Thursday, August 27, 2015

yo notley : spending cuts the best medicine for ailing albertan economy

The Notley government has decided to delay their budget until the end of October, perhaps to save Mulcair and his merry gang of mensheviks the embarrassment of explaining away her 7 billion dollar shortfall while campaigning on the promise of eliminating the federal deficit. With the energy sector struggling under low oil prices and oil & gas being such an integral part of the economy in Alberta, how should Notley best handle this situation in her inaugural budget?

Spending Cuts

The best thing the government can do when the economy is struggling is cut taxes and cut spending. This gives the private sector, the engine for economic growth, room to recover. Where to cut? Anywhere and everywhere; the deeper and broader the cuts the better. Privatize and downsize. Cut funding to post secondary education, for seniors, cut the salaries and ranks of bureaucrats, cut the oil royalties, auction off parks and stop government advertising.

The deeper the cuts in spending and taxes the more wealth will remain in the private sector.  The market economy is a positive sum game. People only trade when they expect to benefit, and in the vast majority of cases their expectations are realized. While errors can occur on the route between ex ante and ex post, these are rare, the exception not rule. There is an immediate feedback mechanism. If you make a lousy trade you recognize this and don't do it again.  The state, by contrast, is win / lose. One individual or group benefits only to the extent that another suffers. Government is a negative sum game, as state expenditures are not directed towards the highest ranking ends of the people the money is spent on. Instead government spending is the consumptive decisions of bureaucrats.

An additional benefit to deep spending cuts is that the government employees who become unemployed by this course of action would have no recourse but to find more gainful employment in the private sector, switching from burden to benefactor. Coupling the spending cuts with meaningful tax relief would draw in foreign investment, always eager to find a jurisdiction free of confiscator tax rates and would enable consumers to more easily save and invest. Savings are critical for long term economic growth since firms borrow this money to purchase capital.

Unfortunately it is very unlikely that those who are ideologically committed to their dirigiste view of the state are going to find religion sometime during the next two months and Albertans will have to suffer under a status quo budget of profligate government spending and tax hikes.  C'est la vie.

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