Aug 27, 2009

Spending cuts will spell further job losses and a longer recession


Want a recipe to harm the economy and increase hardship for British Columbians in the middle of a recession? It’s easy – all you have to do is cut government spending. Unfortunately, this is exactly where our government seems to be headed judging by their ominous throne speech.

A new report by yours truly, released today by the CCPA, examines the social and economic costs of spending cuts and concludes that in these hard economic times, spending cuts will create far more problems than they solve. This is because government spending has ripple effects throughout the economy, causing a change in output (GDP) that is greater than the actual cut. For the economy as a whole, less money floating around means higher unemployment and lower aggregate income – a drag on the economy at exactly the wrong time. For BC families, spending cuts mean reduced access to public services like libraries, seniors’ care and community health services and reduced supports for the most vulnerable among us. It means that thousands of people would lose their jobs and that’s on top of the recession-driven losses we are going to continue to see for months or even years. Many would be forced into poverty and homelessness.

The high cost of spending cuts

But it doesn’t have to be that way. British Columbians have been trained to think that government debt is bad and should be avoided at all costs. We continue to be bombarded with dire warnings about the supposed negative effects of running a deficit. Yet, the truth is that it is entirely appropriate for the government to run a large deficit in a serious recession.

At the bare minimum, the deficit needs to be high enough to cover revenue shortfalls arising as a direct result from the recession (the underlying deficit). How big that is would depend on how poorly the provincial economy performs, but our models point to an underlying deficit in the range of $3.2 to $3.9 billion for 2009/10 alone.

The best response to a major recession would go beyond funding the underlying deficit and introduce new spending measures to stimulate the economy and protect incomes and employment.

What British Columbians need from their government in next week’s budget is not a plan to minimize the deficit but bold leadership and a stimulus package that keeps the economy rolling in a way that moves us closer to our social and environmental objectives.

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