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Paul Martin’s 1995-96 austerity budget reduced spending across all sectors: payments to individuals, transfers to other levels of government and direct program spending. But the Conservatives have vowed not to make cuts in the transfer payments that make up most of federal government spending. (Ryan Remiorz/Ryan Remiorz/The Canadian Press)
Paul Martin’s 1995-96 austerity budget reduced spending across all sectors: payments to individuals, transfers to other levels of government and direct program spending. But the Conservatives have vowed not to make cuts in the transfer payments that make up most of federal government spending. (Ryan Remiorz/Ryan Remiorz/The Canadian Press)

Economy Lab

Small spending cut wields big axe on government jobs Add to ...

The federal government’s plan to cut program spending by $4-billion doesn’t sound like much on the face of it. That’s less than 2 per cent of total federal spending, and a fraction of a percentage point of GDP. Reductions of that size look tiny in comparison to the cuts of the Chrétien-Martin years, in which spending was cut by more than 2.7 per cent of GDP in two years (source is the Department of Finance’s Fiscal Reference Tables). So why are public sector unions kicking up such a fuss?

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The answer is in the structure of the cuts. Paul Martin’s 1995-96 austerity budget reduced spending across all sectors: payments to individuals, transfers to other levels of government and direct program spending. But the Conservatives have vowed not to make cuts in the transfer payments that make up most of federal government spending: Table 5.9 of the June 2011 budget projects that they will continue to grow in line with GDP.



But that means little when it comes to the effect on employment: it doesn’t take many people to change the numbers on the cheques sent out by the federal government. Instead of spreading the cuts across all sectors, the Conservative plan is to focus on direct program spending – the component that involves hiring people to implement policy. This concentration has the effect of making the effect of the anticipated budget cuts on employment comparable to – although still less severe than – the austerity years of the mid-1990s.



Federal program spending accounted for 7.4 per cent of GDP in the fiscal year that preceded the spring 1995 austerity budget, and this share fell by 1.3 percentage points over the next two years. In 2011-12, federal program spending was projected to be 7.0 per cent of GDP, and was to fall by 0.8 percentage points by 2013-14. In other words, the cuts in program spending announced in last year’s budget were roughly 60 per cent as large as what we saw in the mid-1990s.



Federal public service employment fell by 29,000 in 1996, and by an additional 26,000 in the following three years. If the effects of the planned cuts are proportional to what was experienced in the 1990s, then the number of job lost would be on the order of 30,000.



The Chrétien-Martin austerity program involved deep cuts spread across individuals, the provinces and the public service. The Harper-Flaherty program is to make much smaller cuts, concentrated almost entirely on the public service. Public sector unions are alarmed at the prospect of these job losses -- and perhaps also because they are more isolated than they were fifteen years ago.





For more of Stephen Gordon's recent posts, click here.



Economy Lab, winner of the 2011 Eppy Award for best business blog. Follow Economy Lab on twitter

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