Postponing balancing the budget to avoid damaging the economy: A false anti-austerity argument

June 18, 2015

“The anti-austerity argument that balancing the budget should be postponed for a few years to provide the economy with additional support in the short term simply does not make sense in Quebec’s current socio-economic context. This is what the IdQ’s latest report, Economic Growth and Austerity: The Truth About the Situation in Quebec, reveals,” explains Institut du Québec (IdQ) director Mia Homsy.

According to IdQ analyses, the current budget cuts are not too hasty, and the Quebec economy is in a position to support them, since it is currently growing at a rate close to its long-term growth pace. With GDP growth expected to be near 2 per cent—which is its average over the past 35 years—from 2015 to 2017, Quebec is well on its way to economic recovery.

This context does not warrant increased government spending to avoid damage to the economy. “It’s a false argument to cite protecting economic growth as a reason for demanding that budgetary balance be postponed,” says IdQ research director Robert Gagné. From a historical and comparative perspective, none of the socio-economic indicators that the IdQ analyzed justify postponing the deadline for balancing the budget in order to further support the economy in the short term.

An unemployment rate below its historical trend, an employment rate higher than it has been in the past few decades, stable social inequalities, the proportion of public spending in the economy on the rise, and record-high government debt do not justify additional government intervention in the short term in Quebec, since that would jeopardize its action levers and future leeway in the event of another recession.

According to The Conference Board of Canada’s forecasts, with the expected gains in economic growth in the years to come, Quebec will reach its potential GDP—that is, its sustainable long-term level of production—in 2017. In such a context, any additional government stimulus measures could increase public debt without providing a lasting benefit to the province’s economic performance.

“In the current context, the priority is putting long-term growth conditions in place to mitigate the effects of an aging population on the labour market. This starts with a qualified and well-trained workforce that will be able to meet the needs of a modern society and an economy increasingly based on advanced technologies,” emphasizes Mia Homsy.

The IdQ report also discusses the impact of government intervention on economic growth through a full economic cycle—that is, between 2003 and 2016—to evaluate whether the budgetary policy was one of austerity or stimulation.

“After vigorously stimulating the economy between 2007 and 2009, the Quebec government began a period of budgetary cuts in 2010 that will continue until 2016. According to the IdQ’s calculations, based on International Monetary Fund methodology, the findings are clear: 2003 to 2016 was in no way a time of austerity in Quebec; in fact, the government directly stimulated the economy, contributing approximately $3.5 billion,” explains Robert Gagné. When we consider the indirect and induced impacts of these government investments, the overall economic effect of the government’s intervention during this period was even more positive for the economy.

It is important to note that this report is not about how the cuts are made or how they may affect the level and quality of services offered to the population. It focuses on the economy’s ability to absorb the current cuts.