Now Is Not the Time For Spending Cuts: Study

policyalternatives.ca – newsroom/news-releases
October 18, 2010.   Ottawa

Given the fragile economic recovery and the weak job market, now is not the time for a sharp turn to spending cuts, says a study released today by the Canadian Centre for Policy Alternatives (CCPA).

“It would be a huge mistake to significantly tighten the fiscal screws,” says the study’s author, economist Andrew Jackson. “While debt has risen due to the Great Recession, there will be a major human and economic cost if deficits are eliminated before a real recovery has been achieved.”

The study points out that debt in Canada—even after two years of stimulus—is still at very low levels compared to other countries, and compared to the mid-1990s. It warns against repeating the major spending cuts of the 1990s, which shredded social programs and public services.

“Cuts will shrink rather than raise our economic potential. We need to maintain high rates of public and private investment to boost our future rate of growth,” Jackson says.

Balancing the books can be done without spending cuts or raising taxes: deficits and debt will shrink rapidly so long as interest rates are lower than the rate of economic growth and interest rates are at historically low levels today.

Once the economy has recovered, the report recommends changes in taxation in order to address the small structural deficit and to meet the costs of an ageing population.

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