It’s nearly impossible these days to have a conversation about public finance without someone crying “Austerity!” This term has become the meme of choice for political actors, activists and commentators who oppose any reductions to government spending.
You’d think that Atlantic Canada, with its generous government programs and social safety net, high taxes and large public sector, would be immune to this language. Certainly, there is no comparison between our situation and the experience of many European countries, who have been forced into austerity measures on account of the Great Recession and the Eurozone Crisis.
A new report from the Atlantic Institute for Market Studies quantifies the difference. Entitled “Measuring Austerity in Atlantic Canada,” author Patrick Webber demonstrates the silliness of employing austerity rhetoric here. Over the last 35 years, all four provincial governments in the region have substantially increased their program spending (i.e. total budget expenditures minus debt servicing).
Nova Scotia and New Brunswick, for instance, spend about $5,200 more per resident today than they did in 1980 (about a 90 per cent increase for each). And this figure adjusts for inflation.
By contrast, Webber shows that the European “PIGS” countries – Portugal, Ireland, Greece and Spain – have had to cut their budgets by as much as a quarter over two fiscal years. This “slash and burn” ethic has not taken hold in these nations because of heartless or cruel governments. Austerity is a condition, not a choice, and these countries didn’t wipe their spending regimes because they wanted to. There just wasn’t any money left.
The AIMS report serves as a check on this hyperbole and a warning for the future. With spending having risen so steadily in the last generation, anti-austerity activists clearly need to regain their equilibrium. None of the Atlantic provinces has come anywhere close to the cuts in spending that would constitute austerity measures.
Since 1980, the largest cut to program spending was in Prince Edward Island between 2013 and 2016, totalling a 7.5 per cent decline. (Again, for context, true austerity policies in Europe reached 25 per cent in a shorter period.) In the other Atlantic provinces, however, there was greater spending restraint in the 1990s than following the calamitous Great Recession. And as Webber notes, all four provinces have established a habit of quickly reversing spending cuts whenever they are tried.
Evidence: in Newfoundland and Labrador, Nova Scotia and New Brunswick, the most significant spending cuts since 1980 were undone after one year.
The warning of Webber’s analysis for Atlantic Canada is about the unsustainable nature of these spending regimes. It is certainly true that the Atlantic experience cannot be described as austere. But it’s also true than the circumstance of spending beyond one’s means can’t last forever.
Two aspects of the European experience should give Atlantic Canadians pause. The first involves debt: as Atlantic governments indulge their penchant for budget deficits, they will register greater debt levels, just as the Europeans did. This would be questionable in its own right, but consider as well that today’s interest rates are at near-record lows. A return of these rates to their more normal, historic levels would increase debt servicing costs, meaning that even more public funds would have to be used to service debt instead of paying for programs or reducing the tax burden.
The second lesson is that being part of a larger economic and political union does not protect smaller entities from a fiscal reckoning. Membership in the Eurozone did not prevent the onset of austerity policies in Greece, and indeed forced the Greeks to answer to other countries in their recovery efforts. Likewise, Atlantic Canadian provinces should not assume that being part of Canada will insulate them from the effects of a budget crisis.
Citizens and elected officials should take the message of this report seriously. First, they must stop crying “austerity” where it doesn’t exist, and appreciate the fortune that Atlantic Canada has enjoyed in being able to maintain its government services notwithstanding global economic uncertainty. Second, they should commit to reducing the public debt load and prepare for an increase in interest rates, such that a change in economic circumstances would not force the region to face genuine austerity.