Addressing the Deficit's Root Cause and Putting Ontario Back to Work

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?