Poor suffer the most in deficit wars
One of the few iconic tales of Canadian politics revolves around how Paul Martin, as Liberal finance minister in the 1990s, wrestled the deficit to the ground with his bare hands.
While there’s some truth to it, the legend sidesteps an important question: was Martin’s ruthless “hell-or-high-water” deficit-slashing really the only thing that would have worked? Could a defter touch have solved the deficit problem without laying waste to much of our social infrastructure in the process?
All this is worth raising now that we’ve entered into another era of deficit hysteria, with governments and the business community making deficit elimination their top priority and shunting aside almost every other goal.
In that spirit, Finance Minister Jim Flaherty brought down an austerity budget last week that slashed $17.6 billion in planned government spending, and he promised to cut more deeply if necessary.
But while balanced books are an important goal, blindly worshipping them is awfully short-sighted. A family that celebrates having its finances balanced, while several of its children lie unfed on the living room floor and the roof is about to collapse, is clearly suffering from a warped sense of priorities.
Back in the 1990s, leading economists Pierre Fortin and Lars Osberg, both past presidents of the Canadian Economics Association, argued that the long-term consequences of Martin’s spending cuts would be devastating, and that the economy could have grown its way out of the deficit problem instead, with a little more time.
But Martin, with the enthusiastic backing of the business community, insisted on plowing ahead aggressively with deep spending cuts. Just like today, tax increases were ruled out, even though they would have been more equitable, requiring the well-to-do to share in the pain.
In the U.S., for instance, the Clinton administration dealt with its deficit problems in part by raising taxes significantly on those at the upper end. While the rich squawked, they ended up paying the higher taxes, and Clinton left office boasting of surpluses.
Martin’s decision to rely almost exclusively on spending cuts put the burden of Canada’s deficit reduction squarely on those with lower incomes, notes Andrew Jackson, an economist with the Canadian Labour Congress. “This was a significant factor behind the pronounced increase in Canadian income inequality over the 1990s.”
Of course, a deficit-reduction scenario like Martin’s fits nicely with the aims of Harper’s Conservatives, who are committed to reducing the size of government, and have no hesitation about favouring those at the upper end.
For the past several years, burdened by large surpluses, it’s been hard for the Harperites to justify spending cuts. All that surplus cash made it awkward to take food away from the hungry kids on the living room floor.
Now that mayhem on Wall Street has plunged our economy into deep recession and left us mired in deficits, the coast is clear. But a further assault on our social infrastructure isn’t necessary. As Clinton showed, there’s lots of room for tax increases at the top – and even more room today than in the 1990s, with the significant rise in the incomes of the elite over the past decade.
In January, a statewide plebiscite in Oregon gave voters a choice between reducing the state deficit through spending cuts or through a tax increase on those earning more than $250,000 a year and higher corporate taxes.
They chose the tax increases – just as the Canadian public might, if it were ever given the chance.
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