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

Lessons from the Rock: Oil Revenue, Government Spending, and Public Debt

Newfoundland and Labrador has experienced tremendous economic growth in the last decade. GDP per capita, for instance, has increased significantly and is currently above the national average, personal earnings are at record-high levels, and most importantly, the province is no longer a “have-not” province under the federal equalization programme.

Largely thanks to booming oil production, Newfoundland and Labrador has set a benchmark for short-term economic growth. Yet, with oil prices plummeting, the provincial government has implemented a freeze on discretionary spending and placed additional restrictions on public sector hiring. Given the recent expansion of the province’s public sector, however, it is important to consider whether spending restraint is achievable, or whether the provincial government’s decision is simply too little, and too late.

nl public sector employment

In the past ten years, oil revenues have been a major staple of the province’s budget. The most recent budget, for instance, projected offshore royalties to bring in $2.4 billion, representing roughly 36.45 per cent of total projected revenue. Equipped with this enlarged, volatile revenue source, however, the government has continuously increased spending, rather than having enacted measures to improve the province’s position in the long-run, such as paying down the province’s public debt or creating a savings fund.

Between 2005 and 2011, for example, public sector employment increased by nearly 8,000 jobs–17 per cent in six years, which is a rate much larger than that of private sector job growth during the same period. Since 2010, however, offshore royalties have fallen and forecasts suggest a steady decline over the next twenty years. Ebbing royalty flows stem from the end of federalization equalization payments, as per the Atlantic Accord, and the falling value of oil production.

This combination of increased spending and faltering offshore revenues spell fiscal trouble for Newfoundland and Labrador. It is, therefore, important for the government to consider important cuts to the public service to ensure sustainability, lest the provincial government compound the public debt.

If recent history is any indication, it is unlikely that the provincial government will pursue substantive reforms. Instead, projected expenditures are set to increase in the next decade. But with oil prices hovering roughly $40 lower than the budgeted $105 USD per barrel, fiscal consolidation is highly important.

The government attempted to curb spending in 2013 by cutting nearly 1,200 public sector jobs, implementing a long-term public sector hiring freeze, and announcing plans to conduct an efficiency review of postsecondary institutions. But after public backlash, the provincial government reversed many of these decisions, such as lifting the hiring freeze. The efficiency review was also never completed. In fact, the most recent provincial budget features rising expenditures, adding $808 million to existing net debt.

Of course, cutting the public sector is politically sensitive and it requires serious deliberation, but if the provincial government chooses to base spending on volatile revenue sources, it also needs to cut expenditures when receipts fall. These jobs would be lost in the short-run, but in the long-run, consolidating the province’s fiscal situation will lower the public debt burden and consequent spinoff effects will provide benefits for every resident of the province.

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