Capital Spending Raises Capital

Finance Minister Graham Steele

If the opposition want to reduce capital spending, they will have to name the roads, bridges, schools and hospitals they don’t want fixed.

Unlike previous governments, Finance Minister Graham Steele releases the capital budget in the Fall, instead of as a part of the spring budget. This allows contractors to better plan and keep their bids lower. It’s a good move.

The Liberals and Conservatives both came out against the NDP’s 2012-13 Capital Plan, claiming it was an expensive pre-election spending spree, and not much of a jobs plan. The problem – the next election is not yet in sight, and capital spending does create jobs.

The opposition’s failure to understand Economics 101 is not good news for Nova Scotians who do understand that capital spending on hospitals, schools and roads is a very good way to support the public good and create direct and indirect jobs.

There is a troubling argument in the current American right-wing that is spreading to Canada. They want significantly less government spending during economic downturns, despite evidence that infrastructure dollars have a great return on investment, and historically are needed to avoid depressions. If Nova Scotia Liberals continue to follow Conservatives down that path that would be unfortunate.

Here’s economist and New York Times columnist Paul Krugman:

The starting point for this discussion is Okun’s Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun’s Law coefficient range from 2 to 3. I’ll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been…

How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts…

Stay with us. Economics 101 is good for you. More Krugman:

Deficit Hawks like to complain that today’s young people will end up having to pay higher taxes to service the debt we’re running up right now. But anyone who really cared about the prospects of the young would be pushing for much more job creation, since the burden of high unemployment falls disproportionately on young workers — and those who enter the work force in years of high unemployment suffer permanent career damage, never catching up with those who graduated in better times…

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue.

The NDP understand. Keeping people working means increased income tax revenue, a stabilized workforce and well-fed families. Add onto this stimulus spending the fact that the NDP are now connecting government investment in businesses to equipment upgrades, worker training and energy efficiency. That means businesses, as well as government, continue to spend despite troubling economic times – a rare and useful thing to see.

If Deficit Hawks need a reason to continue to support the government, they need only remember that last year’s surplus allowed the province to reduce its net debt for only the seventh time since 1951. In part because of stimulus spending (not in spite of) Nova Scotia was be one of only a few jurisdictions in North America able to pay down their debt in 2011.