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The Macroeconomics of Recession, Deficits, and Austerity

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CCPA Research Associate Jim Stanford's presentation of his analysis of the Drummond report's fiscal and economic projections. …

CCPA Research Associate Jim Stanford's presentation of his analysis of the Drummond report's fiscal and economic projections.

February 16 2012, Toronto
CCPA-Ontario “Deconstructing Drummond” Workshop

Published in: Business, Technology
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  • 1. The Macroeconomics of Recession, Deficits, and Austerity Presentation by Jim Stanford February 16 2012, Toronto CCPA-Ontario “ Deconstructing Drummond ” Workshop
  • 2. Macroeconomics of Deficits
    • Ontario ’ s deficit was created by the financial crisis & recession (not over-spending).
    • The recovery has been historically weak – that ’ s why the budget has been slow to recover.
    • Austerity perversely prolongs recessionary conditions.
    • Stimulating growth & employment is an essential pre-condition for improving fiscal health.
  • 3.  
  • 4. Impact of Recession
    • Double-barreled impact on revenues:
      • Decline in GDP (8-10% below previous trend)
      • = $10 billion lost revenue.
      • Decline in revenue as share of GDP (<1 point)
      • = $5 billion lost revenue.
      • Combined fiscal impact: $15 billion.
    • Impact on expenditures:
      • Automatic stabilizers (income supports).
      • Discretionary stimulus.
    • Impact on debt service:
      • Follow-through growth of interest costs.
      • Low interest rates have been helpful.
  • 5. Scale of Potential Austerity (I)
    • Liberal election platform: 1.8% annual growth in program spending.
      • Other parties almost identical.
    • Amount required for constant real per capita spending: 3.1% annual.
    • Drummond: 0.5% annual.
      • His 0.8% number is 2010-11 to 2017-18, but that implies 0.5% per year going forward.
    • Scale of real per capita cuts: $12 b annually by 2015-16.
  • 6.  
  • 7. Scale of Potential Austerity (II)
    • Liberal election platform: very slight decrease in real aggregate program spending.
    • Amount required for constant real aggregate spending: 2% annual.
    • Drummond: 0.8% annual.
    • Scale of real aggregate cuts: $7 b annually by 2015-16.
  • 8. What a (Fiscal) Drag!
    • Scale of real per capita cuts: $12 billion annually by 2015-16.
    • Scale of real aggregate cuts: $7 billion annually by 2015-16.
    • Add a reasonable multiplier (1.5-to-1), and that will reduce GDP by $10-18 billion.
      • 1.6% to 2.8% of GDP over next 4 years.
    • Depending on what happens in other sectors, that could certainly drag Ontario into negative GDP territory.
  • 9. Numerators, Denominators, and Other Basic Math
    • Key constraint: debt ratio
      • = Net debt
      • GDP
    • Reducing debt ratio requires reduction in the numerator and/or expansion in the denominator.
    • Greece: The more they cut, the more GDP shrank, the worse the debt ratio became.
    • Normal recovery? Ratio falls via denominator.
    • No recovery? You need more spending.
  • 10.  
  • 11. Job Creation Strategies
    • Traditional engine of growth (private sector investment) is not working.
    • Progressives need to develop visionary but credible alternatives:
      • Avoid spending cuts; expand public services.
        • NB: Health care created 80,000+ jobs since 2009!
      • Longer-run capital / infrastructure spending.
      • Targeted sector strategies.
        • Needs different approaches on trade/investment.
      • Other novel ways to channel investment:
        • Government as venture capital funder??? [Shiller]
        • Social sector / co-ops / other non-profits???
  • 12. Ontario ’ s Deficit in the Federation
    • Ontario ’ s situation in Canada has changed dramatically as Canada becomes an “ energy superpower ” & deindustrializes.
    • That ’ s a key factor in provincial GDP weakness.
    • It also explains why:
      • Ontario has less fiscal capacity than average.
      • Ontario spends less on programs than average.
      • Fiscal gaps across Canada are huge & growing.
      • Yet Ontario still net pays into federal equalization.
    • Challenging the neoliberal economic vision for Canada is part of fighting to protect our public services in Ontario.
  • 13. The Macroeconomics of Recession, Deficits, and Austerity Presentation by Jim Stanford February 16 2012, Toronto CCPA-Ontario “ Deconstructing Drummond ” Workshop

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