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Jim Stanford: Ontario slashes with austerity regime even though predicted massive deficit has not developed

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay.

In Ontario, Canada, the Ontario government is pursuing, like most other governments around the industrialized world, austerity policies.

Now joining us to talk about the effects of it is Jim Stanford. He’s an economist with the Canadian Auto Workers union. He writes a regular column for The Globe and Mail newspaper and he’s a member of CBC TV’s economics panel The Bottom Line. He joins us from Toronto.

Thanks for joining us, Jim.


JAY: So explain a little bit what’s been happening in Ontario politics. You know, I don’t know people know this. Our number one viewing city is actually Toronto, Ontario, even though 60 percent of our audience is from the United States. So, at any rate, a lot of our viewers won’t know what’s going on in Ontario, so give us a bit of a gist of what’s been happening.

STANFORD: Well, they might not know the details of Ontario, Paul, but the story will be a familiar one. As you noted, it’s the same kind of reaction as we’re seeing in so many parts of the world.

Ontario was hard hit by the financial crisis and the recession in 2008, 2009. The manufacturing sector, which is very important here, was just hammered by the crisis in the U.S., which is its major market. So the province had had a balanced budget until 2008, but with that recession, of course, the government went very deeply into the red and ended up with a deficit equal to about 3 percent of provincial GDP, which is a large deficit for a subnational level of government.

JAY: And, Jim, how much of that deficit was just sort of automatic kick-ins of various social programs, social safety net programs when that type of recession happens? And how much of it was a kind of direct stimulus, if any?

STANFORD: The bulk of it is the kind of automatic thing that happens during a recession, namely your tax revenues go down because fewer people are working, they’re not spending as much, and to some extent your spending goes up, and not really for income support programs, because those programs have been cut back so much there wasn’t that much of an increase in the cost of those programs, ’cause nobody could qualify. But the province did put some money into different make-work projects or so-called stimulus projects, and that added some to the deficit in the initial year or two.

Very quickly, though, the government switched from stimulating the economy and trying to get out of the recession to an austerity mode, where their top priority was now slashing the size of the deficit. And to help bring that full austerity shift about, the government appointed a commission. It was called the Drummond Commission, named after Don Drummond, a famous bank economist who was the head of the commission. He came out with a very detailed report, about 400 recommendations for different ways, some very radical, downsizing that he proposed for the government to save money. And then in the year since that report was issued, now the government has been implementing some of his recommendations–not all, but very much undermining the level of financial support for public health care, public education, roads, infrastructure, and other public services here.

JAY: Now, the deficit that the Ontario government was projecting, if I read correctly, actually turned out to be a lot less than they thought it was going to be. Is that true? And if so, have they changed anything on the cuts side?

STANFORD: Yes. This is an old game that finance ministers like to play. They paint a situation that’s incredibly bleak in terms of the size of the deficit. They claim that the province or the country is headed to a catastrophe. And then they use that sort of atmosphere of crisis to justify very painful reductions in services. And in Ontario it’s been true to the course.

I should point out for your U.S. viewers, Paul, in Canada a province is allowed to run a deficit. In America, of course, the states are supposed to have balanced budgets, so that’s made it even worse there. At least in Canada the province can run a deficit, and that provides a bit of cushioning.

But then, of course, the knives come out and the pressure is on for budget reductions. In that Drummond Commission report that I mentioned, they painted a doomsday scenario whereby Ontario would be heading to a $30 billion deficit, which would be very large for a province to finance. In reality, the deficit has been shrinking steadily. It’s down to about $11 billion now and probably less than that. So, again, while we can’t pretend the deficit isn’t an issue, it certainly is not, you know, a doomsday scenario, especially in the context where the overall economy is still performing quite weakly and partly as a consequence of that interest rates are very low.

So that means that the interest cost to the government of this debt has been very modest. In fact, it’s incredible. Despite the big deficits, total interest costs paid by the provincial government have actually shrunk during this time, precisely because interest rates have fallen so dramatically. So it is–.

JAY: Well, they argue that’s because they have these austerity measures that interest rates are low. Isn’t that supposed to be the argument for having such cuts?

STANFORD: No. I mean, they invoke fear that the bond rating agencies will downgrade the province and that will lead to higher interest rates. But nobody could argue the low interest rates that we have today are because they’re cutting. The low interest rates are there because the whole global economy has yet to recover from that financial crisis.

So across the board in Canada, whether it’s a province with a surplus or a province with a deficit, the interest rates are at record low levels. So the government can basically borrow money for long periods of time for basically zero after you’ve adjusted for inflation. Real interest rates are almost zero, barely higher than the rate of inflation.

So in that setting, it really makes sense for government to continue to do stuff that adds to employment and incomes in the economy, whether that’s, you know, building public transit or repairing sewer systems or building low-cost housing. Those are the sorts of investments that it makes really good sense to do at this point in time. But, of course, with the dominant ideology being government should be smaller whether you have a deficit or not, the pressure is on around the downsizing of government.

JAY: So who gains from this logic? I mean, it’s pretty obvious you can look at Europe and see how wonderfully these austerity measures are working, and obviously it’s a disaster. So who wants this?

STANFORD: It is ironic that Ontario in a way actually came late to the austerity party. And in the initial years of the financial crisis and the recession, the government here, which was a majority liberal government at that time, really kind of softpedaled the deficit, and they adopted a timetable that would see the budget balanced not until 2017, which is a bit later than most other provinces in Canada are doing it.

