Austerity “an ideological choice, not an economic choice”: economist

The Liberals’ turn to austerity in Budget 2016 to address the province’s deficit will do more harm than good and could “kill” the economy, says Diana Gibson.

This week a visiting political economist told people gathered at public town halls in Corner Brook and St. John’s that the Liberal government had better options to address the province’s so-called fiscal crisis, but that with Budget 2016 it instead chose an approach that is likely to “kick the economy further into a tailspin.”

Diana Gibson is a director of PolicyLink Research and Consulting, a founding director and president of Canadians For Tax Fairness, a research associate for the Canadian Centre For Policy Alternatives, and a research fellow with Parkland Institute.

At the Corner Brook event on Wednesday, which was organized by Common Front NL, a coalition of labour unions, community groups and grassroots organizations, Gibson likened Newfoundland and Labrador’s recession to a patch of black ice on the highway.

“World oil prices crashed, there was high employment, low commodity prices, high poverty and inequality and an aging population, a highly rural population, difficult geography, and one of the most expensive places in Canada to deliver services,” she explained, highlighting characteristics of the province’s economy. 

“So there was black ice and…the government had the opportunity to steady on, keep the wheel dead on and not hit the brakes,” she said. “And the government hit the brakes.”

Gibson said the Liberals’ characterization of the province’s nearly $2 billion deficit as the crisis is misleading, and that the actual crisis is the recession and high unemployment, coupled with the province’s rapidly aging population. She said comparatively speaking Newfoundland and Labrador has a lower debt-to-GDP ratio than most provinces, and that instead of cutting public sector jobs and investments in important social services like education, healthcare and libraries, the Dwight Ball administration should be raising taxes on high-income earners and corporations more than they are, while simultaneously working to create a “jobs economy”.

“As someone who’s been involved in economics for some time now, I would say that the deficit is not something that’s jeopardizing this economy. It’s often used as a hammer to bludgeon people, to scare them [by saying] we’re not going to be able to borrow money,” she said.

“The reality is that’s not the case. Other [provincial] governments are bending over backwards to ensure the private sector that they will steady the economy through the hard times, and that they won’t be overcorrecting and putting the economy into a further tailspin. And this government instead chose to kick the economy further into a tailspin by hitting that brake.

“The crisis really is unemployment, and the reason why it’s important to recognize what the crisis is, is because the solution to the deficit is to cut jobs, but the solution to unemployment is to invest in a jobs economy. So it’s really important not to misdiagnose the problem, or you’re going to have a wrong solution.”

Tax fairness, not reduced services

Gibson said the Liberals are making a mistake in reducing services, which will impact low and middle-income earners hardest, for the sake of maintaining a corporate tax rate and personal income tax rates on high income earners that they perceive to make Newfoundland and Labrador ‘competitive’ with other provinces.

“Higher income folks tend to spend less of their income locally,” she explained, offering the example of a library worker in light of the impending closure of more than half the province’s libraries.

“A library worker who lives here in Corner Brook has their only residence here, has kids who they buy haircuts for, and winter jackets for, and groceries and services. And they spend almost all of their income here. And a wealthy person is most likely, if they get that money in a tax cut, to spend it on their condo in Hawaii.”

It’s estimated that the personal income tax cuts introduced by the Danny Williams-era PCs have been costing the province upward of $744 million per year, with the wealthiest Newfoundlanders and Labradorians benefitting the most. 

“Interestingly, the deepest cut in 2010 was in a budget when [the Williams administration] ran a deficit,” Gibson explained. “So they gave that money away while running a deficit, which is fiscally completely irresponsible.”

Gibson said while the Liberals are moving in the right direction by raising personal income tax rates in Budget 2016, the increases don’t go far enough, and that if they aimed for tax fairness the extra revenues skimmed off the top would allow the government to fund some of the crucial services they’re scaling back or cutting altogether.

Those earning $125,500 or more per year will pay three percent more in 2017. Workers making between $125,500 and $175,700 will pay 17.3 percent, while those earning $175,700 or more will pay 18.3 percent. 

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. Quebec boasts the highest personal income tax rates in Canada, set at 25.75 percent for those earning more than $103,150 annually.

“Economists have come to the conclusion that getting the money out of the hands of people who aren’t spending it and into the hands of people who are spending it is a good way to stimulate the economy,” said Gibson. “Other jurisdictions have been raising tax rates on the wealthy [and] Newfoundland and Labrador could have gone a lot further in this budget while reinstating fairness in this economy, and they failed to do so.

 We see where the wealth went during the boom — into profits and to the wealthy in terms of tax cut handouts — and now we’re seeing a Deficit Levy that lands on lower and middle income folks more. — Diana Gibson

“The government has consistently let the wealthier off the hook while taking more out of the pockets of those who are most likely to create jobs here in the private sector by spending their money locally.”

Gibson also said the province’s corporate tax rate, which increased in Budget 2016 from 14 to 15 percent, could be higher without jeopardizing business’ interest in the province. She said in recent years Newfoundland and Labrador has maintained below average (among provinces) rates of wages as a share of gross domestic product (GDP) while at the same time having larger than average rates of profits as a share of GDP.

