More Deficit Déjà Voodooism in Atlantic Canada

In mid-August, the Nova Scotia Liberal government delivered their “Public Service Sustainability Mandate” in a meeting of Finance Minister Randy Delorey with public sector labour leaders.

Once you get beyond all the language about collaboration, meaningful engagement, innovation, etc. what it comes down to is the government insisting on “net zero” increases consistent with their fiscal plan and minimum five year collective agreements.

Because the government’s fiscal plan includes increases in departmental spending of less than 1% this fiscal year and less than 2% in each of the following two fiscal years (all below the expected rate of inflation), this will mean real cuts in departmental spending and real reductions in pay and/or benefits for public sector workers unless significant savings can be found without reducing services. With the province’s population continuing to rise, non-compensation costs increasing, and compensation costs amounting to 52% of total departmental spending, it’s  impossible to see how real wage & compensation cuts could be avoided under this mandate.

The government’s subsequent offer to the Nova Scotia Teachers Union (which the government immediately publicized) bears this out, with a proposed three year wage freeze followed by wage increases of just 1% in the fourth and fifth years.

As I demonstrated in a meeting of locals in Halifax on October 2, this offer would mean a real wage cut of about -7.2%  by the final year of this agreement.  This would reverse more than a decade of very modest real wages of public sector workers in Nova Scotia.

Here’s a link to the presentation I made, which covers a lot of same ground as I go through here: Is the Sky really Falling NS

(I won’t get into the government’s bargaining tactics, which have already started off as aggressive, full of misinformation and hostile to the role of unions.)

Why does the government say such severe real wage cuts are necessary?  Once again, they’re engaging in deficit déjà voodooism and alarmism.  They claim the province is in crisis, hovering on the “brink of an extended period of decline” and “is facing a structural deficit”, etc. etc.

It’s all bunk of course, that is unless perhaps the government actually succeeds in their objective of squeezing wages!  (The deep irony, obviously lost on the Finance Minister, is that his forecast update released September 21, reported slower growth in revenues (and a higher deficit) largely because of slower wage and income growth!).  Nova Scotia’s deficit/GDP ratio is one of the lowest in Canada and its debt and other fiscal measures are all mid-range or low in comparative terms.

In fact, even with the Nova Scotia government’s very modest forecasts of revenue growth, the province’s 2015 Budget reported it is expected to go into surplus in 2016/17, with that surplus increasing in subsequent years.  So of course Nova Scotia has no structural deficit if it will be surplus while the economy is operating well-below capacity, with unemployment still above 8%.

The government’s fiscal plan appears to be significantly underestimating future revenue growth in order to make its future surpluses look smaller.   They have revenues increasing by an average of just 2.2% over the four years from 2014/15 to 2018/19.  This is about a full percentage point lower each year than the average rate of nominal GDP growth that we can expect over that period.

If significant tax changes aren’t made, a government’s own source revenues can be expected to grow close to or even faster than the rate of nominal GDP growth.  Now Nova Scotia relies  on federal transfers, including the CHT, CST and Equalization payments, for about a third of its overall revenues, so revenue projections need to take those formulas into account.  CHT is now on a per capita basis and is set to increase by 6% nation-wide until 2017/18 and then by a moving average of nominal GDP growth thereafter.  The CST is also on a per capita basis with the national pool legislated to grow by 3% annually.  Equalization is more complicated, but overall the government’s federal transfer and revenue growth forecasts appear to be lowballing it.

What this means is that the province is understating its future revenue by up to a percentage point per year.  With Nova Scotia’s revenues close to the $10 billion mark, an extra 0.5 to 1 percent higher growth per year would add an extra $50 to $100 million each year: an extra $50 to $100 in the first year, an extra $100 to $200 million in the second year, etc.

Why would the government underestimate its future revenues by such a degree?  I suspect that it is for the same reasons many other governments (including Greece) have wildly exaggerated the extent of their fiscal woes in order to implement austerity measures: in part to squeeze labour and to force through privatization & other neo-liberal measures, but also because they then expect to extract larger surpluses they can then use either to cut taxes or to spend just before their next election.

The problem is that even these politically opportunistic calculations can backfire badly.  Witness of course what has sadly happened in Greece.  Then there’s New Brunswick, Canada’s poster child for the failures of austerity.  Successive Conservative and Liberal governments in that province have engaged in deficit alarmism and austerity measures with dire consequences.  Even though the Liberal government of Brian Gallant was elected on a jobs and growth platform last year after voters there rejected the failed austerity polices of the Alward government, they immediately exaggerated the size of the province’s deficit in order to engage in more cost cutting.

And unfortunately a funny thing happens if you claim you’re in a crisis: some people start to believe you. In addition to the negative direct economic consequences of austerity, the perception of New Brunswick as a fiscal basket case has led to declining household and business confidence, a negative economic climate and lower investment.  It’s a case of fact following fiction.  And if the McNeill government in Nova Scotia keeps playing the same game, they could end up in the same broken down basket.

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