had been indexed to inflation as they should have been for decades, but those options were unpalatable and remain so. Alas, the debt has stayed put and it has put on a few pounds.

Importantly, as Premier Couillard argues, the proposed spending cuts do not actually qualify as “austerity.” Austerity refers to an attempt at shrinking the state through spending cuts. The PLQ is not proposing this solution to the province’s debt situation. Instead, it is proposed a reduction in the growth of spending, which is mild by all measures of comparison.

But, as previously mentioned, protesters have a right to feel frustrated. Leitao’s budget will increase subsidies to small and medium enterprises, reintroduce the controversial economic development “Plan Nord,” and increase spending in other areas, ostensibly to encourage economic activity. More importantly, perhaps spending cuts should be more specific, as opposed to the provincial government spreading them around all departments. Public sector pension reform was necessary, however, spending cuts in the realm of social services could have been much friendlier. Lastly, one must consider whether it is appropriate to cut spending on education in light of Quebec’s universities performing worse each year in international rankings.

It could be more palatable, and more economical, to replace some of the spending cuts to education and health by eliminating business subsidies and scrapping Plan Nord, which, in particular, is a very expensive and ambitious project dating back to the Charest era to “develop” energy and mining sectors in Northern Quebec. The province would be better served by focusing on fiscal health and tax reform and by cultivating a commerce-friendly environment. Enacting Bill 78­-styled protest repression measures, however, will almost certainly not calm things down.

All said and done, the Leitao budget is a reasonable and effective one for sorting Quebec’s fiscal mess. It is imperfect, but it mostly makes good sense and it is moderate in nature. Thus, the province’s long-term economic prospects depend on its success and, ultimately, protesters will have to join the rest of the province and confront the reality that debt cannot be reduced without everyone taking a haircut.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

In Defence of Choice and Competition: Vouchers and Charter Schools

Education reform is typically a controversial and polarizing issue. Student performance is falling below the national average in some provinces such as Newfoundland and Labrador, however, and the rationale for reforming the public education system seems clearer than ever. Yet, revisiting how provincial governments deliver education does not necessarily mean creating more government programs and more bureaucratic red tape. Instead, there are two alternative reform paths that will be the topic of discussion in this article: vouchers and charter schools.

By definition, a school voucher is a funding certificate issued by the government to parents who wish to enroll their child in a private school or, in some jurisdictions, who choose to homeschool their children. The values of these vouchers typically reflect the cost of educating a student at a public school. They reduce barriers that prevent parents from sending their children to privately-owned institutions, which may provide higher-quality education or education programs that are more suitable for their children’s needs. Critics of school vouchers argue that they force public schools to compete with private schools and that the diversion of funds away from the former results in lower-quality education for those who cannot afford a private alternative. Yet, while it is true that implementing a school voucher system would force public schools to compete with private schools, several studies indicate that student performance improved in jurisdictions wherein competition is rife.

Another alternative is that of the charter school system. Charter schools are publicly-funded, privately-operated autonomous schools operated by groups of educators and parents. These schools feature flexible curricula and offer unique educational programs, but they must demonstrate that their programs are different from what other schools offer and they must be held accountable to the provincial government.

Since elected officials in Alberta enacted the School Amendment Act in 1994, charter schools have played an important role in the province’s education system. And, like the implementation of a voucher system, the charter school system has demonstrated the value of competition and choice. One study indicates that charter schools have been better equipped to advance student learning and another study argues that the success of Alberta’s charter school experiment should be the rationale for expanding it.

In reviewing the successes of both the school voucher system and Alberta’s charter school experiment, it becomes increasingly evident that competition-driven reforms that emphasize individual choice deserve the attention of elected officials in Atlantic Canada, particularly in Newfoundland and Labrador. Parents could then decide what school will best meet the needs of their children and public schools would have an incentive to improve student performance outcomes by developing more effective curricula. Indeed, a rising tide lifts all boats.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Melting Newfoundland’s Tuition Freeze

Recent comments by the Auditor General of Newfoundland and Labrador have sparked debate throughout the province surrounding public investment in post-secondary education. Specifically, the Auditor General suggested the need to review the existing tuition freeze and evaluate whether it has been effective. By considering the high costs of the tuition freeze and the lack of significant benefits, however, it is clear that ensuring fairness for provincial taxpayers requires some form of change. Thus, the provincial government should consider removing the tuition freeze in the upcoming provincial budget.

In 2001, the Government of Newfoundland and Labrador announced a program to freeze tuition in an effort to keep post-secondary education affordable in the province and encourage enrolment. This program focused primarily on increasing core funding to two post-secondary institutions in the province, namely College of the North Atlantic (CNA) and Memorial University of Newfoundland (MUN), including spending over $282 million since 2005. Further, tuition was lowered every year from 2002 to 2005 for a total decrease of 22.7 per cent at the cost of over $50 million. Now, provincial tuition rates are second only to Quebec for affordability, yet the question remains: has this investment been worth it?

To consider whether it has been, it is important to evaluate how effective the tuition freeze has been in meeting the goals that the policy was to address. The provincial government implemented a tuition freeze for two reasons: 1) encouraging university enrolment in a province that has an ageing population and substantial outmigration in the last half-century and 2) helping ensure that post-secondary education for residents of the province is affordable. An appeal to the evidence, however, shows that this policy has not effectively met these goals.

While there are serious demographic issues set to face the province over the coming decade, including severe labour shortages due to a lack of young skilled workers in an ageing workforce, the tuition freeze has not been successful in attracting skilled young people to enrol in provincial institutions or to stay in the province after graduation. Instead, we have seen increased enrolment from out-of-province Canadian students who pay the same discounted rate. Out of province enrolment has increased by 64 per cent, however, less than half of them (43 per cent) are staying in the province after graduation to work and live. Further, enrolment for provincial residents has actually decreased by 13 per cent in the same period. This development should signal to the provincial government that the policy is not working. It also shows massive inequity for provincial taxpayers who subsidize students from other provinces to earn a post-secondary education.

Furthermore, while the tuition freeze was put in place to ensure that provincial residents can afford to earn a post-secondary education, the existing policy ignores recent reforms made to the provincial student aid program that already ensures this possibility. Over the last decade, the Government of Newfoundland and Labrador has invested over a $100 million in their existing student aid program and has modified the program criteria to ensure more students are able to access Student Aid services. Most notably, the Government has announced the conversion of provincial student loans to non-repayable grants to take effect this fall. These reforms have significantly reduced the barriers for provincial residents to earn a post-secondary education and would continue to assist students in earning an education without the continued implementation of a tuition freeze.

As indicated in my last blog post, faltering oil prices means severe consequences for the government of Newfoundland and Labrador and illustrates a need to curb spending in risk of a near-billion dollar deficit. By cutting the tuition freeze, Newfoundlanders and Labradoreans would no longer be subsidizing the tuition rates of out-of-province students, nor be on the hook for an ineffective public policy.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies