Are we really living in an age of austerity?

In Canada, the government belt-tightening associated with austerity has in fact meant higher taxes.

Austerity is being talked about around the world, and rarely in a good way. People say cutbacks are crippling economies, not stimulating them. Even in Canada, the word "austerity" is all the rage, with pressure groups exploiting the term to protest any and all attempts at imposing budgetary discipline.

Retrenching, however, isn’t optional. For two or three decades now, rich countries have been living beyond their means. Consumers and governments, especially Canadian provinces such as Ontario and Quebec, have racked up record debt levels. But, if the law of gravity still applies, debt cannot be accumulated indefinitely. Lenders will run out of patience sooner or later.

What austerity?

Are we truly living in an era of austerity? While some European countries such as Greece may have experienced it through actual declines in government spending combined with layoffs, the numbers show that overall spending by European countries has steadily climbed since the 2008 financial crisis.

However, the situation is entirely different in most Canadian provinces. Ontario did not really go down the cutback route in its latest budget. The Liberal government is expecting to spend $12.5 billion more than forecasted revenue, with spending set to rise by $3.4 billion this year. As for the province’s debt, it is expected to increase by $20 billion in the current year. If this budget has any curtailing measures, they basically target taxpayers. For instance, Queen’s Park raised taxes on tobacco, aviation fuel and the wealthy.

In Quebec, the five-year "belt-tightening" period essentially resulted in a barrage of extra taxes and fees for citizens, including a hike in the provincial sales tax and higher prices for gas, licence plates, alcohol, tobacco and so on. In 2010, the government planned to assume 62% of the effort required to balance the budget, while Quebec taxpayers would have to shoulder the remaining 38%. However, according to current figures, Quebec made zero effort to turn things around. In fact, there are more civil servants today than in 2010. 

The wrong medicine

The problem is that while austerity is associated with government belt-tightening, the reality is starkly different. Up to now, economy of means has meant higher taxes. While some measures to cut spending have been adopted, they have certainly not kept pace with tax increases.

According to researchers at Europe’s Centre for Economic Policy Research, tax increases stifle consumers and businesses and therefore do more to hurt the economy than government spending cuts. Their findings are based on evidence from 40 years of fiscal adjustments across OECD countries. They believe that only government spending reforms ultimately lead to budgetary consolidation. When a government raises taxes to fix its financial problems, it avoids making hard choices. And by increasing the tax burden, it undermines business confidence in the long run, which hinders economic and job growth.

Governments shouldn’t blindly slash spending. However, they need to focus on the spending column much more than the revenue column. Austerity through tax hikes, which is the strategy our governments have been applying these past few years, will only exacerbate the situation.

Pressure groups never miss an opportunity to take to the streets over the mention of program cuts (especially in Quebec). Yet, actual cuts will be inevitable in the months and years ahead. Imagine the scene when "real" austerity hits all taxpayers.