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Federal Finance Minister Jim Flaherty (CHRISTINNE MUSCHI/REUTERS)
Federal Finance Minister Jim Flaherty (CHRISTINNE MUSCHI/REUTERS)

Jim Flaherty: The master of stealth austerity Add to ...

The IMF called on the weekend for the United States and Europe to abandon austerity – even before they had begun to practise it. Interesting.

Used to describe fiscal restraint, austerity – you would think – means austere: A word (from Latin and Greek) that expresses sacrifice. Indeed austerity means an almost puritanical self-discipline. (One definition: “stringently moral.”) Used to denote government restraint, however, austerity is a euphemism. It doesn’t mean making do with less. It means making do with smaller degrees of more. Few countries ever reduce spending in real terms. Even in hard times, few even try.

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Britain proclaims austerity, for example, but flagrantly practises inflation-plus spending. Britain hasn’t experienced a single year of government austerity in more than 60 years – the market meltdown years of 2008 and 2009 included. In the past year, Britain’s Conservative-Liberal coalition government has increased spending in real-dollar terms by 5.3 per cent: An act of public sector restraint so apparently harsh in its consequences that demonstrators have filled the streets of London to express their collective rage. By the government’s projection, public sector spending in 2014 will exceed public sector spending in 2010 by £93.7-billion ($148-billion); new government borrowing in this same period will exceed £485.5-billion.

One of the few countries now practising austerity, however marginally, is – trumpets, please! – Canada. Finance Minister Jim Flaherty has completed one year of real-dollar, per-capita austerity. He envisages four more. If he meets this target, Mr. Flaherty will achieve a remarkable accomplishment: five consecutive years of austerity.

More remarkable still, however, is this astonishing fact: Hardly anyone will have noticed. Call it austerity on the quiet. By making small, incremental spending cuts, here and there, hither and yon, Mr. Flaherty has provided the world with a good example of responsible restraint – without inciting mobs.

Mr. Flaherty appears to have mastered his difficult assignment: Rubbing his tummy and rubbing the hair on his head in different directions at the same time. On the one hand, his budgets will show nominal increases in national expenditure every year (averaging 2 per cent a year). This means that no one will ever find a minus sign in a Flaherty budget. This is smart. Opposition parties go berserk when they spot minus signs.

On the other hand, plus signs notwithstanding, Mr. Flaherty’s budget will produce decreases in real-dollar, per-capita expenditure. You can calculate the decreases by taking last year’s expenditure and adjusting it for population increase and for inflation. This population-plus-inflation formula ensures a fair and objective comparison of year-over-year spending.

In 2010-11, for example, Mr. Flaherty budgeted spending of $276.5-billion, an increase of $2.4-billion from spending of $274.1-billion the previous year. From the base year, (1) allow a 0.9 per cent increase in spending ($2.4-billion) for population increase; and (2) allow a 1.7 per cent increase ($4.6-billion) for inflation. Thus, Mr. Flaherty’s austerity-compatible limit for the coming year would be: $274.1-billion plus $2.4-billion plus $4.6-billion: or $281.1-billion. In fact, Mr. Flaherty actually budgeted $276.5-billion – for an austerity saving of $4.6-billion.

Every bit of honest-to-God austerity helps. In 2010-11, Mr. Flaherty produced a (projected) austerity saving of $6.2-billion for a two-year austerity saving of more than $10-billion.

Mr. Flaherty’s austerity program is an exercise in adroit economic management – rendered more remarkable by its modesty. No one is waving his arms in the air. No one is bragging. But it is by small, repeated acts of restraint that the government can restore public sector consumption from 34 per cent of GDP to 29 per cent – in a single parliament – to its pre-crisis level in an orderly way.

A couple of years ago, during the market meltdown, Mr. Flaherty looked ahead (in a year-end interview) to now – to 2011. Among other things, he anticipated the killing off of government programs that no longer serve a productive purpose. “We have hundreds and hundreds of programs that just trundle along, growing at 3 per cent or 4 per cent a year – ahead of the rate of inflation,” he said. “It takes resolve to restrain this spending growth.” Further, he said, “some programs should end.”

It is in the nooks and crannies of government – in the “hundreds and hundreds” of them – that Mr. Flaherty will find targets for his program of austerity by stealth for years to come.

 

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