Provincial Economy Relies on Obama and Ottawa

By Peter Lindfield, published in the Telegraph-Journal 17th July 2012

With the failure of the European Union still a possibility, a furious debate continues in Europe over whether fiscal austerity – higher taxes and less spending – helps or obstructs growth. To opponents of fiscal austerity, recent events in Europe have thoroughly discredited that idea. A similar debate rages in Canada, with the critical exception that the pro-austerity contingent would rather take out memberships in Greenpeace than approve tax increases.

The outcome of the November 2012 election in the U.S. will have profound implications for Canadians. Many Democrats, including President Obama, are on record as wanting to assist state and local governments to sustain their current levels of public expenditures, which have been reduced by 6.4 per cent since its 2008 peak. Most Republicans have rejected that idea.

Many Democrats also want to take advantage of the combination of historically low government borrowing rates and historically high unemployment to fund infrastructure projects. With bond yields at an all-time low, a unique opportunity exists to borrow and invest productively to rebuild and make much-needed repairs to roads, bridges, tunnels and water filtration systems. Projects such as these would send as many as 600,000 state and local workers back to work. President Obama has repeatedly made the argument that borrowing now would simply accelerate payments that Americans know will need to be made in the near future. Even though the economic outcome of the use of more public capital is identical to the outcome using more private capital – each promotes growth – most Republicans reject that idea.

In Canada, the federal government has approached cost-cutting more moderately. Some reductions in federal government services and oversight, notably in environmental protection, could be seen as driven more by political ideology than by economics. But fiscal prudence is still the hallmark of this government. Prime Minister Harper and Finance Minister Flaherty consistently have made it clear that they believe that growth and prosperity are most effectively promoted by long-term deficit reduction that does not drag the economy into a tailspin in the near-term.

In Canada as in the U.S., a short-term jobs program that involves more spending on infrastructure would leave governments at all levels in a better fiscal position going forward. The low cost of borrowing means that it makes sense to move up planned maintenance projects, speed up the process to replace obsolete military equipment and partner with the provinces on their infrastructure needs. All of this would serve to help Canadian households rebuild their balance sheets. The fundamental obstacle to such a job-creation scheme is political, not economic.

The New Brunswick government can’t drive growth through unilateral infrastructure development because this province doesn’t have the fiscal headroom for additional borrowing to undertake large-scale public investment. The New Brunswick net public debt approached $9.5 billion at March 2011, an increase of $1 billion in that fiscal year. More worrisome, the province’s debt service cost was more than $640 million. Credit rating agencies are poised to downgrade New Brunswick’s credit rating if fiscal restructuring measures are not sustained, at least in the near term.

Continued cost pressures on health and social programs and the prolonged effects of the economic slowdown were major contributing factors to the debt increase. While government has gained some traction to reduce the rising costs of health care and education, they continue to exact a substantial toll on public expenditures, and there are no structural solutions in sight. And the shock of the 2007-2009 financial crisis still reverberates in the U.S. economy, New Brunswick’s largest export market.

In New Brunswick, the fundamental obstacle to a major government-led job-creation initiative is economic, not political. So whether New Brunswick can achieve consistent robust economic growth in the near term may depend on whether Obama can maintain his grip on the Executive branch.

Advertisements

Leave a comment

Filed under Job creation, New Brunswick

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s