The Crisis: Unemployment or Deficit?

UNEMPLOYMENT IS AT ITS HIGHEST LEVEL in five years in NL and almost twice the Canadian average. The provincial government’s labour market outlook forecast doesn’t add a rosy glow for the short term: the number of workers is expected to fall more than 24,000, or about 8 percent, from roughly 292,000 in 2015 to just under 268,000 in 2018.

The region is officially in a recession and the government is projecting a large deficit—BUT, is the crisis really the deficit, or is it unemployment? The answer is important because solving the deficit by further job cuts would make unemployment worse — potentially much worse.

Any Public Sector Cut Means Job Losses In The Private Sector

The public and private sectors are intertwined, and public sector spending cuts would cut into sales of industries supplying government. Spending has a multiplier effect, creating jobs and GDP growth elsewhere in the economy — meaning that cuts also have impacts elsewhere in the economy.

The indirect impacts of spending or cuts affect sectors that supply government. The employees in those indirectly affected sectors, and government employees, spend their money in other sectors. Those are where the induced impacts are felt.

Induced multipliers are not published by government. However, based on other multipliers, it is possible to come up with order-of-magnitude estimates. Depending on where cuts are made, for every 10 civil servants jobs cut, the province would lose roughly five jobs in the private sector.

How many jobs would be lost if the government cuts spending significantly? The following are estimates of the combined direct and indirect job losses in the public and private sectors from cuts in public spending (not including induced jobs in local businesses):

  • 3% of spending: around 3,500 jobs
  • 10% of spending: around 11,600 jobs
  • 30% of spending: around 35,000 jobs

Other impacts from public sector cuts

  • ON POPULATION AND YOUTH RETENTION: Economists are reporting that jobs lost in austerity cuts are often permanently lost. The jobs that are cut are generally held by those who have less seniority — younger workers. With such high unemployment they will likely need to leave NL in search of employment, taking their families with them. With the aging population, NL cannot afford to lose young families.
  • ON PROGRAMS AND SERVICES: 70 percent of spending is on health care and education, meaning significant cuts would hit those priority services.

But what about the deficit?

The NL labour market and revenue forecasts see bluer skies down the road, as revenues come on stream from projects like Hibernia and Muskrat Falls and employment tips back up.

The NL government has room to move on the revenue side. The previous government’s tax cuts are costing the province several hundreds of millions of dollars per year, and already have added over $4 billion in debt. Just moving corporate income tax, personal income tax, and sales tax (HST) to rates comparable to neighbouring provinces would reduce the deficit by about $300 million to $600 million. Instituting a carbon pricing system like those that will soon cover 80 per cent of Canada’s population would reduce the de cit by approximately $200 million.

What do the economists say?

  • Economists have been clear: austerity measures like deep public sector spending cuts risk deepening a recession and/or causing a double dip.
  • Nobel prize winning economist Paul Krugman reports that since 2010, every country that introduced significant austerity has seen its economy suffer.
  • Economists report that public spending creates more jobs per dollar than do tax cuts.

The previous government’s tax cuts are costing the province several hundreds of millions of dollars per year, and already have added over $4 billion in debt.

  • Protecting jobs, in the private and public sector;
  • Protecting demand for local businesses; and
  • Keeping young families in Newfoundland and Labrador.

TAX CHANGES CAN BE DESIGNED to refund a portion of revenues to lower income people, making them fancily better off than they would have been without the change — and thus stimulating more spending.

A strong public sector is important during a recession as it offers an automatic stabilizing force. This is particularly important in an economy that relies on resources like oil, gas and mining where jobs per dollar invested are few relative to other industries, and government revenues are volatile.