11/09/2012 05:50 EST | Updated 01/09/2013 05:12 EST

Quebec Needs a Healthy Dose of Austerity

Description 1 Montreal, Quebec, Canada 1 Montreal, Quebec, Canadá | Source | Author Poco a poco | Date 2007.03.08 | Permission | other_ ...

As Quebec now prepares for the return of parliament with its new government, the hot issue is undeniably the claims of rampant corruption. Sadly, in the midst of this debate, the issue of Quebec's large budget deficit and debt has been put aside. Truth is Quebec is one of the most profligate in Canada with a correspondingly high tax burden and debt stands considerably above the Canadian average. Were it not for federal transfers, Quebec's situation would be even more problematic.

Moreover, the economy is still constrained by burdensome government regulations and inefficient government monopolies that stunt economic growth. Combined with the aforementioned high tax burden, the prospects of future economic growth are dim. As if this situation was not dire enough, economic growth has slowed down and Quebec is only a shock away from recession. In fact, in the last few quarters, more prices have increased than did GDP or population indicating a slight decline in real living standards.

It is hard to see any other way to return to true growth by any other way than curtailing expenditures and deregulating the economy. Maybe it's time to look into history books to see if we can find hope in the case of countries facing a similar situation. Fortunately, we can find many and the case of the United States and Great Britain are great examples.

The case of Great Britain and the U.S.

The best example from which we may draw hope is that of Great Britain during the worse recession of the 20th century: the Great Depression. In the first years of the Depression, the economy dipped by 5.8 per cent in inflation-adjusted terms at a time when British public finances were in dire condition, especially with a huge debt burden. To tackle the situation, the British government curtailed spending in order to eventually cut taxes and avoid expansion of the public debt. Moreover, the government made sure that it was not suffocating entrepreneurs and investors with burdensome regulations. Led by a boom in construction activity and industrial activity, Britain had regained all lost ground by 1934. In fact, between 1934 and 1939, growth exceeded 4 per cent annually in inflation-adjusted terms.

Although it was far from perfect, the case of Great Britain during those years is in complete opposition to that of the United States who went in the opposite direction. During the Great Depression, the United States embarked on large spending plans combined with tax increases, higher import duties (protectionism) and heavier regulatory burdens. Accordingly, the United States saw the recession drag on and all the policies they adopted are estimated to have lengthened the recession by a total of seven years. By 1939, they the United States still had living standards below those they had experienced in 1929.

Nothing predicated the United States to such a dismal performance. In fact, a decade earlier, the U.S. had adopted a similar approach to that of Britain to get of a recession. After the First World War, the United States entered into a "severe" and "deep" recession when the economy contracted deeply while unemployment surged from 2.3 per cent to 11.7 per cent. The administration of the time decided to slash spending by half; it reduced tax rates for nearly every fiscal year and lifted many of the wartime regulations on prices and labour that had restrained the economy. Economic growth (adjusted for inflation) returned quickly and living standards increased rapidly for everyone, averaging above 4.2 per cent a year between 1920 and 1929. At that pace, individual incomes would have doubled every 17 years!

Quebec's inspiration?

In both cases, the lifting of the numerous regulations is to be credited for the return to fast economic growth. However, the spending cuts contributed as well by consolidating the return to growth by liberating resources for the private economy while making room for tax cuts to stimulate investment. In short, spending cuts were most successful when measures to liberate the creativeness of workers, investors and entrepreneurs act as complement.

For a society with a tax burden as high as Quebec, going in the direction of increasing spending, raising taxes and the multiplication red tape is to ignore the lessons of history that should give us hope. In fact, the lessons of history teach us that curtailing spending to make room for tax cuts while also liberating individuals from the shackles of burdensome regulations is the best way for us to return to sustainable growth.