Recessions are like bad illnesses. They strike hard, debilitate the patient and require a long time for full recovery. Even after the illness is gone, the patient remains weaker than before.
Fiscal recessions cripple governments when they happen, then require years of painful recovery, as we’re seeing across Canada and, especially, in other countries with weaker economies and worse budgetary problems.
This week, Ontario produced a budget of spending cutbacks because of a yawning deficit. But the province’s underlying troubles can be traced to two bad recessions, one in the early 1990s, the other in 2008-2009.
In 1990-1991, Ontario’s debt-to-GDP ratio was a very manageable 13.6 per cent. Then came a brutal recession. Bob Rae was premier of an NDP government. By the time he left office, the ratio had more than doubled, to 28 per cent.
The ratio stayed in the range of 26 per cent to 32 per cent until the 2008-2009 recession, when it soared to 38 per cent, where it stands today, about three times higher than in 1990-1991. Even after the cuts in this week’s Ontario budget work their way through the government’s spending, the ratio will still be 39 per cent in 2017-2018, when the budget is supposed to be in balance.
These figures tell three tales. First, two recessions badly hurt Ontario’s fiscal position, and recovery from both was painful and long. Second, governments in good times couldn’t wrestle down the debt ratio; the new norm was a higher debt-to-GDP ratio. Third, recessions drove up spending, as governments tried to pour money into a faltering economy, but then governments kept spending even though the economy had recovered.
Keynesian economics – spend in bad times, retrench in good times – got applied inconsistently. In bad times, governments properly upped spending; in good times, they couldn’t pull back. They took whatever surpluses appeared and spent most of it on new programs, higher wages and pensions for government employees.
Those employees then assumed their own new norm in the form of these improved benefits and, through their unions, professional associations and work rules, fought to protect their gains.
A variation of the same occurred in Ottawa. The federal government’s debt ratio had been in decline since the Chrétien-Martin budgets of 1995. The 2008-2009 recession reversed that trend. It will now take the rest of the Harper government’s term to bring the ratio back to where it was before the recession. Like other governments, the Conservatives spent most of the surplus inherited from the Liberals on new programs, higher transfers, more civil servants and soldiers, and tax cuts.
What economists call “deleveraging,” a fancy name for debt reduction, becomes an essential priority of government following recessions. The longer a government waits to deal with a deficit/debt situation, the more painful the remedies when they’re applied.
Sometimes, when governments begin to tackle their debt, the economy hasn’t fully recovered from the effects of recession. So cutbacks can slow down recovery, as is evident in some European countries whose unemployment rates are high, growth rates are slow, but deficits are huge.
The alternative strategy consists of continuing to spend to stimulate the economy, at the cost of higher deficits and accumulated debt – which risks even more wrenching downward spending adjustments and/or tax increases later.
In Canada, where the deficit/debt situation is comparatively better, governments still find it hard to curtail spending in the way best designed to lower the baseline of that spending: by eliminating or sharply curtailing programs. This option is just too painful politically.
So the Ontario and federal budgets were less about cutting programs than seeking to deliver existing programs more efficiently while restraining the number of employees, their remuneration and their pensions.
The same thing happened in New Brunswick, a small province with a huge debt ($10.8-billion) and deficit ($471-million), both worsened by the recession. The government, trying to balance the books by 2014-2015, is counting on much-ballyhooed efficiency gains, consolidations and new delivery systems. Good luck to it.