G20: Hard Right Turn to Austerity and Finance as Usual on Road to Toronto
In line with a major shift in thinking at the OECD and the IMF on the most appropriate timing for “exit strategies” from fiscal stimulus, the G20 finance ministers dropped the usual call for continued stimulus through 2010 from their June 5 communique, and highlighted the need for more or less immediate fiscal consolidation. God knows what lies in store for us in Toronto.
This sharp turn of course follows publication of the May, 2010 Economic Outlook of the Organization for Economic Co-operation and Development (OECD) which said that â€œ(e)xit from exceptional fiscal support must start now, or by 2011 at the latest, at a pace that is contingent on specific country conditions and the state of public finances.. (i)n those countries that have not yet begun the consolidation process, public finances need to start being brought credibly onto a sound footing by next year at the latest.â€ (Editorial and pp. 9-10.)
The May issue of the IMFÂ Fiscal Monitor http://www.imf.org/external/pubs/ft/fm/2010/fm1001.pdf has also called for fiscal retrenchment to begin no later than 2011, and for immediate measures in countries experiencing either a rapid recovery (eg. Canada?) or â€œfacing acute financing pressures.â€ For the IMF, the gross debt level should be brought back to 60% of GDP over the next 20 years. This is calculated to require a combination of spending cuts and tax increases amounting to almost 9% of GDP on average in advanced countries, on top of which governments will have to fund underlying increases in public health and pension costs amounting to 4-5% of GDP. In short, balancing the books now is seen as but a prelude to long-term austerity.
As Paul Krugman has argued in his columnÂ http://www.nytimes.com/2010/05/31/opinion/31krugman.html and recent blogs, abandonment of stimulus at a time of continued high unemployment will barely dent medium term public debt accumulation in the advanced economies while inflictingÂ a lot of unnecessary suffering in the process. Neither the OECD nor the IMF make any pretence of arguing that aÂ job market recovery is at hand (indeed the unemployment rate is still at a recession peak in the US and the EU.) The only possible rationale is appeasement of the markets, which are apparently demanding cuts as the price of continued funding of deficits and debts.
Krugman’s ball park estimate is that cutting spending by 1% of GDP at a time of high unemployment will raise unemployment by .75 percent, but reduce future debt by less than 0.5% of GDP. The markets might be demanding cuts,Â then, but they don’t really make sense in terms of bringing government books into balance so long as the G20 advanced economies – including the US, Europe and Japan, – are operating so far below capacity.
That same argument – that the effect of cuts on debt accumulation will be largely offset by the costs of continuing high unemployment and slack capacity in terms of lower GDP growthÂ – has also been put forward in a detailed policy brief by the International Institute for Labour Studies affiliated with the ILO. http://www.ilo.org/public/english/bureau/inst/download/promoting.pdf
What makes this hard right turn to global fiscal austerity especially hard to take is that the charge in the run-up to the Toronto G20 festivities is being led by Flaherty and Harper. As host leader, Harper has written a letter to all G20 members asking them to come to Toronto armed with concrete fiscal consolidation plans.
This follows, of course, the great media hailed “Canadian victory” in heading off the dreaded global bank tax (irrespective of any specific form which it might take, including those endorsed by the IMF.) Harper had dispatched a squad of Canadian Ministers to fan out to G20 countries to lobby against UK, European and US support for the tax. (The cynic in me suspects that the support may have been a little thin to collapse so swiftly.)
The Canadian media seem to have swallowed the line that there should be no tax since “our” banks were not bailed out.
This line surely fails to take into account that Canada was very much hit by the global financial crisis, and that we clearly stand to gain from bringing back some sanity to global financial markets. The financial transactions tax is intended to do just that. By evading the need to limit out of control speculation in the financial markets, the G20 have made themselves all the more vulnerable to ill-informed market demands for fiscal discipline.
And revenues gainedÂ from a global bank tax – not least in Canada – would offset some of the pain of the fiscal austerity about to be imposed upon us in 2011 federal and provincial Budgets.Â Harper and Flaherty are silent on why the costs of the crisis shouldÂ not be fairly shared.
For the record, on top of Bank of Canada measures to secure liquidity for dodgy bank assets, the federal government added $60 Billion to its debt to fund CMHC purchases of residential mortgages from the banks. One can argue that this is a wash in terms of net debt since the mortgages carried a guarantee,Â but don’t tell me that extraordinary action was not needed to shore up the Canadian banking system in the wake of the collapse of Wall Street and European Banks. If Canada was not an island of stability, how can Canada reasonably refuse to be part of a global solution?
And don’t tell me thatÂ the right-wing in Canada had anything to do with the relative stability of our banking system. If they had had their way in the mid 1990s, bank mergers would have gone ahead and the big Canadian banks would have expanded their US operations, and US banks would have been entered the Canadian market.Â Without a concentrated, oligopolistic, widely-held national banking system, the capacity to effectively regulate would have been dangerously undermined.
It is a sad day when it is hailed as a victory for Canada when the G20 agenda is being driven so far off course.