Canada West Foundation Blog

By: Roslyn Kunin

Any reporter knows that if you can get the answers to six questions, you have a story. The questions are Who? What? Where? When? Why? And How?

The biggest economic story that is likely to affect all parts of Canada as we move out of 2011 and into 2012 is not within Canada. Nor is it in Asia, the source of much of global economic growth. It is not in Africa which we should be starting to watch as that continent begins to exhibit growth patterns similar to those in China and India of a few decades ago.

The story concerns the very precarious financial situation in Europe and the on-going, increasingly desperate attempts to ameliorate things or at least generate enough stability to avoid conditions becoming any worse.

So far, we have answered the “what” and the “where” questions. The “when” is now. The “why” is generating growing concern among both political and business leaders and informed citizens. Failure to put Europe back on a secure financial footing could spell the end of the euro as a widespread and growing common currency. It could threaten the European common market and the resulting free trade and mobility. The simple uncertainty of the situation could generate economic retraction in Europe, which could then spread to the rest of the world.

This has led the political leaders in Europe to earnestly seek out “how” to avoid these dire consequences. Greece and Italy have positioned unelected technocrats as heads of their governments, hoping they will be able to find and implement the tough answers needed.

An almost continuous series of summit meetings has been held, featuring Nicolas Sarkozy of France and Angela Merkel of Germany, each meeting seeming to lead only to the next summit meeting. The latest meeting did result in some more specific proposals, including a tax on financial transactions.

Already Britain and others in Europe are stepping back from this potential solution. Nevertheless, the situation is serious enough that this proposal just might work. Merkel has already stated progress could be made even if not all countries choose to participate.

However, there is still one very important unanswered question. The current proposal, and indeed any solution, will involve imposing fiscal and monetary requirements on individual countries. Rules will be set and penalties specified for breaking those rules. The big remaining question is “who” will apply and enforce these rules and penalties?

Europe and the euro zone have always had rules. They were often broken. If previously established deficit limits had been adhered to, Europe would not be in its current mess. So putting in place more rules that will intrude even more deeply into national sovereignty and expecting them to work requires a leap of faith. Unless, and until, there is an agreed upon body with both power and widespread consensual support, an effective solution to the European problem will remain elusive.

By: Tom Carson, Director of the Manitoba Office

Manitobans head to the polls on Tuesday, October 4, 2011, and with only 169 days to go it is not surprising that the budget tabled on April 12 seemed designed both to benefit the largest number of interests and to create the least possible controversy.

On the revenue side, no increases are planned for major corporate or personal income taxes and expenditure increases will be sprinkled across many sectors, reaching a very broad public. These increases include the freezing of administrative costs for the regional health authorities and tying tuition increases to the consumer price index (CPI).

However, there was also some disappointment, especially for those who viewed the budget through a lens where the economy and our future spending ability is of preeminent importance. While the minister stated that overall expenditures were expected to rise by 2.3%, year over year, spending on core programs actually rose by 4.89%.

Going into the preparations for this budget, consultations generated a few hot points:

• The Business Council of Manitoba had what seemed to be an unprecedented recommendation; in recognition of the serious impact that Manitoba's infrastructure deficit has on the economy, the leaders of Manitoba's business community actually recommended a 1% increase in the provincial sales tax to be applied for a ten-year period and used only for infrastructure expenditures. This was seen as an opportunity for municipalities to deal with their infrastructure problems with a revenue source that actually grows with the economy.
• The government responded with a commitment to spend the equivalent of one point of the provincial sales tax on municipal infrastructure and public transit. This looks like a bigger commitment than it is. Rather than being incremental to current infrastructure spending, this commitment blends current grants for infrastructure and public transit. While blending both grants identifies a secure and growing source, for the City of Winnipeg it would represent an estimated 9% increase from funds they already receive. Winnipeg will benefit by having this increase funded from a growth stream, whereas previously approximately 50 to 60% was funded in this manner. Over time the value of that growth will become more obvious, however, it is not a substantial investment and will not contribute significantly to correcting the infrastructure deficit.
• Comparatively, Manitoba's universities have been both underfunded and, due to a decade-long tuition freeze which ended in 2009, prevented from using tuition increases as a means to help balance their books. The government has committed to increased grants of 5% over the next three years and has reinstituted a tuition freeze, although this time tying it to growth in the CPI. Although this commitment is not enough to bring them on par with the support received in most other provinces in Canada, it does at least begin to reflect the importance of universities to our provincial economies.
• For those hoping that the budget would reflect a major commitment to cut spending, the tone of the budget speech demonstrates that it was clearly not something the government wished to lead with. The publicly stated commitments to restraint are quite narrow—they are striving to negotiate a 0% increase for the general civil service, freeze discretionary salary and operating expenditures, maintain last year's reduction in ministerial salaries and carry on a freeze on salaries for members of the legislative assembly along with their staff. They will be attempting to freeze salaries for senior management in the regional health authorities and generally seeking ways to foster innovative, cost-effective services. (Government will likely also expect all public-sector employers to seek the same wage freeze—presenting an interesting dilemma for university administrators).
  
  

The question yet to be answered for Manitobans is whether the right policy choices are being made through the current budget. Were there alternatives which could have resulted in balancing the budget more quickly? If these choices were not made in this budget, will it be incumbent on the government formed after October's general election to initiate them?

It might be tempting to say that no government going into an election would choose to add 1% to the sales tax or to introduce themes of restraint and program redesign. However, Saskatchewan is also heading into an election in November of this year, and unlike Manitoba and most other provinces, has already posted a surplus. Both provinces saw greater revenues last year and both spent more than they had budgeted in 2010/11. Saskatchewan's revenues and expenditures have grown significantly more than Manitoba's, but their treatment of the budget challenge in 2011/12 is quite different despite the upcoming elections. While Saskatchewan plans to be spending 5.48% more than their printed estimates of last year, they will be spending 2.45% less than their actual previous year expenditures. And the untouchable—spending in the Department of Health will actually be reduced compared to the previous year.

Now, that would have raised eyebrows amongst those looking for more attention to the bottom line in Manitoba!

by Roslyn Kunin

The bill to dismantle the gun registry has been defeated in Parliament and, according to Prime Minister Harper, this controversial and divisive issue has now been raised to become fodder for the next federal election campaign.

Among all the heated discussions that have been aired there has been one too frequently overlooked concern—one that should be of great importance to every Canadian taxpayer: is the gun registry the best use of our tax dollars?

Everyone who watches these things knows that the federal government is in a tight fiscal situation. Government expenditures are exceeding income and debt is accumulating. As is true for ourselves and our families, this situation cannot continue over the long run. And the only solutions are to raise taxes, cut government expenditures or both.

With the economy still fairly fragile and unemployment still relatively high, raising taxes is not a very viable option at this time. This means that the government is going to have to cut its spending. So, where shall it cut? It could squeeze the provinces, but that would impact both healthcare and education. Canadians already have an on-going rant about wait times, lack of doctors and drug costs in healthcare. We are also concerned about our children and ourselves if we face a career change, being able to get the education and training we need to be productive workers, providing for our families and keeping our economy moving.

If we look at most other components of government spending, similar objections can be raised as to reducing what the government provides. We are even altruistic with most Canadians supporting the prime minister in encouraging more foreign aid spending to help the really poor in the less developed world.

So where can expenditures be cut to have the least negative impact on Canadian society and on Canada’s role in the world? One of the only other areas where the current budgets are big enough so that their elimination or major reduction would be large enough to make a difference is the billion dollars spent annually on the CBC.

So the question that needs to be asked is not just should we have a gun registry or not. It is a much bigger issue. Given that the government is spending beyond its means, given that we as Canadians do not want—and at this time probably cannot afford—to pay more taxes; sooner or later the government services that we receive are going to have to be significantly reduced. Which cutbacks would make us least unhappy: healthcare, education, foreign aid, some other services, the CBC or the gun registry?  Looking at this list, what would you cut?

