Manitoba at the Crossroads

Commentary, Taxation, Peter Holle

In less than six months, Manitoba moves into the much-hyped new millenium. How will our province fare?

Despite many grounds for optimism, new threats to Manitoba’s competitiveness are building. Substantially lower taxes in Alberta and Ontario will pull jobs and investment from our economy.

In June, Alberta eliminated its net debt and the province is now looking at accelerated tax cuts. Stockwell Day, Alberta’s Treasurer, has mused publicly that his goal is to eliminate that province’s income tax. The re-elected Ontario conservatives are chopping their income and property taxes, already lower than ours, by 20%. High-income professionals in Manitoba can lower their tax load by thousands of dollars simply by moving to these provinces.

With uncompetitive taxes, Manitoba will keep falling further behind. Unless we match or exceed these lower rates, new investment, together with existing high-value brainpower and corporate headquarter jobs, will continue to migrate east and west.

The task is formidable. Playing catch-up is harder when the competition has the momentum of a superior tax environment and demographics. Manitoba’s population is older and less educated compared to the front runners, so we have less income tax revenue and more demands for public expenditures. On healthcare, Manitoba spent $1,741 per citizen in 1998. That’s about 10.4% of our GDP, more than the Canadian average of 9.2%. As in other provinces, the system is beset by waiting lists, labour strife, and constant upheaval and restructuring. This is largely because a "free" system means limitless demands for medical treatment and more spending. This phenomenon conflicts directly with the requirement to lower taxes.

In education, student populations have been static. Yet public school spending rises at the same time as performance in the public system slowly declines. Between 1962 and 1995, the student-teacher ratio in the public school system dropped about 40%, partly because school divisions report consultants, advisors and assorted managers as teaching positions. Instead of a simple set of curricula focusing on the basics, Manitoba’s 750-odd public schools offer a bewildering assortment of frills. But language and mathematics achievement levels dropped by at least one grade.

There is also substantial room for improving the performance of other public spending. According to Statistics Canada, Manitoba’s public sector employment rate in 1998 (including municipal, provincial and federal workers) was 113 government employees per 1,000 population, substantially above the all-Canada average of 92. Only the Northern Territories and Prince Edward Island employed more. Alberta, in comparison, had 88 government workers per 1000 population.

Manitoba also has a larger tax-exempt sector than Alberta. Competitive private-sector companies provide insurance, liquor, and energy services there. Those same services in Manitoba generate no business, corporate or income taxes. Our narrower tax base requires higher levies on the private sector.

How can Manitoba push tax rates down, keep service levels up and retain the high-income earners so critical to the provincial tax base?

Conventional thinking holds that only massive service reductions can finance competitive tax reductions. But even the brief, preceding review of major spending areas points to a different conclusion. We can lower taxes and preserve services by improving the efficiency of public spending.

The ultimate solution is to think "outside the box". Governments play a central role in important public services like education, healthcare, and local government. But they can finance them in the competitive marketplace instead of delivering them directly.

Governments can dramatically sharpen productivity by shifting out of "in-house" services provided by a heavily regulated, rule-bound civil service. Small policy and regulatory agencies, whose main task is to define service levels and then seek out the best deal from either in-house suppliers or commercial vendors, will eventually replace large government departments. Services are then provided in an open and competitive framework where innovation, cost-effectiveness and accountability are guiding principles.

While this would require fewer government employees, many of them would flourish in the new environment. Many civil servants would set up their own taxpaying companies to supply services. In other cases, they would find employment with commercial providers with more interesting career ladders.

The highly politicized healthcare and education sectors present greater challenges. But we can improve their performance with the same concept, replacing monopoly service provision with competitively supplied services. Policymakers could shift funding away from the public school and healthcare monopolies by providing funding directly to customers: parents, students, and patients.

In education, funding could move directly to the parents through a tax credit or voucher system. The Department of Education would shrink, and focus on quality control by monitoring school progress and publicizing the results. Good schools would flourish and expand while bad ones would close. School decisions, including teacher hiring and local curriculum would fall to parent councils and principals. Many teachers would prosper by setting up their own schools. School boards and their massive administrative superstructures would disappear.

Medical savings accounts could similarly restore accountability in healthcare. Instead of funding a highly centralized monopoly, governments would simply transfer tax dollars on a per capita basis to individuals and families. As with an RRSP, the money would be theirs to spend or save. A portion would be used to purchase healthcare insurance for long-term and catastrophic care, with the remainder available to finance user fees for minor visits. Hospitals would then compete for business, with success or failure depending on the quality of service offered.

These public policy innovations have the potential to deliver substantial savings, clearing the way for tax reductions. Where they’ve been tried, the results have been phenomenal. The public benefits by obtaining higher quality services for less money. Manitoba would dramatically expand its tax base, creating more enterprises and more jobs.

Get out of the way, Alberta and Ontario. With some political will, Manitoba can prosper and thrive in the next century if we have the courage to re-invent the way government does business.