So, What’s Wrong with Austerity Anyway?

Economist David MacDonald Breaks Down Austerity

NewsNoelle Didierjean — Published November 3, 2014 | Updated November 4, 2014 at 1:36am

In a nutshell, what are the implications of austerity?

Government spending makes up part of the GDP measure, so when government spending goes down it pulls down the GDP measure. Austerity means that the government is cutting back on its spending. What that means is they’re reducing their contribution to the growth in the economy.
The provinces have seen much bigger cuts in their revenues, particularly because there’s been a huge decrease in corporate income taxes which has really driven up deficits at that level. Because of that they’re running up deficits faster and have seen harsher cutbacks.

What can provincial and federal governments do to avoid cutting in the public sector?

They could maintain their spending growth. You might think, “austerity is a good value, it’s good to be austere sometimes and save a little money.” But what austerity practically means is that you’re likely cutting off services to balance the books more rapidly, to lead to a faster surplus, and that surplus will be spent on tax cuts. So what’s in effect happening is that services are cut, to veterans for instance, to food safety, to the unemployed, so that you can reduce taxes for rich people.

What would happen if the government ran a deficit?

One of the things that we’re continuing to look at is a weaker labour market. In a time of a weak labour market, it makes a lot of sense for governments to run deficits so that in the future, when times are better, then they won’t have to spend so much on things like programs for low-income folks, because there [will be] less low-income folks because there [will be] more job opportunities. When times are bad, you have to spend more money on things like employment insurance, for instance, when people become unemployed.

What’s in effect happening is that services are cut, to veterans for instance, to food safety, to the unemployed, so that you can reduce taxes for rich people.

What are examples of governments who have avoided cutting in the public sector?

It’s a very mixed bag. Europe has implemented some of the most severe austerity. Greece for instance has seen some of the most severe austerity and it’s been a devastating depression. There you see youth unemployment rates of 50 per cent and general unemployment rates of 25 per cent and it’s being driven by the fact that the government is unwilling to step in and kickstart the economy.

On the other hand is the extreme example of Iceland. They had a full-scale banking crisis, just like the U.S. did, but instead of bailing the banks out, they backed deposit-holders in their country, so they gave them their money back. Anybody that was outside of their country got nothing. So they just said to the banks, “fine, you want to go bankrupt? Fine, you go bankrupt and every single one of your CEOs is going to jail.”
So they put all the bank CEOs in jail, and they had a currency crisis to some degree, but they actually wrote a new constitution and have been recovering substantially faster because of more government spending—much more than the southern European states that instead went full-speed ahead on austerity cutbacks.

Do you think there are any tactics that can be used to prevent cutbacks in the public sector?

Well, I think it’s important to take note of all the programs that have been cut in order to rapidly get to a balanced budget. I think that’s one of the ways, just to keep track of what’s been lost. It’s quite a long list, and it’s one way to keep track of what’s been lost in the hopes that we can, at some point, reinstate those programs.

This interview has been edited and condensed for the sake of brevity.