Category Archives: Economic Growth

Moving From Debt to Growth


Published in the Telegraph-Journal 17th May 2013

The recent downgrade of New Brunswick to AA-minus from A-plus underscores the extent to which the global financial crisis continues to cast its shadow on local economies. Standard and Poor’s (S&P) outlook change took place in June 2011 when New Brunswick became the only province with a negative outlook rating.  According to the credit agency, even with the downgrading, New Brunswick maintained a very strong capacity to meet financial commitments.

At the time, S&P explained their downgrading this way: “Credit concerns include our view of the significant deterioration in the province’s budgetary performance since fiscal 2009 , which continued in fiscal 2011. In addition, New Brunswick’s relatively high net tax-supported debt burden, rose further in fiscal 2011 to about 33% of GDP from about 30.6% in the previous fiscal year. The province expects it to rise further to about 36% in fiscal 2012. The negative outlook reflects our expectation that New Brunswick’s budget plan will not be enough to return the province to a balanced budget position in the medium term.”

Although the downgrade has had no immediate impact on the province, the longer-term effects may be more profound, albeit manifested in subtle ways. Some of the effects of a ratings downgrade are straightforward and manageable. The underlying differences in fundamentals — the set of economic indicators, institutions and policy frameworks that shape the economic outlook — between an AA-minus and an A-plus bond arguably are only minor. Prudential regulations restrict some large institutional investors from holding any asset that is not rated A-plus but this is not an insuperable obstacle to investment.

A small change in fundamentals can result in a relatively large change in bond yields. If the change in yields is large enough and the stock of debt correspondingly high, there is the real possibility that the province could suffer a vicious circle of rising risk premiums and increased debt charges with the consequence of deteriorating economic performance.

There is an expectation that New Brunswick eventually will need greater access to capital to play a more active role in its economic renewal. To achieve this, the fundamentals will need to slant in the province’s favour. Government’s solution to the challenge to date has been to reduce government expenses to draw down its costs. It has been unable to engage in more aggressive austerity policies but additional reductions in health care costs will come with increased unemployment and slowed economic growth. The public policies that will support greater efficiencies — and which will provide real solutions to the growing constellation of health care challenges — will be more transformational than incremental. These policies will require budgets and long-term spending commitments, if they are to reduce costs over time.

To reduce the risk to the province, government would need to avoid introducing discontinuities in the set of policy choices in favour of smooth, orderly adjustments. This may require more time to achieve. Ratings agencies have confirmed their conditional confidence in the direction of the province’s finances. To some extent, the expected sequence of events that will eventually lead to the province’s financial health has already relieved some pressure on New Brunswick and delayed the implementation of greater austerity. The success of this strategy will depend in part on the ability of Finance Minister Blaine Higgs to gain traction on his deficit reduction plans. But success will additionally be predicated on economic growth.

This is where the province’s downgrade could have disproportionate and unexpected effects in the longer term. New Brunswick’s credit worthiness is a synthetic composite of risk and expectations about the future. The objective of government should be to move from current conditions characterized by concerns about the speculation of out-of-control deficits and growing debt, to a desirable equilibrium of improved public finances and a return to growth where government is a committed player.


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Filed under Austerity, Economic Growth, Fiscal Policy, New Brunswick

What Drives the Circular Economy


Published in the Telegraph-Journal 14th May 2013

Economists continue to insist that the recovery is at hand, even though unemployment remains stubbornly high, global warming continues unabated, GDP growth stagnates one quarter after another and governments stagger under record deficits.

In the face of these set-backs or even outright failures, some are asking whether more economic growth is the single solution to deliver prosperity and well-being for our societies. There is little denying that development and growth is essential for poorer countries but in the advanced economies the argument is gaining momentum that ever-increasing consumption makes little contribution to human satisfaction. In addition, the critics of unconstrained growth charge that the ecosystem that supports economies is straining to the point of breaking under the weight of rising consumption. For these critics, the solution is devising a route to prosperity that does not depend on continued growth.

This limited-growth thesis has startling implications. It proposes that society has reached a fundamental turning point in its economic history in which the growth of industrial civilization can no longer be guaranteed. Economic orthodoxy would view this as heresy. Supporters view the limits to growth as the most urgent task of our times. They see the possibilities of flourishing within the ecological limits of a finite planet. And they see an opportunity to improve the sources of well-being, creativity and lasting prosperity that lie beyond the reach of the market.

This is what became known as the sharing economy. Participants in this economy were developing better ways to share fewer resources for less money, sacrificing or limiting their ownership of things such as living accommodations, vehicles, clothing and consumer technologies. The sharing economy, which can be seen as a circular economy rather than the conventional linear economy, was built on the belief that, because the Internet had connected everyone, a global inventory had been created that could be discounted and shared.

The profit margin from the sharing business was significantly smaller than anyone thought even a few years ago. With time and perspective, the circular economy has failed to take over in the way it was anticipated. Instead, its resilience has been uneven and limited to specific segments of the market. The ideal sharing economy customers are young urbanites who value flexibility and savings over consumer purchases. The question is how much of their decisions are ideological and driven by concerns for the planet.

But the limited success of the circular economy is only part of the story. Tim Jackson, professor of sustainable development at the University of Surrey and an economic adviser to the UK government, makes a compelling case against continued economic growth in developed nations. Mr. Jackson argues that “prosperity goes beyond material concerns”, and at beyond a certain point growth does not increase human well-being. Mr. Jackson asks if it is conceivable that economic growth may not deliver lasting prosperity.

These concerns have some resonance in New Brunswick. Some are beginning to question if conventional economic growth is the solution for everyone in all parts of the province. New Brunswick is a society with not insignificant economic problems. Life in this province can be, for an increasing number of its residents, more difficult than in other places. But New Brunswick also possesses greater strengths and assets and it is clear that most residents find it a rewarding place to call home.

Facing a slowing economy, increasing regional disparities and a chronic skilled human resource scarcity, governments and businesses will soon be forced to review the prospect that unorthodox directions should be considered alongside those traditional policy solutions that have shown limited effectiveness for an increasing number of New Brunswickers.

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Filed under Economic Growth, Innovation, Sharing Economy, Social policy