However, last year they really started to drink the austerity Kool-Aid. And I still don’t understand the politics of it, because last year the government actually lost its majority, and now they are a minority Liberal government, and they need the support, usually from the NDP, the social democratic party, in order to stay in power. So why they chose this particular moment to embark on this radical austerity vision is not clear to me.

And it’s caused all kinds of controversy. For example, they tried to legislate away the collective bargaining rights of teachers and other public-sector workers in Ontario as a way of not just freezing their wages–the unions had already agreed to that–but taking away all kinds of historic benefits. And that was very difficult politically for the government. They’ve lost a lot of support, and the premier ended up resigning over it all.

So we have a new premier, Kathleen Wynne, the first woman premier in Ontario’s history. She’s clearly trying to put a softer touch on the whole thing. Whether she facilitates any kind of real movement away from austerity remains to be seen.

JAY: Well, if you follow the money, not necessarily the ideology, who benefits from this? Or is this also about some day those that have money assume if you don’t make cuts there’s going to be higher taxes on the wealthy, so to avoid that they’d rather have a cut, damn the consequences?

STANFORD: Well, I think there is an ideology from big business, what we call neoliberalism, which is the view that not you should get rid of the state, but that the state should be kind of put in a corner and given very specific, limited functions to do, and then the rest of the economy and the rest of society is dominated by private business. So there are folks, obviously, in Ontario who would prefer to see programs like public health care reined in and cut back. And, again, they would be making that argument even if there wasn’t a deficit. But they clearly do seize on the deficit as the excuse to bring about some of this downsizing that they wanted in any event.

JAY: And to what extent do you think this is about what we’ve seen, and certainly in Europe, sort of creating the conditions for some kind of privatization? Ontario still has some jewels in the publicly owned crown that I would assume if you’re sitting there on a lot of money, your lips are salivating at trying to privatize some of–in the health-care sector and some of the other areas. Do you think that plays a role?

STANFORD: It could. There have been some limited calls for privatization in Ontario. Two of the government’s assets that have been mentioned are the liquor stores–still for hard liquor and wine, you must sell it through a government-owned monopoly. The problem is that this liquor store chain, the LCBO as it’s called up here, is a tremendous moneymaker for government. So there have been some–.

JAY: And very popular. I remember years ago the Harris government wanted to privatize after it was elected, and the polling numbers were tremendously in support of publicly owned liquor stores, and they had to back off on it.

STANFORD: Yeah. They are a high quality chain of liquor stores. And then of course there is a public policy issue. You know that when liquor is sold by private small stores on every street corner, they’re not going to be as serious about checking the drinking age and other safety issues.

So the LCBO is a good moneymaker for government. So I think that is going to rebuff the call for privatization.

The other one they’re looking at is the outfit that runs all the casinos and slot machines and the lotteries in Ontario. The OLG it’s called, Ontario Lottery and Gaming commission.

So on the whole, I think that the demands for privatization have been relatively muted here, but there is a very aggressive right-wing party, the Conservative Party, waiting in the wings, and they are making the judgment that all kinds of dramatic things should be sold off, the labor laws should be really slashed, some of health care should be privatized. And they are in a way the biggest danger right now. They’re the ones really using the deficit as an excuse to really remake all of Ontario society.

JAY: And how long before there’s an election?

STANFORD: Well, we have a minority government. So in our system, in the parliamentary system, the liberals can keep governing so long as one of the opposition parties votes for them on the key measures, like a budget bill.

Now, we are coming up to a provincial budget sometime in the next month or two, and what’s happening is there is some negotiation going on between the Liberals and the NDP, the social democratic party, over whether the budget will be passed by the NDP or if the NDP votes against it–and the Tories of course are going to vote against it. Then we would go to the polls for a new election.

That will be a very complicated scenario for a couple of reasons, one I’ve mentioned, the danger of the Tory (Conservative) Party, which is a very hard-right party right now. They even want to adopt a so-called right-to-work law in Ontario that would be similar to what was just passed in Michigan and Indiana in the U.S. and which really would help to eliminate unions as a real force in society.

The other difficult thing to peg is what the NDP will do. They have a leader who’s very middle of the road, kind of populist in a way. She’s actually made opposition to different taxes the centerpiece of her campaign, so it’s hard to tell where she would come at the issue of austerity. They have adopted the same budget-balance timetable as the Liberals and the Tories do.

So I don’t think an election is really going to help us at this stage. I hope they can find a way to preserve the current government and keep–you know, at least make some modest changes to the budget. It’s hard to tell what an election would bring about.

JAY: Alright. Thanks for joining us, Jim.

STANFORD: Thank you very much, Paul.

JAY: And thank you for joining us on The Real News Network.


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Jim Stanford is an Economist in the Research Department of the Canadian Auto Workers, Canada's largest private-sector trade union. He received his Ph.D. in Economics in 1995 from the New School for Social Research in New York. He also holds economics degrees from Cambridge University in the U.K. (1986) and the University of Calgary (1984). Jim is the author of Paper Boom (published in 1999 by James Lorimer & Co.) and co-editor (with Leah F. Vosko) of Challenging the Market: The Struggle to Regulate Work and Income (McGill-Queen's University Press, 2004).