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Government “definitely does have a choice” in NL Budget 2016: economist

By: | April 14, 2016

There are alternatives to austerity, say federation of labour president and an independent economist. They just have to be sought out.

On Thursday the provincial government will hand down an austerity budget expected to contain, among other things, the privatization or semi-privatization of public services, cuts to social programs and reduced investments in education and healthcare.

Last week Finance Minister Cathy Bennet told media “there is not one single choice in this budget — not one — that is a happy one.”

The Liberal government has been bracing the people of Newfoundland and Labrador for austerity, an apparent effort to soften the blow of what some observers say could be a major turn to the right following in the footsteps of neoliberal governments in Canada and elsewhere.

Since the Nov. 30 provincial election Premier Dwight Ball, Bennett and others have promoted the idea that the province is facing an economic crisis and that “the status quo is not an option” in addressing it, Ball said in December.

“The choices will not be easy,” Bennett added during the government’s first fiscal update, three days before Christmas.

Dealing with the province’s finances “requires a new approach — one that is open, transparent and engages the public in meaningful ways,” the premier said in January at the launch of the Government Renewal Initiative, an undertaking that featured community consultations around the province as the government sought out ideas on how to cut spending and increase revenues.

“The questions we will be asked will challenge us to think beyond ourselves as individuals. We are being asked to balance our wants against our needs,” Bennett said at the Jan. 12 press conference.

The government’s efforts to contextualize the provincial deficit and recession as a crisis, while launching a consultative process to signify democratic decision-making, and in describing its exploration of cuts within government as “bold” thinking, which intentionally or unintentionally gives the appearance of strong leadership, all support the government’s justification that it has no choice but to implement an austerity plan.

But an economist who met with Bennett and Premier Dwight Ball just two months ago says the Liberals do in fact have clear choices in how they address the province’s deficit, and that those choices are fairly clear-cut.

David Thompson, an independent economist from British Columbia, told The Independent on Wednesday that the Ball Government “definitely does have a choice,” and that cuts to social spending that could disproportionately affect the most vulnerable people in the province and decrease the quality of life for some more than others are not inevitable.

“The government has plenty of room to improve its fiscal position by increasing revenues and doesn’t have to engage in cuts at all,” said Thompson, who made his case in a meeting with Ball and Bennett last February, during which Thompson said the premier and finance minister were receptive to his suggestions and asked lots of questions about the proposal.

In the meeting Thompson outlined how Newfoundland and Labrador has higher costs per capita for the delivery of social services, that the province faces unique geographic and demographic challenges with its aging and spread-out population, and that N.L. has high and increasing levels of unemployment and poverty.

 They can choose between cuts that are going to have a significant impact on recipients of services…or they can ask everybody to pay their fair share. — David Thompson

He told Ball and Bennett that cutting government’s investments in social programs was a bad idea, especially while the province is in a recession, and that the province needed fiscal stimulus instead.

“As responsible economists in Canada and worldwide point out, a recession is not the time to go balancing your books,” he said. “So the question is, how much revenue do you want to get? If the deficit is $2 billion, then the government may choose a far smaller target in the range of 10 to 20, or even 30, percent of the deficit to tackle this year. And you can easily get that just by adopting the tax rates and tax structures of neighbouring provinces.”

Thompson said the main three areas where the province can increase revenues to help cover necessary social spending and begin reducing the deficit are in raising corporate and personal income tax rates, as well as the harmonized sales tax.

“There’s more than enough revenue [to begin reducing the deficit] just by tweaking the existing major tax categories,” he said. “And we haven’t even talked about the smaller taxes that can go along with that.

“So there is a choice. They can choose between cuts that are going to have a significant impact on recipients of services…or they can ask everybody to pay their fair share.”

Thompson said if the government “wants the people who can afford to pay to reduce the deficit [to do so], then the way to do it is through broad-based tax increases. And again, not to make them super high, but to make them competitive with what other provinces have.”

Newfoundland and Labrador’s current corporate tax rate sits at 14 percent — with the exception of small businesses, which pay three percent — while Nova Scotia and Prince Edward Island boast a 16 percent corporate tax rate. New Brunswick sits at 12 percent.

On par with other provinces

Thompson was invited to the meeting with Ball and Bennett by the Newfoundland and Labrador Federation of Labour (NLFL).

NLFL President Mary Shortall echoed Thompson’s call for a fairer taxation scheme as a way to address the deficit. She said taxation “is the price we pay for democracy, and our tax rates were cut in 2007 and have never come back. New Brunswick and Nova Scotia, who have higher rates than we do, haven’t lost their competitive edge. Just about every single province in this country, in their last budgets, have increased their tax rates, especially around corporate taxes.

“More corporate profits as a percentage of GDP leave this province than anywhere else in Canada,” she said.

Among the Atlantic provinces, at 15.3 percent Newfoundland and Labrador has the lowest personal income tax rate for individuals earning more than $150,000 per year. By comparison Nova Scotia’s personal income tax rate for those earning more than $150,000 per year is set at 21 percent, while New Brunswick’s is 20.3 percent, and PEI’s is set to 16.7 percent for those earning more than $63,969. Quebec boasts the highest personal income tax rates in Canada, set at 25.75 percent for those earning more than $103,150 annually.

