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Deficit Déjà Voodoo again in New Brunswick

The Fredericton Daily Gleaner published an op-ed I wrote about how the province doesn’t have a structural deficit, despite the government claiming it does. The commentary piece is behind a pay wall so I’ve copied it below.

Last month, CUPE New Brunswick also published a paper I wrote on this issue, Deficit Déjà Voodoo: is New Brunswick really headed off the fiscal cliff? It and a presentation I gave, another blog post and other background material are also available through this post.

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Want to know a secret? There is no structural deficit

By Toby Sanger

The New Brunswick government is engaged in extensive province-wide consultations focused on finding $500 to $600 million in spending cuts or increased revenues to address what it claims is a serious fiscal challenge. It says this is necessary because the province has a $400 million structural deficit, has been spending beyond its means, and additional funds are needed for other initiatives.

There’s just one big problem with this exercise: the province doesn’t have a structural deficit. It’s not that the emperor has no clothes: it’s that he’s hiding them and pleading poverty instead.

A structural deficit is a deficit that continues to exist even when the economy is operating at its full potential output with full employment, while a cyclical deficit is one that exists because the economy is operating below its potential.

If anything, the province has a structural surplus. New Brunswick’s current deficit at $255 million for 2014/15 is a cyclical deficit that is shrinking fast and will soon become a surplus when the economy recovers to its full potential.

New Brunswick, with its unemployment rate at 10 per cent, has a lot further to go to reach its full economic potential.  Let’s say we consider full employment to be when the unemployment rate is down to five per cent. Â With five per cent higher employment and output, the province’s own source revenues, now estimated at $4.98 billion this year, would be about five per cent, or $250 million, higher. These higher revenues and lower spending resulting from lower rates of unemployment would be more than enough to eliminate its current $255 million cyclical deficit.

If that isn’t enough, the province could increase revenues by further reversing some of the ill-conceived tax cuts brought in just before the economic crisis. New Brunswick’s revenues are now 25 per cent of the province’s economy, a full percentage point below its long-term average of 26 percent. Returning to the long-term average would generate additional revenues of $320 million.

The province’s program spending at 24 per cent of the economy is just slightly below its long-term average of 24.1 per cent and in the mid-range for Canadian provinces. Clearly New Brunswick isn’t spending beyond its means, but is collecting revenues below its means and should take steps to increase revenues in a fair and progressive manner, as I’ve outlined elsewhere.

The problem with making further spending cuts now is it will slow down the recovery and make the return to fiscal balance that much more difficult.  Spending cuts have a much larger negative impact on the economy than tax increases do, particularly when the economy is operating below capacity

We saw the same mistakes made by the previous government. Four years ago the Alward government, assisted by former TD Bank economist Don Drummond, also exaggerated how bad the province’s fiscal situation was. This was used to justify significant program spending cuts while the economy was still recovering. New Brunswick was the only province to cut overall program spending in 2011/12. This may have temporarily reduced the deficit, but it resulted in the worst economic slump in 30 years. Unemployment soared to rates above those during the financial and economic crisis and the lower revenues resulted in higher deficits.

In the fall election, New Brunswickers rejected the previous government’s austerity measures and poor economic record and elected the Gallant government instead with its promises to create jobs and grow the economy.

Unfortunately, the Gallant government seem to have misplaced their jobs and growth platform when they entered their executive offices and picked up the previous government’s austerity program instead. They even hired Prime Minister Harper’s former deputy minister of Finance Michael Horgan (instrumental in implementing federal austerity measures) to chair New Brunswick’s strategic program review advisory committee.

If New Brunswick doesn’t have a structural deficit, why is the government pretending it does? The best I can guess is they’re doing this for political purposes: so they’ll have extra money to spend just before the next election. But that seems to be what the Alward government was planning and it didn’t turn out too well for them, or for New Brunswickers.

Instead the Gallant government should focus on and consult on what it was elected to do: create jobs and growth. This should involve getting employers, labour, community groups and educators together to work out ways to grow New Brunswick’s economy, create good jobs and add value to its resources. These might be more challenging discussions than just asking people where to cut, but ultimately they’ll be more productive and beneficial.

If the province’s recent history has shown anything, it’s that you can’t cut your way to growth and that if you manufacture a fake crisis, you may end up with a real one.

Toby Sanger is the economist for the Canadian Union of Public Employees and previously served as chief economist for the Yukon government and principal economic advisor to the Ontario Minister of Finance. He produces the quarterly Economy at Work, a weekly Eye on the Economy and also recently published Deficit Déjà Voodoo: is New Brunswick really headed off the fiscal cliff?

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