The big news from yesterday’s budget includes the $49.2 billion deficit and the plan to reduce the red ink to just under $2 billion by 2014/15.

There are lots of other announcements and dollar figures in the budget document entitled “Leading the Way on Jobs and Growth.”

I stumbled across more than a few items, however, that don’t seem particularly “budgety.” For example, there is a short section on “modernizing Canada’s currency” on page 117 (the budget document is a whopping 451 pages). The section notes that new “bank notes will have increased security features and will be printed on a polymer material, which lasts significantly longer than the current cotton-based paper, thereby reducing production costs and the impact on the environment.” This sounds great, but does it belong in the budget document? There isn’t even a dollar amount attached to how much this will cost or save.

On the next page, there is a short section announcing a federal framework for credit unions that includes the following statement: “To promote the continued growth and competitiveness of the sector and enhance financial stability, the Government will introduce a legislative framework to enable credit unions to incorporate and continue their operations as federal entities.” As with the new bank notes, what does this have to do with how much money the government is taking in and spending?

We have bigger fish to fry than reducing the girth of the federal budget document, but in the name of doing more with less, maybe next time around the budget document will be leaner.

Posted By: Robert Roach

Given that a prorogation of the House of Commons was required to put it together, yesterday’s 2010 federal budget was quite a disappointment.  Minister Flaherty’s document is thick with announcements related to the government’s much publicized “Economic Action Plan” but despite a thorough scan not much else is new in terms of economic policy.  The overall opus is 450-pages long but the complete list of genuinely new announcements could probably fit on a business card.

A large section of the budget consists in a report concerning the Action Plan, a report that the government was due to release anyway.  The bulk of it deals with infrastructure spending.  Of specific interest to the West, over this year and the next one or so (the time period is not clear), BC will get $1.6 billion, Alberta $1.0 billion, and Saskatchewan and Manitoba about $0.4 billion each for infrastructure.  These projects cover anything from new highway interchanges to new windows in some public buildings and are for the most part just barely getting started.

All this stimulus spending leaves the government with a $49.2 billion deficit in 2010-11. This marks a slight improvement in the government’s fiscal balance compared to last year as a result of revenues edging up this year due to the return to growth, but is still a deficit position.  If revenue projections are met, we will start to edge towards a surplus position over the short term as the stimulus money taps will shut down by the end of next fiscal year and the government will freeze its departmental operating spending starting this year.   Optimistically, Mr. Flaherty anticipates he will be able to balance the books sometime after 2014-15, the fiscal year marking the end of his forecasting horizon.  The back-to-surplus date may or may not be 2015-16.  He doesn’t know.

This deficit-fighting plan assumes that economic growth will average 2.8% over the next five years, which is a possible yet somewhat optimistic scenario.  During the deficit wars of the 1990s Paul Martin would average the private sector forecasts and then assume a bit less growth just in case. No such prudence for Mr. Flaherty.  The margin of error is therefore very thin: all it takes is one year of sub-par growth to derail the whole thing.

One solution the government said it would not use to bring the deficit under control is to reduce the provinces’ funding in areas such as equalization and health transfers.  In other words, there will be no shoveling of the federal deficit into the provinces’ yards.  All premiers will be happy to hear that, but they will keep asking for more money anyway.  That’s required by their job descriptions.

Note:

In a previous blog I mentioned that this year was a golden opportunity to simplify our personal income tax system.  The results are in, and I won’t bore the readers by showcasing in how many languages I can say the word “nothing.”

Posted By: Jacques Marcil

In yesterday’s Throne Speech, the Harper Government announced that it “will lead by example, introducing legislation to freeze the salaries of the Prime Minister, Ministers, Members of Parliament and Senators” and that it “will freeze departmental operating budgets, that is, the total amount spent on salaries, administration and overhead.”

