Prosperity Not Coming From Public Sector

By Peter Lindfield, published in the Telegraph-Journal 31st August 2012

Since Premier Alward took office, provincial government expenditures have fallen and only a relatively small number of private sector jobs have been created. The province’s economy is forecast to grow at less than 2 per cent in the near term. One immediate response to this outlook is that it is the responsibility of the private sector to create jobs. That these jobs have not materialized points to the shortcomings of New Brunswick industry and the causes offered for these shortcomings have ranged from low productivity growth, an excessive reliance on U.S. markets, to a pervasive lack of competitiveness in some sectors. Some have responded to the problem of slow growth and unemployment by suggesting that government needs to do more to create jobs. The argument is that we need only to bolster the number of workers in the public sector to have a healthier economy.

A key theme of this argument is that the provincial government should create an infrastructure investment program, contract the private sector to rebuild New Brunswick’s highways, bridges and municipal water and sewage systems in order to supercharge economic growth and create jobs indirectly. This expansion of New Brunswick’s balance sheet would create opportunities to hire workers and buy products and services from other New Brunswick companies and quickly restore private sector confidence. Newly employed workers would spend their wages in communities that would otherwise be economically depressed and the confidence of New Brunswick retailers would benefit from the suddenly increased purchasing power of these workers.

This Keynesian solution has been met with some success when applied by Canada’s federal government. And it can be argued that direct government investment in conjunction with quantitative easing is what saved the U.S. from economic disaster in the wake of the 207-2009 financial crisis.

But there are severe limits on the ability of the New Brunswick government to leverage this solution, for a number of reasons.

First, the New Brunswick economy has hit a borrowing wall, partly as a consequence of its heavy government debt. Increasing deficits at a time when interest payments continue to escalate – carrying charges on the debt are currently at $600 million and rising – is a solution certain to raise the eyebrows of credit ratings agencies. These agencies already have downgraded New Brunswick’s credit worthiness over concern about its tax-supported debt and the cost implications of the province’s long-term demographic trends. This downgrading prompted Finance Minister Blaine Higgs to say that, “years of overspending are continuing to hurt New Brunswick’s future.” The prospect that his government would support economic growth in New Brunswick with government expenditures alone is remote indeed.

Second, New Brunswickers have lost confidence in the social returns of government jobs and our ability to afford them. This loss of confidence has coincided with demands for expenditure reductions, and government employment has been chosen as a target. If government engaged in macroeconomic expansion without any other significant and confidence-restoring transformation, prosperity may still not be assured. Engineering government spending would only bring demands to make offsetting cuts elsewhere with a consequent loss of jobs associated with those cuts.

Government policymakers can no longer address this problem through fiscal stimulus because even these policies would be likely to underperform in part since, to the majority of the public, they will not be confidence building. In fact, fiscal stimulus increasingly has been viewed primarily as a benefit to elites.

We have become skeptical of government’s abilities to act alone to create prosperity. In turn, that skepticism has made successful policy more difficult to engineer. The critical challenge is lack of trust in the authority of government solutions. The way out of this dilemma is for trust to return over time, both in government and the private sector. New Brunswickers will then spend and invest, bolstering both aggregate demand and supply in both private and public sectors. But because trust is more easily destroyed than restored, this will take time, an increasingly valuable commodity in this province.

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Filed under Fiscal Policy, Job creation, New Brunswick

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