Public Finances in disarray, the more inequality in a view

magictr | June 22, 2020 | News | No Comments

The crisis of the COVID-19 to cause the filing of an economic update.

June 21, 2020 16h31

Updated at 23: 20

Public Finances in disarray, the more inequality in a view

Olivier Jacques

Phd candidate, department of political science, McGill University

The crisis of the COVID-19 had a significant effect on the public finances of the provinces and Ottawa.

The slowdown in economic activity decreases the tax revenue, so that the support programmes are particularly costly. In Ottawa, we can expect a deficit of at least $ 260 billion this year, 10 times more than expected in 2019-2020. We’ll know more tomorrow on the fiscal situation of Quebec, while the Quebec minister of Finance, Eric Girard, will have a budget statement.

Several countries are at risk of going through a period of fiscal consolidation, during which governments increase their taxes and/or decrease spending to reduce the budget deficits incurred in the wake of the crisis of the Covid-19. We commonly call these periods of fiscal consolidation ” austerity “.

They are the subject of my research, in the framework of my phd in political science which I completed at McGill University on the political economy of public finances, and which have been the object of publications in Journal of European Public Policy and Journal of European Social Policy.

Cuts in sectors that are less visible

In Quebec, the government Legault has already ruled out raising taxes to reduce the deficit.

It is therefore likely to witness a reduction in the rate of growth of public spending or even budget cuts, unless the government defers to several years, its goals of reducing the public debt.

While the crisis of the Covid-19 has revealed the shortcomings of public services in Canada and in Quebec, the pressure will be strong to respond to acute needs, especially in the network of the health and safety of the income.

If the government decides to reduce its spending while responding to these requests, the severe cuts will be felt in several areas of public intervention, often less visible, but equally important in the long term. In fact, my research shows that periods of fiscal consolidation is generally accompanied by a decrease of public investment in infrastructure, particularly in the maintenance and the maintenance of public assets. We can also associate the decline in investment in the infrastructure that characterizes the Québec for several decades in the exercises of reduction of budget deficit.

Other public investments that are not very visible : the research and development. Although they are at the origin of technological innovations to ensure future economic growth, these investments remain an easy target during fiscal year of fiscal consolidation.

Certainly, the economic recovery strategy of the government of Québec includes additional investments in infrastructure, but these efforts will be in vain if the stimulus is followed by a period of austerity.

The expenses popular, visible, and that offer short-term benefits to citizens tend to be preserved during the years of consolidation of the budget. For example, the health expenses have not decreased in the last period of austerity imposed by the government Couillard. Their rate of growth has certainly slowed, but their proportion relative to the rest of the budget has increased, while the other expenditures, including in education or in the public administration, which suffered the heaviest cutbacks.

In short, when a government is forced to make cuts, it preserves the policies of the most popular, in order to minimize the electoral consequences. These policies are popular tend to offer net benefits in the short term to the voters.

Austerity, growth and inequality

If the government decides not to increase its revenues, there are two options available to him : increase the public debt, or reduce public spending. The second option may result in a decrease in investments beneficial in the long term, while the first option implies that future generations must finance the decisions taken to resolve the crisis of the Covid-19.

Thus, the decision to not raise taxes is fraught with consequences of a point of view of intergenerational equity. At least, the rate of interest on the public debt are particularly low, which limits the adverse effects of this option.

The consequences of the fiscal austerity go beyond the fairness between the generations. Economists have long questioned the effect of austerity on economic growth and on inequality. After the 2008 crisis, the thesis of austerity will be expansionary was in vogue : a reduction in public spending could have a positive effect on economic growth.

This thesis has been largely discredited, while the european countries which have followed this recipe are mired in a recession endless. However, it is generally accepted that a fiscal consolidation based on a decrease of public expenditure has effects that are less harmful on economic growth than if the government were to increase taxes to reduce public deficits.

That said, it is shown that a fiscal consolidation based on a reduction in public spending contributes to an increase in inequality, while an increase in taxes can decrease.

The reason is simple. Almost everywhere, public spending and taxes are progressive : the rich pay considerably more taxes than the poor, so that they enjoy more public spending. A tax increase therefore has a negative impact more important for the rich, while a decrease in spending affects more the poorest. From the point of view of the fight against inequality, even an increase in consumption taxes, which are paid by the rich than by the poor, is preferable to a reduction in public spending.

By refusing to increase taxes to reduce the deficits incurred by the crisis of the Covid-19, the government Legault bet on the economic growth, at the expense of inequality between individuals and between generations.

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This text first appeared on the site of the franco-canadian of The Conversation. Reproduced with permission.