18 November 2014

Government Spending and the Economy – Again #nlpoli

A post last week offered a quick confirmation that, as finance minister Ross Wiseman said,  provincial government spending accounts for about 30% of the gross domestic product measured as spending.

A couple of people on Twitter took issue with that idea, apparently.  They also took issue, as it seems, with the contention around these parts that the situation Wiseman described was a matter of government policy as opposed to the random changes in the economy.

Let’s dig into this in more detail.  It really is quite important as the government has a very serious financial problem to deal with, what with the growing deficits and the weakening income. Wiseman mentioned the impact of government spending on the economy, incidentally, as a reason why he could not cut spending very much, if at all. 

The Idea

And that’s really the first big clue at the start that what we are talking about is not some sort of accidental situation.  The finance minister is acutely aware that provincial government spending is a big part of the overall economy.  A cut in spending will cause problems in the economy.

Second clue:  Premier Paul Davis’ speech to the board of trade last week.  When Davis pointed out that $6.0 billion in “infrastructure” spending produced lots of jobs,  he was acknowledging the extent to which the government spent money beyond that needed to replace critical infrastructure as a way of driving the economy.  Davis mentioned the “stimulus” spending during the recession after 2008.  Davis didn't say that he and his colleagues started spending then as a temporary measure.  No.  Davis said that the Conservatives continued to spend.

Third clue:  the “Prosperity” plan announced in 2012 was basically a plan to continue high levels of government spending, despite very large deficits,  rather than adjust spending down to what the provincial government revenues can support.  In itself, that’s a pretty clear statement of a deliberate policy.

Plus, we know that the Conservatives have been aware that their spending was unsustainable. Paul Oram raised the issue as he left cabinet in 2009.  Danny Williams and Tom Marshall have acknowledged their spending plans were unsustainable.  So too, did Kathy Dunderdale.  They have excused this high level of spending and the debt and deficits with a variety of reasons.  They needed to stimulate the economy according to one set of explanations.  And when the stimulus excuse wore out,  they said every government before had neglected the province so the current Conservatives were just playing catch up. 

What’s more, the idea that government spending affects the economy is such an old idea in economics that it is a bit of a head scratcher that someone might actually doubt that a modern government in Newfoundland and Labrador is not only aware of the economic impact of government spending but is actually using it as part of their economic policy.

Put all that together and it’s pretty clear you have a government that is aware of the economic impact of government spending. And, they are committed to sustained government spending at levels beyond what government revenue would support. They’ve offered lots of different reasons for it: the one consistent thing is the high spending.

The Slide – Constant Dollars

Now let’s turn our attention to the slides.  Here’s the one SRBP used last week.  It shows government spending as a share of the economy (gross domestic product) measured by spending.  In the slide,  the numbers from Statistics Canada are given in constant 2007 dollars.  That means that SC has converted the 1981 dollars and the 2013 ones and all the others in between into the equivalent value in 2007 dollars.

expenditure gdp constant

These are not the actual amounts, incidentally.  They are a percentage.  They show the relationship of one thing – government spending – in terms of another (GDP).

Between 1981, the first year for which we have figures and 1997,  government spending was between 30 and 35% of GDP.  The increase through the 1980s and the jump up in the early 1990s are all explained by the relative weakness of the provincial economy.  That’s particularly obvious in that big spike in the early 1990s during the Great Recession.  The economy shrank and the result was that government spending was a bigger part of a smaller GDP, measured in constant dollars.

Starting around 1997, there’s a fairly steady drop.  That doesn;t mean spending dropped.  It means that spending didn’t grow at the same rate as the economy.  The steady line from 2003 through to about 2008 doesn’t mean spending stayed the same, either.  It means that the relationship between GDP and spending stayed the same.  They could have stayed the same, grown proportionately or declined proportionately.

The Slide – Current Dollars

There’s another way to do the comparison, using the value of dollars at the time.  This one might actually be a bit more intuitive for people because it reflects what the actual  numbers were at any given time.expenditure gdp current

In this chart you can see that, at the time,  the government used to play a much bigger part in the economy than it does even today.The place continued right up to 1995 by which time government spending restraint during the recession really took hold. 

As with the constant dollar chart, government spending declined as a share of GDP starting around 1997.  Look what happened in 2005, though.  There’s a big jump in the share of the economy held by government spending.  That changed ratio coincides with the boost in spending by the Conservatives.  The dip in 2008 was caused by the massive spike in oil prices right before the economic collapse in mid-2008 coupled with a cut in government spending in the back half of the year. 

The decline in the back end of the chart reflects a growth in the economy larger than the growth in government spending.  We don’t know the basis the finance officials used to give Wiseman his briefing, but wither using current or constant dollars, government is somewhere between 25% and 30% of the provincial economy these days.  That’s not as big a share as it used to have but, as you can see especially in the current dollars chart,  starting in about 2005,  the Conservatives increased spending more than the economy grew.

The Slides – Spending and GDP

For those who want more, here is the actual spending and GDP using constant and current dollars.  The red in each slide is government spending, shown on the left vertical axis.  The blue line is the GDP, measure don the right vertical axis.

Here’s the one in constant 2007 dollars.

spendign and GDP current

You can really see the deliberate government policy in the current dollars chart.  Just look at that massive jump upwards in 2006, right on the heels of the closure of the Stephenville mill,  the fish plant problems at Harbour Breton,  and the first disastrous year of falling polls in 2004.  There’s a slight drop in 2007,  another tinier drop in 2008, what with the immediate fear struck by the recession mid-year.

spending and GDP  current

But look at how rapidly spending got back up to the 2006 level and beyond.  The big difference is that while the government produced surpluses in those years in between, thanks entirely to oil prices,  the more recent spending is sustained by sizeable deficits.  Well, deficits or drawing down some of the accumulated surpluses from 2007 and 2008 and not replacing the cash in the notional savings (surplus) account.