Thompson told Ball and Bennett that if they adopted the personal income tax rates of other provinces in Canada Newfoundland and Labrador could generate significant revenues. With Nova Scotia or P.E.I.’s personal income tax rate the province would generate an extra $250 million per year, while adopting New Brunswick’s would generate an estimated $208 million.

Meanwhile, a two percent HST increase, bringing Newfoundland and Labrador in line with other Eastern Canadian provinces, would generate approximately $250 million, he told the premier and finance minister.

Tweaking the “big three” taxes “alone would raise a few hundred million dollars,” Thompson said, while the addition of a carbon tax would generate another couple hundred million. So there’s more than enough revenue just by tweaking the existing major tax categories. And we haven’t even talked about the smaller taxes that can go along with that.”

Shortall and Thompson both advocated for a carbon tax, arguing Newfoundland and Labrador should put a price on the private sector’s contributions to climate change.

Thompson said 80 percent of Canadians are living in jurisdictions that already have a carbon tax, and that if the province introduced one it could raise a couple hundred million.”

All in all, Thompson said by adopting a more progressive taxation scheme and aligning Newfoundland and Labrador’s tax rates with those of other provinces the government could generate an estimated $800 million annually, which would put it in a position to pay off the deficit over a few years.

Austerity not a magic solution

Thompson said that while a number of governments have introduced austerity to their jurisdictions since 2010, it has become clear “there’s not a lot of magic” to it.

“It’s really an ideological and programmatic set of policy prescriptions that do centre around cuts. It was an international movement that was advocated for by people within organizations with a particular ideology and adopted by some governments, not all…and it is actually fairly simple in terms of fiscal policy: cut spending, cut wages and that sort of thing.”

He said the most interesting part of austerity is how governments dress it up as necessary and the best way to address deficits.

“It was a movement that was pushed by organizations with a lot of media access and a lot of organizing dollars funded by individuals, corporations and organizations with strong political views that weren’t particularly concerned with good public interest outcomes or even about recessions. They were primarily motivated by their ideology, which regardless of what the problems are, the government needs to shrink. And that’s an ideological stance as opposed to any kind of economic analysis.

“Unfortunately the people pushing austerity dress up their policy arguments as if they’re economic arguments, but economic evidence and economic theory show that they are not economically beneficial, they’re economically harmful.”

Privatization is one of the ways austerity is imposed on a population, and it too is rooted in a set of ideological right-wing beliefs that the private sector can offer goods and services more efficiently and at a better price than the public sector. 

“It’s kind of a reversal of the Wizard of Oz story, where the protagonists come in and the curtain is pulled aside and the magic that was being performed was exposed for what it was,” Thompson explained. “Privatization is pulling that curtain closed and basically shutting the public off from actually understanding what the financial position is — basically hiding spending and hiding debt and making the public pay in other ways that are less transparent, less accountable, less politically obvious.

“Really it’s a matter of hiding your spending and your debt off the books, so you enter contracts that require government or require users of services to pay. Either way, the public is going to be paying for something that is privatized, whether it’s through user fees that are collected by corporations that are seeking to extract surpluses from the services provided, or whether it’s from citizens being on the hook to pay taxes to government for the next decade in order to satisfy contractual obligations that the government has created with its privatization schemes. 

 Privatization is not going to solve problems — it’s going to hide problems and create different problems. — David Thompson

“Governments often turn to [privatization] because it makes their books look better, but it doesn’t make the burden on the public any less, and in fact can increase it. The private sector has some structural disadvantages when it comes to being able to carry out projects and provide services, among them the higher costs of obtaining capital in the markets, higher executive compensation, the need to advertise, lobby, litigate in order to obtain and protect the contracts.

“Privatization is not going to solve problems — it’s going to hide problems and create different problems.”

Shortall said the main message to Ball and Bennett at the meeting in February was to “not panic,” and to realize austerity is not the way out of a deficit.

“We can’t cut so desperately that we can’t keep our young people here, so what do we have to put in place to make sure that there are young people here, that they’re trained, that we combine that with a well thought-out immigration policy to sustain our labour market, and that we look very carefully at how we do that — that we make sure the vulnerable are looked after in the meantime. We need to make sure all these things happen — we can’t just be short-sighted or have knee-jerk reactions to something that’s happening right now,” she said.

“It’s not just as simple as one thing or the other; it requires a fair amount of thought and number-crunching and a long-term vision, not just a one-budget vision.

“Austerity is not going to bring prosperity. You can’t cut your way to prosperity.”

Correction: An earlier version of this story misquoted David Thompson as saying “government is going to be paying” for privatization. Mr. Thompson in fact said “the public” will pay for privatization, “whether it’s through user fees that are collected by corporations that are seeking to extract surpluses from the services provided, or whether it’s from citizens being on the hook to pay taxes to government for the next decade in order to satisfy contractual obligations that the government has created with its privatization schemes.”

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