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Why we can expect a gentler era of austerity

Members of the building and construction trades demonstrate in Ottawa in 1994 to protest proposed changes to the unemployment insurance program.

Chuck Mitchell/Canadian Press

Someone asked me recently why government efforts to reduce budget deficits weren't causing much outrage among the general public.

He reminded me of the deficit fighting years in the early to mid-1990s, when provincial governments were slashing public services across the board. The federal government also cut deeply into program spending -- some departments were thoroughly routed. Industry Canada alone had its staffing level cut in half.

Back then, federal-provincial efforts to eliminate budget deficits sparked a broad-based public backlash in many parts of the country. In New Brunswick, there were sustained protests over cuts to entitlement programs and public services. There were bitter battles over the reduction in hospital beds and health services – particularly in rural areas. Anyone living in Atlantic Canada at the time will remember the huge outcry and large protests - some violent - after changes to the unemployment insurance program. Some big-name politicians were tossed out of office as a direct result of the changes.

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Fast-forward to the present: Most provincial governments are running budget deficits -- and have been for several years. Ottawa's budget has been out of balance for five consecutive years. As a result, governments have enacted austerity budgets.

RBC Economics keeps a running tab on public spending going back to the early 1980s. Using RBC's data, we can compare deficit-fighting efforts today compared to previous eras of austerity.

The Ontario budget grew at an average rate of 7.4 per cent between 2003/04 and 2009/10, but dropped to an estimated 2.7 per cent in 2011/12 and is expected to decline to 1 per cent or less over the next few years.

Average program spending growth at the federal level was 7.8 per cent per year between 2003/04 and 2009/10 and is forecast to be less than 2 per cent a year until 2017/18.

There are several reasons why provincial and federal government austerity efforts seem to be kinder and gentler than they were last time.

First, Government balance sheets, for the most part, were in much worse condition back then. Provincial budget deficits as a percentage of gross domestic product (GDP) between fiscal 1991/92 and 1994/95 were more than triple compared to now (2009/10 to 2012/13).

The non-weighted average provincial budget deficit between fiscal 1991/92 and 1994/95 was 2.3 per cent of GDP. From 2009/10 to 2012/13 the non-weighted average provincial budget deficit was only 0.7 per cent of GDP.

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During the same periods, the federal government budget deficit was 5.1 per cent and 2.1 per cent of GDP respectively.

For the most part, government debt to GDP ratios were also worse in the mid-1990s. The net debt to GDP ratio for the federal government in 1995/96 was 67.3 per cent. By 2010/11, it was down to 33.9 per cent.

Seven provinces have lower net debt to GDP ratios in 2010/11 compared to 1996/97. The three that have witnessed increases are British Columbia, Ontario and Quebec. In Quebec, net debt to GDP has risen from 35.9 per cent of GDP in 1996/97 to 51.5 per cent in 2010/11.

Second, after years of government spending growth at rates much faster than overall economic growth, there seems to be some room to trim the 'fat' without significantly impacting programs or substantially increasing taxes.

Third, the overall economic situation across the country has changed. High unemployment in the early to mid-1990s remained a stubborn problem. Across the country, the unemployment rate remained above 10 per cent from 1991 to 1994 and stayed above 8 per cent until 1999. After the most recent recession, the unemployment rate peaked at 8.3 per cent in 2009 and dropped back down to 7.4 per cent in 2011.

While unemployment among the 15-24 age group is currently higher than it should be (a 14.2 per cent unemployment rate across the country in 2011), unemployment among the critical 25-29 year old demographic is considerably lower now compared to the early 1990s. In 1993, the unemployment rate among this age group was 13 per cent compared to only 7.8 per cent in 2011.

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The number of persons receiving unemployment insurance benefits across the country was also much higher then compared to now. In 1992, the average monthly number of persons receiving benefits across the country was 97 per 1,000 persons in the labour force. In 2009, the high water mark after the most recent recession, the ratio was only 57.7 per 1,000 persons in the labour force. In 2011, the ratio was down to 45.5 per 1,000.

Some of the changes to entitlement programs such as Old Age Security (OAS) and Employment Insurance (EI) have the potential to generate increased social unrest as the impact start to be felt across the country. Provinces more reliant on federal transfers will have a much harder time balancing the books and that could eventually lead to the kind of deeper cuts we saw back in the 1990s. But for now, it appears that we are in a kinder, gentler period of government austerity.

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