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

Envisioning a Better Rural Transportation System

Consider this hypothetical scenario: a very successful company has grown to the point where its consumer base is roughly 100,000, but due to mismanagement, evolving technology, and changes in consumer preferences, that company’s consumer base drops almost 75 per cent to 25,000. As a stakeholder, should you continue to invest in the company to appease a small cohort of loyal consumers, cut your losses, or revamp the business model? Depending on the situation, the latter two options seem to be the most feasible.

In this instance, we are talking Transit Cape Breton.

During its peak, Transit Cape Breton had a ridership of 1.25 million, which has dropped to 320,000 in 2013. Annually, it receives $3 million from the CBRM, however, planned cuts will push that number down to $2.3 million. Predictably, there has been an outcry from the community, mostly from seniors, the unemployed, and the disabled. The largest criticism has come from proposed route reductions and the implementation of a single fare.

Government-funded mass transit is a classic example of the information problem, and to a certain extent the public goods problem. In this case, government is unable to assess accurately the need for transit. Moreover, deciding how, where, and when to provide a service is a political process that results in low-quality, inefficient outcomes. These inefficiencies, however, do not indicate that Cape Breton should not have a transit system–public or otherwise; it indicates the need to revisit the business model and adapt it to the omnipresent “rural disease”–an outflow of young skilled workers, an increase in the amount of seniors, and a deficit of economic development.

There are several ways, however, that the CBRM could develop a profitable transit service.

The addition of smart card passes should be a priority. Reloading them is effortless and they would benefit seniors. Moreover, Transit Cape Breton should engage with the Cape Breton University Student Union and begin negotiating a student transit plan. In Kingston, Ontario, the Alma Mater Society (AMS) at Queen’s University charges students a mandatory $46.50 for an 8-month bus pass. Transit Kingston’s largest source of revenue is the deal they have with the AMS. According to the 2011 Transit System Review Report, a majority of ridership attends the university. The report recommends rearranging routes, zoning, and transit fares to reflect this fact.

Secondly, the municipal government has taken a respectable stance on cutting routes that have low ridership–obviously the government cannot commit limited resources to an area with very low ridership at the expense of high volume zones. However, there are ways in which the government can replicate that service through promoting private enterprise or creative resource allocation. In Richmond County, Nova Scotia, the transit system, albeit a very small one, is a non-profit community based transit line. Facilitating the creation of something similar in communities such as North Sydney, Sydney Mines, Glace Bay, and some areas of Sydney would be beneficial. Additionally, the CBRM could use school busses when they are not in use to serve low volume routes.

Lastly, the CBRM should consider partly- or fully-privatizing transit on Cape Breton Island. The United Kingdom privatized transit in 1985, which resulted in lower costs through increased productivity and employment cuts. York Transit, GO Transit, and Phoenix Arizona have contracted out certain portions of their transit, saving $2 million annually. In Cape Breton, contracting small busses to service low volume routes or amending by-laws to allow independent operators to run certain routes should be an option.

These are only some policy options the CBRM can pursue and most of them have a proven track-record of cost reduction and service improvement. What we can say for sure though is that Transit Cape Breton is in need of a massive overhaul.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies