Confidence is the Key to Economic Growth

By Peter Lindfield, published in the Telegraph-Journal 4th May 2012

Policymakers have called for caution on austerity measures in the New Brunswick economy. But while Finance Minister Blaine Higgs’  commitment to fiscal prudence has been to support policies intended to prevent future crisis-inducing fiscal and financial imbalances, his remedial solution is consistent with a strategy of gradual adjustment. These policies include reforms that are intended to strengthen long-run growth. This is not the same as indiscriminate fiscal austerity.

Premier David Alward this week announced that his government’s soon-to-be-unveiled innovation agenda will serve to promote growth in New Brunswick. The apparently contradictory messages of the Premier and his Finance Minister are actually complimentary. They point to the need for a measured approach in which Mr. Higgs’ fiscal prudence and Mr. Alward’s growth-oriented reforms operate in tandem.

This tandem approach will require significant political discipline.

Without reinforcing expectations and reassuring investors on the strength of fiscal prudence policies in the medium term, any short-run growth project runs the risk of failure. Quite simply, the notion that structural reforms, however desirable, could achieve economic growth in the near term without expenditure management reform is an illusion. But, as Atlantic Provinces Economic Council president Elizabeth Beale and economic development expert David Campbell have warned, too much austerity runs the risk of hindering economic growth and exacerbating the fiscal problem. Since fiscal contraction is not expansionary, it slows growth, depresses tax receipts and leads to the expansion of government deficits.

Not everyone agrees that aggressive austerity measures are an obstacle to economic growth. Supported by academic research, some economists have argued that fiscal austerity could actually support economic expansion. But expansionary contraction has not worked in the field. Ireland, Greece and Spain are ample evidence of that. Moreover, academic support for this view has been undercut by a reappraisal of the evidence by the International Monetary Fund whose recent forecasts suggest that the eurozone is now threatened by a second recession, with even Germany showing signs of weakness.

Instead of across-the-board spending cuts, Mr. Higgs has targeted outlays that unnecessarily divert resources from activities that make the economy more efficient.  His fiscal stabilization program is based on unambiguous and vigorous actions leading to a progressive reduction of this burden will have the result of restoring confidence which has been under siege by concerns about the negative consequences on growth of considerable public debt.

Fiscal consolidation and structural adjustment are needed then, but New Brunswick also needs to pursue a growth agenda. The positive impact of these government-supported growth programs will take longer to take hold than the growth-inhibiting effects of austerity. The favorable expectations supported by these growth initiatives should dampen the impact of fiscal restraint until those growth initiatives have had an opportunity to achieve their full impact.

In New Brunswick, the recent challenges of demographics, weak demand in export markets and industries in transition have been a distraction from the province’s real crisis which is borne out of historic indecision, lack of focus, and insufficient financing, all of which have served to undermine confidence. For a lasting solution to this crisis, the underlying problems will need to be dealt with squarely. Beyond fiscal stability, New Brunswick has a serious problem of competitiveness. Attempts to overcome these underlying problems by applying quick fixes that only serve to mask the symptoms will not be sufficient to the task. The current government appears to be gaining a keen understanding of that challenge.

The New Brunswick government’s current policy mix of fiscal prudency and support for growth in key industries is fundamentally the right one. Whether it is sufficient to turn New Brunswick around will depend in large part on whether the private sector will respond positively to its growth promotion strategy. If it does not, Mr. Higgs will be forced to become more creative in ways to contain economic anxiety without undermining the credibility of the government’s long-term economic agenda.

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Filed under Economics, Innovation strategy, New Brunswick

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