The Macroeconomicsof Recession, Deficits,

and Austerity

Presentation by Jim StanfordFebruary 16 2012, Toronto

CCPA-Ontario “Deconstructing Drummond” Workshop

Macroeconomics of Deficits

• Ontario’s deficit was created by the financial crisis & recession (not over-spending).

• The recovery has been historically weak – that’s why the budget has been slow to recover.

• Austerity perversely prolongs recessionary conditions.

• Stimulating growth & employment is an essential pre-condition for improving fiscal health.

Ontario Provincial Deficit

-25

-20

-15

-10

-5

0

5

2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11

$ Billi

on

Impact of Recession• Double-barreled impact on revenues:

– Decline in GDP (8-10% below previous trend)= $10 billion lost revenue.

– Decline in revenue as share of GDP (<1 point)= $5 billion lost revenue.

– Combined fiscal impact: $15 billion.

• Impact on expenditures:– Automatic stabilizers (income supports).– Discretionary stimulus.

• Impact on debt service:– Follow-through growth of interest costs.– Low interest rates have been helpful.

Scale of Potential Austerity (I)

• Liberal election platform: 1.8% annual growth in program spending.– Other parties almost identical.

• Amount required for constant real per capita spending: 3.1% annual.

• Drummond: 0.5% annual.– His 0.8% number is 2010-11 to 2017-18,

but that implies 0.5% per year going forward.

• Scale of real per capita cuts: $12 b annually by 2015-16.

Ont. Program Spending Profiles

110

115

120

125

130

2011-12 2012-13 2013-14 2014-15 2015-16

Annu

al Pr

ogra

m S

pend

ing

($b)

Drummond

3.1%

1.8%

0.5%

ConstantReal Per Capita

Lib.Election

Scale of Potential Austerity (II)

• Liberal election platform: very slight decrease in real aggregate program spending.

• Amount required for constant real aggregate spending: 2% annual.

• Drummond: 0.8% annual.• Scale of real aggregate cuts: $7 b

annually by 2015-16.

What a (Fiscal) Drag!• Scale of real per capita cuts: $12 billion

annually by 2015-16.• Scale of real aggregate cuts: $7 billion

annually by 2015-16.• Add a reasonable multiplier (1.5-to-1),

and that will reduce GDP by $10-18 billion.– 1.6% to 2.8% of GDP over next 4 years.

• Depending on what happens in other sectors, that could certainly drag Ontario into negative GDP territory.

Numerators, Denominators,and Other Basic Math

• Key constraint: debt ratio= Net debt GDP

• Reducing debt ratio requires reduction in the numerator and/or expansion in the denominator.

• Greece: The more they cut, the more GDP shrank, the worse the debt ratio became.

• Normal recovery? Ratio falls via denominator.

• No recovery? You need more spending.

Ontario Debt Ratios

0

5

10

15

20

25

30

35

40

2002-3 2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11

% of

GDP

Net Debt

Accumulated Deficit

Job Creation Strategies• Traditional engine of growth (private

sector investment) is not working.• Progressives need to develop visionary

but credible alternatives:– Avoid spending cuts; expand public services.

NB: Health care created 80,000+ jobs since 2009!

– Longer-run capital / infrastructure spending.– Targeted sector strategies.

• Needs different approaches on trade/investment.

– Other novel ways to channel investment:• Government as venture capital funder??? [Shiller]• Social sector / co-ops / other non-profits???

Ontario’s Deficitin the Federation

• Ontario’s situation in Canada has changed dramatically as Canada becomes an “energy superpower” & deindustrializes.

• That’s a key factor in provincial GDP weakness.

• It also explains why:– Ontario has less fiscal capacity than average.– Ontario spends less on programs than average.– Fiscal gaps across Canada are huge & growing.– Yet Ontario still net pays into federal equalization.

• Challenging the neoliberal economic vision for Canada is part of fighting to protect our public services in Ontario.

The Macroeconomicsof Recession, Deficits,

and Austerity

Presentation by Jim StanfordFebruary 16 2012, Toronto

CCPA-Ontario “Deconstructing Drummond” Workshop