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How Long Can We Crash Diet? Nourishing a Leaner State that Works

Governments around the world are systematically being put on fiscal crash diets. Economists – the economy’s nutritionists – are debating just how drastically to reduce government spending in order to balance the budgetary scale. We’re meticulously counting millions in programmatic spending like calories. And just like diet advice, the range of opinions in this debate is notoriously extreme.

Skeptical of the austerity trend, Nobel Laureate Paul Krugman recently declared the policies of fiscal austerity a failure and predicted that the economies of the leading countries in Europe were on the verge of another recession. “None of the countries slashing spending have seen the predicted private-sector surge,” he wrote. Instead, prescriptions of fiscal austerity seem to have led to decreased public spending and decreased private spending; potentially starving the state of the resources necessary to sustain a robust society. It is worth noting that in his home country, the US has not assumed a level of fiscal restraint as extreme as Europe and its economy is finally growing again (albeit slowly), though political leaders have preached the need to rein in spending. Japan’s recent experience reducing their budget by about 2.2 per cent has been similar to that of the US.

Here in Canada, the Commission on the Reform of Ontario’s Public Services outlines a monetary future where the deficit in Ontario could bloat to $30 billion or more if we do not begin to restrict public spending. Going forward, Drummond’s recommendations include constraining growth in health spending to 2.5%, education to 1%, post-secondary education to 1/5% and most programs to -2.4% over the next several years. Not only has sustained austerity of this magnitude never been achieved in Ontario, in sectors such as health care, there is no historical working example across the OECD. Part of the justification for these precedent-setting and anemic reforms is a pre-emptive concern that we in Ontario don’t want to ever find ourselves in a fiscal mess similar to Europe’s. Weary of austerity’s strict prescriptions, left-leaning economists have criticized the report’s recommendations by suggesting that the assumptions driving it overstate the crisis and offering that the deficit in Ontario is principally driven by either the recession or tax cuts. As the provincial government poises a scalpel to public accounts, perhaps out of control public spending is not the only problem.

We share the concern that governments must be able to afford the programs that they finance through the revenue that they generate with minimal borrowing, and belief that the Ontario government is currently not in this position (it has what is often called a “structural deficit.”)  We also share a concern that previous public choices have, at least in part, put us in the position we’re in. Politically favourable cuts to the tax base have contributed to the structural deficit, greater economic inequality, and less redistribution. The right balance over the next few years will need to address in some measure both this popular call for greater austerity and efficiency while protecting the government’s ability to both provide high-quality public services while offsetting some of the recent growth in income inequality. The question is then how to exercise government so that it can afford the quality public services we want.

A reasonable approach to achieve this ‘goal weight’ is to strive for some of the efficiencies recommended by Drummond but understand that hitting these superficial, appearance-based targets at the cost of quality or redistribution is not the end goal. In the case of health care, for example, this would mean working to achieve short- term savings through tough negotiations so that the province is paying the appropriate prices for services, and to improve the integration within the system so that people are treated in the right place (often not in the most expensive setting), and increasing health promotion, along with a number of other improvements suggested by the report. But 2.5% growth in the health care budget is highly unlikely – and, as the report notes, it is unprecedented – and counting on this kind of restraint to achieve our overall system goals risks either falling short of expectations or doing more harm than good. Crash diets rarely work – why should they now?

Pushing ourselves towards a more efficient public sector and dropping pecuniary deadweight is a laudable goal. Compromising the muscle of public services that form the basis of the society we want, however, is not. While we seek to cut spending that does not deliver the kind of results Canadians want, let’s be sure to properly fund those that do: high quality health care, public education, and a post-secondary sector that competes with the best in the world. Let’s not leave programs that help families in poverty and that redistribute resources from those who are most fortunate to those who are not anemic. In fact, some of these programs may require that we feed them increased public funding to achieve these goals. And raising some taxes or ending tax expenditures that are not serving public goals to help achieve this should and most likely will need to be part of solution to fiscal sustainability.

This financial movement across the OECD to reduce the scope of government is a good opportunity to reconsider what the goals of government are and how it delivers on these goals. We should certainly use this opportunity to refocus government, but also to ensure that we are feeding our government the resources it needs to achieve a robust society that we want to live in. Rather than blindingly shedding pounds in the pursuit of optimal spending, we should refocus on the gradual reintroduction of a healthy fiscal lifestyle with a realistic amount of fat and nourish a leaner state that works.

Mark Stabile is the Director of the School of Public Policy & Governance at the University of Toronto and a Professor of Economics & Public Policy at the Rotman School of Management. (I work with him).

*I am myself.