“In 2010 with those deep cuts, the [Williams] government proudly announced that this was the lowest tax jurisdiction in Canada,” Gibson said. “That’s not something to be proud of because this is one of the most expensive jurisdictions in Canada for delivering services. So why on Earth would it be the lowest tax jurisdiction when we know it has one of the most rural populations in the country, the lowest percentage of its population living in urban areas? It has a very difficult geography, it has the highest aging demographic in the nation, it has higher cost of living increases than most places in the country.

“There’s reason after reason why Newfoundland and Labrador should be one of the higher tax jurisdictions, not the lowest. It’s irresponsible to be proud of having the lowest tax jurisdiction when we know that means citizens here are getting less services because it costs more per dollar to deliver them.”

Gibson also took aim at the Deficit Reduction Levy, arguing it is evidence the Ball Government is more or less aligned with the previous PC government in terms of favouring the wealthy in the province. 

“The wealthy are paying much, much less a portion of their income than lower income individuals,” she said, addressing the levy. “So what we saw in this budget is the continuation of a program the government had since before 2007 of letting the wealthy kind of the hook and having lower and middle income people step up.

“We see where the wealth went during the boom — into profits and to the wealthy in terms of tax cut handouts — and now we’re seeing a Deficit Levy that lands on lower and middle income folks more.”

Differing approaches: N.L. and Alberta

Gibson said though the two provinces boast many differences, in their latest budgets—both which came down in April—the Newfoundland and Labrador and Alberta governments faced a similar decision to either turn to austerity or invest in people and jobs.

“What Alberta did was recognize they need to stay steady on the wheel and not hit the brake. Alberta invested $250 over two years in job creation. They invested in programs like apprenticeships and training. They forecasted an employment increase of five percent by 2019. Newfoundland and Labrador instead cut 650 public sector jobs…and for every public sector job cut you’re going to see job cuts in the private sector. Those library workers have families in the community and they’re spending their money locally — they’re going to have to leave this province,” she continued.

“For every 100 job cuts in the public sector you’ll see almost half that in the private sector…so it’s a job cut budget — it forecasts employment to decline by 2021 and the jobless rate to increase from 13 to [19.8] percent by 2019.”

Pointing to a graphic in her powerpoint presentation, Gibson said the N.L. Liberals are a government “that wants to cure the deficit by killing the economy,” while Alberta’s NDP government “wants to cure unemployment by investing in the economy.

“If it works for this government to recognize that there was a choice and for everybody here to recognize that there was a choice, they chose to prioritize cutting the deficit…and chose instead to cut jobs and see their economy go into contraction,” she continued, calling the Liberals’ turn to austerity “an ideological choice, not an economic choice.”

It’s “not too late” — but a “bigger conversation” is needed

“Economists around the world have said, when you’re heading into a recession do not hit the brakes,” Gibson continued, explaining austerity has already been proven ineffective in kickstarting troubled economies.

“All of the economic research that allegedly supported the push for austerity has been discredited,” she said.

“Around the world economists have come to the conclusion…that history has shown us unambiguously that it’s preferable to raise taxes on those with high incomes than to cut spending. And this government, and the previous government, did the absolute opposite.

“So there were options, there were choices made not to see progressive taxes go back up to at least where they were in 2007, if not above. There’s no reason why fairness cannot be reinstated in the income tax structures in this province. Corporate income taxes could have been higher. A carbon tax wasn’t done — it could have easily been. Most other jurisdictions in Canada are doing it [and] it’s a great opportunity for Newfoundland and Labrador to make sure that companies aren’t getting off the hook. What they did instead was tapped individuals with a fuel tax instead of tapping companies with a carbon tax, again letting corporations and the wealthy off the hook,” Gibson continued, indirectly offering advice to the Liberals.

“Reinstate jobs and programs and build a jobs economy. This province has got options for a strong economy, a strong future, a future where [young folks] want to stay and see a future for themselves. There’s no reason to be eliminating the [post-secondary] grants program,” she said.

“If you’ve got a government that cares about the citizens and wants to see a strong future, then you have a government that focuses on youth retention, focuses on building that demographic that’s needed to balance the aging population, and focuses on building local jobs for people who are investing locally in their own economy — and that was a choice they didn’t make, but we hope to see them make it in the future.”

 There is a sense of financial insecurity, but there is an alternative path. — Diana Gibson

Gibson said a “bigger conversation” needs to happen about how to build a jobs economy in N.L.

“It’s a conversation about trade agreements, it’s a conversation about technological change… It’s part of a bigger conversation that needs to happen about, how do you have local rural economies that have quality jobs that can support families? Every library worker supports multiple other jobs in that community, and this is a government that is failing to recognize that an economy is the people…and any one person taken out of any one small community is devastating to that area. An economy is only the sum of the people there.

“There is a sense of financial insecurity, but there is an alternative path. There are options, and just because the oil boom went down doesn’t mean there aren’t resources here to harvest to build a future for this economy. Just make sure that any wealth generated here is maximized for the citizens here,” she continued.

“So it’s not too late; maybe sometimes it feels like that but it isn’t — there’s a path forward that can be one that fits this economy. So to galvanize that sense of insecurity and turn it into a positive vision is something I think we can do in the coming months.”

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