By PATRICK WEBBER (AIMS Research Associate)
Financial Post, 20 December 2016

AIMS Research Associate Patrick Webber discusses his AIMS paper Measuring Austerity in Atlantic Canada. He outlines how, contrary to the rhetoric of anti-austerity advocates, all four Atlantic provincial governments have increased real absolute and per-person spending since 1980.

“Austerity” has become a popular expression in discussions of public finance. It has gained the most currency in Europe, but has also found adopters in Atlantic Canada. Opponents of reducing government spending in the Atlantic region accuse the provinces of pursuing wanton cuts for the sake of the bottom line.

In a recent report for the Atlantic Institute for Market Studies, entitled “Measuring Austerity in Atlantic Canada,” I examined government program spending going back to 1980. The study provides an objective answer to the following questions: Are the charges of austerity against the provincial governments legitimate? And has there been any instance of austerity policies in the region over the last 35 years?

For the report, I described austerity as a severe and sustained cut in real program spending — that is, total spending less interest paid on debt.

A reference point for recent austerity is the spending cuts of the European “PIGS” countries (Portugal, Ireland, Greece and Spain) following the 2008 economic crash. In a two-year period, Spain cut real program spending by 18.9 per cent, while Ireland made cuts of 24 per cent over four years. Greece and Portugal enacted even more severe cuts, with both countries reducing their budgets by nearly 25 per cent in just two years.

How does Atlantic Canada compare?

Since 1980, the biggest stretch of unbroken spending cuts in the region was in Prince Edward Island between 2014 and 2016, with a real program-spending reduction of 7.5 per cent, far below the PIGS’ experience. Since 2008–09, all four Atlantic provinces have increased real net program spending.

Any pauses or decreases in spending have been minor and quickly reversed. In 2016 dollars, program spending per capita between 1980 and 2016 increased in Prince Edward Island by 61 per cent, in New Brunswick by 89 per cent and in Newfoundland and Labrador by 114 per cent. From 1980 to 2014, Nova Scotia’s spending increased by 93 per cent.

Expenditure increases often lie on dubious foundations. For example, the spending blitz initiated in Newfoundland and Labrador in the 2000s was based on an offshore-oil royalty bonanza, with revenues peaking at $3 billion in current dollars in 2010–11. These revenues have since collapsed to just $485 million in 2016-17, yet spending levels remain stable, dropping by only 0.6 per cent in this year’s provincial budget.

P.E.I.’s spending has been encouraged by federal transfers that have made up roughly 40 per cent of total provincial revenue every year since 2000. New Brunswick and Nova Scotia receive less in transfers as a percentage of revenue but are still dependent on them.

All four Atlantic provinces barely cope with their debt levels (on average, $17,000 per person) thanks to low interest rates. An increase in rates, as happened in the early 1980s, would have a significant impact on provincial coffers.

Between 1980 and 1985, debt-servicing costs more than doubled in real terms in Nova Scotia and New Brunswick, and with it the share of tax dollars devoted to paying said costs. To boot, real per capita debt is now 4.7 times greater in Nova Scotia than in 1980 and 4.4 times greater in New Brunswick.

Atlantic Canada needs a debate about government spending, one that is rooted in objective truths and not emotive misrepresentations. Those who call themselves progressive must acknowledge that deficit spending and mounting debt threaten the future of social programs. There is nothing progressive about spending money one doesn’t have or funnelling tax dollars for higher interest payments.

Atlantic Canada is not experiencing austerity. But we need to address our fiscal challenges if we want to avoid austerity in the years ahead.