addressing the deficit's root cause and putting ontario back to work
Post on 01-Nov-2014
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Obvious (if Forgotten)Truth #1:
The Recession Caused the Deficit,
Not “Overspending”
Forgotten History• Budget was balanced for a decade
until 2008 crisis.– Increases in program spending after
2003 were more than offset by tax revenues ( modestly as share GDP)
• Crisis & recession produced recession:– Decline in employment, GDP.– Slight decline in revenue share of GDP.– Slight jump in program spending
(stimulus, social programs).
Budget Balance & The Cycle
2000 2002 2004 2006 2008 2010 2012-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
On
tari
o B
ud
ge
t B
ala
nc
e (
%G
DP
)
fcst
Obvious Truth #2:
Curing the RecessionWill Cure the Deficit
The Recession and GDP
1998 2000 2002 2004 2006 2008 2010 2012350
400
450
500
550
600
650
700
750
On
tari
o N
om
ina
l G
DP
($
bil
)
At 10-yr Trend (4.5%)
Actual
$70b
Simple Math:
$70b lost GDP* 17.5% provincial revenue
share= $12.4b lost revenue
2000 2002 2004 2006 2008 2010 201260.0
60.5
61.0
61.5
62.0
62.5
63.0
63.5
64.0
On
tari
o E
mp
loy
me
nt
Ra
te (
% W
AP
) Pre-Recession (63.5%)
The Recession and Jobs
250,000 jobs
1998 2000 2002 2004 2006 2008 2010 2012150
200
250
300
350
400
450
Wag
e &
Su
pp
lem
enta
ry I
nco
me
($b
il)
At 10-yr Trend (5%)
Actual
The Recession and Jobs (2)
$52b
Simple Math:
$52b lost labour income= $5b lost PIT revenue (@middle
rate)
+ $3b lost HST revenue (disposable)
+ $1b lost EHT revenue= $9b lost direct job-related
rev.
Put Ontario Back to Work,
the Deficit Will Solve Itself• No need for a downward shift in
program spending.• No need to “reinvent” or privatize
public services.• No need to trample on normal
economic and labour rights.
Increasingly Obvious Truth #3:
Misplaced Austerity is Self-Defeating, and (in Extreme) Can Even Make the Deficit
Worse
Self-Defeating Logic
• Recession causes a deficit.• Austerity “solves” the deficit by cutting
public spending & employment.• But that worsens the recession!• At best, austerity swims against the
tide.– Fiscal gains of cutbacks offset in part by
contractionary macro effects.• At worst, austerity reinforces recession
and worsens the deficit.
Recognizing their Errors
• European austerity creating a lost decade:– Euro zone in another recession.– Catastrophe in southern Europe.– Triple dip recession in U.K.
• Even mainstream economists acknowledged idiocy of automatic austerity measures in U.S. (fiscal cliff).
• Ont. converted late to austerity religion.– But are we the last true believers?
Interprovincial Comparisons
Deficit(2011)
Cuts(2009-12)
Deficit(2011)
Cuts(2009-12)
BC -0.8 0.6 Que -0.8 1.4
Alta 0.0 1.6 NB -0.8 1.9
Sask +0.5 2.1 NS -0.7 1.0
Man -1.8 0.4 PEI -1.5 3.6
Ont -2.0 0.8 N&L +2.3 6.1
FED -1.5 1.8
(% GDP)
The IMF’s Epiphany
• Jan. 2013 technical paper co-authored by Oliver Blanchard (Chief Economist).
• Admitted models badly underestimated fiscal side-effects of austerity.– Especially in Europe.
• Apparent fiscal multiplier: 1.5.• Consistent with traditional macro
models, federal budget estimates.
Fiscal Drag in Ontario• Provincial program spending falls by
close to 1% of GDP.• Federal & municipal program
spending falling, too.• Add a 1.5 multiplier: total lost output
could equal 3% of GDP (over some years).
• Unless other economic engines are in gear, this pulls economy back toward recession.
Fiscal Drag in Canada
Consumers Housing Gov't Bus.Invest. Exports GDP-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Can
ada
GD
P C
han
ge,
3Q
12/3
Q11
(%
)
Not-at-All-Obvious Question:
HOW Do We PutOntario Back to Work???
A Big Challenge• Traditional engines of private-sector
growth in Ontario are stalled:– Manufacturing struggling to rebound.– Business capital spending inadequate;
business is hoarding cash.– Exports pummeled by loonie,
globalization.– Consumers can only spend so much.
• Alternative sources of growth require out-of-the-box thinking.– Mainstream doesn’t want to do that.– Left isn’t adequately prepared to demand
it.• Requires more than resisting cuts &
“stimulus”.
Jobs & Prosperity Council
• Formed in context of Lib-NDP budget deal.– But the politics changed!
• 13 CEOs … and Jim!• Recognized challenge: deficit reduction
and living standards require job-creation, that private sector isn’t delivering.
• But confronted lack of imagination of mainstream economic policy (in gov’t too).
• End report: rather lacklustre.
JPC Recommendations• Good ones:
– Strong call for focused industrial strategies.– Business tax breaks should depend on
capital spending.– Supports active procurement strategy.– Wants more Ont content in Alta projects.
• Silly ones:– Symbolic gestures (entrepreneur schools).
• Contested ones:– Regulatory efficiency.– Funding for public capital projects.
A Progressive Jobs Agenda
1. Resist public sector downsizing.–Fight for increased public programs?
2. Increased public capital spending.–And find creative ways to pay for it.
3. Active industrial strategies in key sectors.–That’s how Germany & Korea did it.
4. Resource development in N. Ontario?– With attention to environment.
5. More generalized public enterprise?
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