Smarter Policy = Growth

Commentary, Public Finance & Fiscal Federalism, Frontier Centre

It looked like an election budget, and it was. But will it ultimately help Manitoba create a higher standard of living? Probably not.

Finance Minister Greg Selinger’s April 22nd budget contained a few targeted tax cuts, including a small reduction in corporate rates, a refreshing break for an NDP government. The giveaway, however, was the whopping 8% increase in health spending, assisted by some new federal money. The Filmon government cranked up this item by 10% just before going to the polls in 1999.

Free of major first-term blunders, the Doer government has reason to be optimistic about its re-election prospects. Partly buoyed by Canada’s strong economy and a housing market ignited by low interest rates, the atmosphere feels good. Winnipeg, where expectations are low, buzzes with news of a hydro building, a downtown college, and an arena, a patina of momentum from reshuffling existing assets.

Contrast this with the Toronto-Dominion Bank’s report on booming Alberta, ironically released on Manitoba’s budget day. The news release’s headline said it all: “Calgary-Edmonton corridor only Canadian urban centre to amass U.S. level of wealth while preserving Canadian-style quality of life, say TD economists.” The corridor enjoys a per capita income of US$40,000, 10% richer than the U.S. metropolitan average and an astounding 40% higher than the Canadian average. “It is truly Canada’s western tiger”, the report comments.

To preserve this growth miracle, the bankers recommend reducing the corporate tax rate to 8%, an ambitious goal since Alberta just cut it to 12.5%, by a wide margin the lowest in Canada. Manitoba’s identical half-point cut brought our rate to a much higher 16%. A comparison of top marginal tax rates, the ones that matter most in creating growth, reveals huge differences. The top personal rate: 10% in Alberta, 17.4% in Manitoba; small business tax: 4% in Alberta, 5% in Manitoba. Alberta has none of Manitoba’s payroll, sales and capital taxes.

The usual suspects dismiss all this by pointing to Alberta’s oil riches. But a large body of work shows that resource wealth is more often connected with economic misperformance. Places like Nigeria and Venezuela are textbook examples. In contrast, wealthy Singapore, Hong Kong and Switzerland, with no resource wealth and smaller governments, have the highest living standards in the world.

In Canada, the slowest growing provinces inevitably report high taxes, large government sectors and a dependence on external transfers. Manitoba’s plainly unattractive tax environment leaves us with a per capita rate of capital investment in new plant and equipment that is only 27% of Alberta’s, 32% of B.C.’s and 41% of the Canadian average. Capital flows to places that tax less.

Manitoba’s high taxes and transfers that compose about 35% of the budget correlate neatly with this low level of investment. They are also tied to a disproportionately large public sector. In the year 2000 Stats Canada data showed that Manitoba’s provincial government accounted for almost 24% of the economy. Alberta’s consumed 14.5%, a huge difference. In perspective, Manitoba would have to increase the size of its economy by $22 billion or cut provincial spending by $3.2 billion to match Alberta’s size of government.

Another measure that displays Manitoba’s out-of-whack spending is our per capita allocation on health care. If we simply spent at the Canadian per capita average in 2002, we could have reduced this budget item by $439 million. Given our aging demographic profile, it might be fairer to compare this with health spending in Saskatchewan. If we matched per capita spending there, we would save $372 million. That would allow us to eliminate much of the school portion of property tax, or cut the sales tax rate by 2.5 points, or abolish all capital and corporate taxes. This from only one over-funded spending envelope.

Despite the overheated rhetoric about vicious cutbacks which is laughably off base, Manitoba has learned the hard way that the simplistic spend more model, relying on big taxes and more federal transfers is a simple recipe for stagnation and backwater status. More equalization and more overspending bring us low investment, the export of human capital and low rates of growth, obviously not a recipe for a dynamic economy.

Rather than ramping up health spending and trimming middle tax rates, Manitoba would have been better served by a plan to modernize the big spending industries like health care and education by ending the public monopolies that give us unnecessarily politicized and expensive services. That would allow us to legislate a bold timetable for major cuts in top tax rates, and the elimination of capital and payroll taxes.

A pro-growth agenda would quickly expand tax revenue and open up exciting new possibilities for the public sector. We do have cheap houses here, but filling them with people requires a fundamental change in direction.

Related 2003 Tax Load Index Charticle shows gap between Manitoba and Alberta top tax rates..