The Past Is Not A Reliable Guide To The Future

By Peter Lindfield, published in the Telegraph-Journal 11th September 2012

The financial crisis marked the end of an economic era. For more than twenty years, the New Brunswick economy rode on the coat-tails of the expansionary impact of falling inflation, including lower interest rates, greater debt and higher personal wealth but we are now suffering its side effects.

New Brunswickers have always placed great store in opportunity. But we are faced with a new economic era that may frustrate this confidence. This new era is not only the consequence of the 2007-2009 financial crisis and its appalling side effects but coincides with other challenges. The combination of an aging population, rising health care spending and unprecedented government debt jeopardizes our prospects for economic growth.

Premier David Alward took office facing the most daunting economic conditions in decades. There is a strong argument that the New Brunswick economy is at a historic inflection point when the past is no longer a reliable guide to the future. That is the central concern confronting Mr. Alward and his government.

New Brunswick will eventually pull out of the economy doldrums, but the recovery will not necessarily ensure a return to previous rates of economic growth. Gathering over the horizon is the looming threat of an aging population.

As baby boomers retire, the workforce will contract, potentially taking growth with it. If productivity levels in New Brunswick continue to falter, as they have for years, the economy could stagnate in the face of growing claims on New Brunswickers’ incomes. Because of low levels of immigrant attraction and retention and the outmigration of young workers to the more prosperous Western provinces, Newfoundland and the U.S., New Brunswick threatens to age more rapidly over the next twenty years. These factors virtually ensure a shortfall in the workers necessary to fuel a buoyant economy.

A dilemma for the New Brunswick government is how to restore public confidence in the economy. The Keynesian solution is to supercharge demand and spending while putting the unemployed back to work and increasing the production of underutilized firms. But the province’s debt has made that stimulus option an unworkable one. Its borrowing capacity has been strained past its limits and government has taken the wise measure of reducing the cost of government until that capacity has been restored.  This measure will continue to be profoundly unpopular with those whose hold that the role of government is not only to stimulate the economy but to sustain it. The principle that government’s commitments should be balanced with what can be sensibly afforded will continue to meet with opposition.

Nowhere is this principle more in jeopardy than in health care. As a society, we have been patently unable – and unwilling – to control health care spending. Many New Brunswickers are firmly of the view that people are entitled to receive all the health care options that are available, regardless of the ultimate cost. The implication of this view is that health care spending increasingly is placing upward pressure on taxes and downward pressure on other government programs.

It is possible that the demands for government spending will overcome the will of politicians to resist them. But some outcomes clearly are superior to others. If we are unable to reduce projected health care spending, we may face unprecedented tax burdens that will depress economic growth, leading to a vicious cycle of increasingly unaffordable spending. If we are not able to come to grips with a public debt that threatens the future of government to act, we may face the deterioration of the province’s infrastructure that is critical to economic growth. Other outcomes, such as Draconian cuts in government programs, are equally undesirable.

There is no doubt that New Brunswick is at a crucial juncture and not only because the world in the aftermath of the financial crisis appears so unfamiliar and forbidding. We all sit at the eye of this storm where weathering it will involve something approaching economic diplomacy as much as political doctrine.

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Filed under Fiscal Policy, Health Care, Labor force management, New Brunswick

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