Thoughts on Austerity

Economist Don Drummond, tasked by the Ontario government to make recommendations for reducing the provincial government’s budget deficit, has served notice that his forthcoming report is likely to engender an angry response from the public. Reading between the lines, Drummond is serving notice that he will be proposing deep program and spending cuts which will not be to everyone’s liking.

Drummond’s mandate did not include examining tax increases. While he acknowledges that tax increases should be discussed, the fact remains that his recommendations will be almost exclusively biased towards austerity.

There are a few points to be made here. First, as Drummond acknowledges, increasing taxes to offset deficits is likely to be a disincentive to striving for greater efficiencies in the provincial public service – the waste will be left “baked in”, so to speak, and covered up with increased revenues from taxes.  In a word, with higher taxes, it would be business as usual in provincial public service operations.

Secondly, if the above proposition is true, so then is its corollary in the private sector. Reducing corporate taxes is likely to be a disincentive for firms to strive for greater efficiencies – firms can increase their NOPAT and retained earnings without doing anything else other than simply paying less taxes.

The concept of efficiency needs to be understood and communicated with much greater precision of meaning than it currently is. When we say something needs to be made more efficient, we need to be clear about we mean. Do we mean producing more output with the same inputs? Or producing the same output with less inputs? And what inputs, specifically, do we mean to reduce?

This is critical, because in the majority of cases, in both the private and public sectors, the greatest input factor cost is labour. So, when we are talking about efficiency increases we are usually talking about reducing labour costs, which can only be achieved by either reducing salaries or downsizing, either through layoffs or attrition. Since wages are sticky due to employment contracts and the like, layoffs are likely to be the preferred methods of achieving lower labour costs.

In the public sector, it is difficult to see how these efficiencies can be obtained without program reductions or cuts necessitated by downsizing. Surely the time has come for honest and open discussion about what austerity really means and what its implications are. Covering up the real implications of austerity under the code word of “efficiency” is both deceptive and dishonest.

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