Why government austerity measures are a good thing

This was originally published in Canadian Business, on August 16, 2012.

Traditional Keynesian economics suggests you “prime the pump” when growth is slow. “The boom, not the slump, is the right time for austerity,” said John Maynard Keynes. Slashing spending while the economy is depressed just deepens the depression. But if that’s so obvious, why is it that conservative governments—such as Germany’s, Britain’s, or Canada’s—continue to fight for austerity? Even François Hollande, France’s newly elected Socialist president, likely won’t be able to overcome a massive hole in France’s budget through tax increases alone and will have to introduce some public spending cuts after all.

The reason austerity continues to be such a powerful force is as much political as it is economic. The fact is, governments of all stripes have found it too difficult to make major reforms when times are prosperous. Corporations, individuals and other levels of government all build in government entitlement programs as part of their annual budgets. Any attempt by a politician to erode these programs risks a response like Solange Denis’s famous “Goodbye, Charlie Brown” when then-prime minister Brian Mulroney tried to cut back old age security in 1985. To get voters to accept austerity, the only time politicians can muster the political will is just when Keynes says they shouldn’t.

Or, in the words of President Barack Obama, this is “a once-in-a-generation chance to act boldly, to turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century.”

The economic crisis similarly presents a chance for Prime Minister Stephen Harper to trim the government’s bloated budgets. In an interview with CBC’s Peter Mansbridge in June, he said that “fiscal discipline and growth are not only both necessary, they are both essential.” His reforms to employment insurance, old age security, science and technology policies, health-care spending and equalization are all designed to reduce government spending.

Reducing spending is key. Though healthier than our peers in general, Canada has serious issues to address. Our debt-to-GDP ratio is higher than Spain’s and household debt is at record highs—$1.52 for every dollar we earn. Low birth rates and declining labour participation will make government debt even more burdensome in the future.

No politician likes to admit to political expediency, but conservatives are generally of the view that it’s only by taking a longer-term view and addressing the fundamental drivers of government debt that countries will ever pull out of this economic malaise. Prime Minister Harper would prefer not to editorialize this, but the fact is the world crisis presents the government with its best opportunity to put in place serious structural reforms necessary to ensure our long-term prosperity.

That might not please the Keynesians among us—but it’s a political reality that Canadian business can understand and live with.

Mike Coates is the president and CEO of Hill+Knowlton Strategies Canada.