Freezing departmental operating budgets will likely result in a freeze on staff salaries unless layoffs take place or overhead cost savings are found.

What example exactly does this set? That stagnant wages should be the norm in Canada after the recession? That monetary rewards for hard work are a thing of the past? That if office space costs increase, someone will have to take a pay cut or lose their job? That inflation doesn’t affect government employees?

I am all for weeding out wasteful government spending. If taxpayers are footing the bill for wild weekends in Vegas or for “Canada” to be printed on ping pong balls or something equally questionable, yes, let’s put a stop to that. If we can find ways to deliver services at lower cost without compromising quality, we should do it. If Canadians want less government overall, that is a valid debate.

But I am less certain that freezing the salaries of elected officials and government staff makes sense. Money isn’t everything, but it is something! If we want to attract and retain high quality elected officials and government staff, it doesn’t make sense to use their wages as a symbolic gesture of fiscal restraint.

In 2007, the Canada West Foundation did a study that compared public and private sector salaries called You Get What You Pay For.  The study argues that top quality personnel come at a price. If Canadians want good public policy and public institutions that operate in the best interest of society, we need professional, well trained and highly motivated public servants and elected officials.

For the public service to attract and retain high quality people, pay packages must be at least somewhat competitive with the private sector. But public sector pay is no where near competitive. At the time of the study, the lowest paid CEO of Canada’s five major banks earned 24 times more than the federal Deputy Minister of Finance, one of Canada’s top civil servants. The highest paid bank CEO made 86 times more.

Canada has always been well served by its public service but an aging workforce and large numbers of retirements are posing significant challenges. Before we applaud salary freezes of any kind, we should carefully consider how we will attract and retain the best and brightest to lead the public sector and effectively protect the public interest of Canadians.

Posted By: Robert Roach

Deficits are the new normal
With a new federal budget due March 4, one wonders how we got into this pickle: a federal deficit of over $50 billion and deficits for at least the next five years? How did deficits become the new normal when the last one was in 1997?

A structural deficit
The Finance Minister says he can balance the books without raising taxes by the 2015/16 fiscal year, but Parliament’s Budget Officer Kevin Page warns that we are facing a structural deficit of close to $20 billion by 2013/14 that will not go away without tax increases. When the optimistic scenario is a string of five more deficits, something has gone terribly wrong.

What happened?
Obviously, the recession is a big factor, but this does not fully explain the lingering nature of the deficit problem. Several other factors are at work. First, the post-recession economy is expected (though no one really knows for sure) to be less robust than it was before we knew what a subprime mortgage was. Second, Page argues that past tax cuts (e.g., the two points shaved off the GST) and an aging population will suppress future federal revenue flows. The implication is that taxes need to go up or spending needs to go down.

Flaherty and Harper disagree
Flaherty disagrees and says that we don’t have a structural deficit. He is confident that economic growth combined with a little belt tightening will get rid of the deficit in due time. The Prime Minister recently promised to eliminate the deficit without raising taxes. This is going to be tricky.

What do you cut?
If the economy does not grow as fast as Flaherty hopes, something will have to give or the large structural deficits the Budget Office is worried about will come to pass. If deep cuts become necessary, the political crap will really hit the fan. Who is going to tell the provinces that their transfers will be going down instead of up, or seniors on fixed incomes that their Old Age Security cheques are going to shrink or the homeless to keep hanging for a few more years? If it comes to big cuts, there will be big repercussions.

At the same time, raising taxes is about as popular as the seal hunt. You can do it, but there will be a lot of outrage.

A tight political spot
This puts the federal government in a very tight spot. The current plan seems to be to cross our fingers and wish for strong economic growth. If the recent recession teaches us nothing else, it should be that wishful thinking about economic growth is a bad strategy. Let’s hope that Flaherty has a plan B and is not caught off guard if the feared structural deficit does indeed surface.

Parliament’s Budget Office Report can be found here.

Posted By: Robert Roach