Conflicted, Inept: Manitoba’s Government and Budget Fails

Blog, Manitoba, Publius Tacitus (historic), Taxation, Uncategorized

Manitoba’s beleaguered NDP government has tabled its budget for 2013-14, a tale long on failure, excuses and self-serving platitudes, while short on self-criticism, forthcoming  reportage and analysis.

The government projects another annual deficit, despite an increase in the Provincial Sales Tax, while expressing the hope that a budget balance will be accomplished by 2017.

Before providing a cursory review of what is currently known of a very sorry budget (a further post will follow Publius’ review of the expected and more detailed budget documents), some context might prove useful.

 

Background

Firstly, the Manitoba economy, more than any other Canadian province, is dominated by government. As University of Manitoba Law professor Bryan Schwartz has observed, Manitobans live in a ‘supplicant society’, one marked by an interventionist government that has its ‘hands in every pie’.

The provincial government employs 13,000 or so core civil servants plus another 10,000 through six of the largest corporations/operations in the Province – covering the fields of gambling, liquor regulation and sales, motor vehicle insurance, workers’ compensation, natural gas distribution and electricity (generation, transmission and distribution).

Every one of those Crown operations are monopolies, and every board member of every one of the boards of directors have been appointed by the government (without a competition).

As if this wasn’t enough control for the control-obsessed NDP government, it also directly or indirectly controls provincial education (daycare, primary, secondary, college and university), health (primary through to tertiary care), nursing homes, and virtually all of  the so-called non-government welfare and helping agencies (such as St. Amant, Canadian Mental Health Association, Klinic). The owners, managers and employees of these agencies are also beholden to the government, as government funds, partially to fully, the agencies. Funding arrangements are on an annual basis, meaning the agencies have to ‘walk to the government’s drum’ to continue.

The professions are also tied to the government in one way or another.  Physicians operate in a one-payor health system (bargaining through their ‘union’, the MMA, with the government).  Both the legal profession and the major accounting and consulting firms (engineering included) derive a significant proportion of their annual income from government, Crown corporations and agencies funded by the government (with appointments to the provincial bench and government-controlled boards also at stake).

As if all of this apparently doesn’t provide sufficient control over the economy for the government, through providing or withholding grants the government also influences if not controls municipal government (some of which are currently being pressured by government to amalgamate), community clubs, industry, cultural and ethnic agencies and events, the arts, and even the major sports and entertainment field (including MTC, WSO, the Blue Bombers and the Winnipeg Jets).

Currently, the government has been engaged not only in the promotion of a $20 billion plus ‘gamble’ in the electricity business, ‘betting the farm’ on a multi-dam for export adventure, but is also increasingly taking responsibility for the economic, health and education of First Nations (primarily a federal responsibility) and even undertaking to wrest control of horse racing from the private not for profit sector.

In essence, nothing much that is important happens in Manitoba without provincial government involvement. Consider the daily torrent of government news releases, just the sheer number and scope of the innumerable publicity pieces suggest that government is ‘everywhere’ in Manitoba.

Hotels are profitable assisted by beer vendor sales and a share of the take from government-controlled video lottery terminals.  Long-haul truckers are enticed to plate their vehicles in Manitoba by an exemption from having to pay motor vehicle premiums covering no fault accident benefits and, as well, having MPI subsidize truck driver training. The Jets got their arena and meet some of their annual payroll through the Province’s largesse and tax breaks, while the Bombers (with its board of directors no longer elected by season ticket holders) obtained a new stadium through a government-arranged loan fronted by the University of Manitoba (bankrolled by the government).

The media relies on government advertisements, while job-light chemical plants came to and expanded in Manitoba mainly due to very low electricity rates – the industrial rate being one-third the marginal cost of new generation and transmission (Manitoba Hydro, while initially concerned with the risk of having to construct new capacity, at great cost, to meet new demand from energy intensive industries, has allowed that risk to remain for a decade; meanwhile rates soar for residential customers).

The great English philosopher Thomas Hobbes would, if he was still alive, quickly recognize that the state, the Leviathan, is alive and well in Canada’s ‘Keystone’ province. Those desiring a government that ‘sticks to the knitting’ generally reserved for government, leaving adventures in trade and at least a few other functions to free enterprise and a truly independent not for profit sector, would best move. As it is, investor immigrants gain their ticket to Canadian citizenship through Manitoba, only to have a high percentage of them move to other provinces (joining Manitoba’s young, professionals and wealthy seniors in leaving).

 

Government Crowds Out Private Growth

All of this hyperactivity costs money, so it should come as no surprise that personal income taxes are ‘high’ in Manitoba, with lower middle income families sharing more of their family income with Leviathan than is the case for any other province other than Quebec. Such is also the case with retail sales tax (with the government avoiding the referendum that was to be required for tax increases by widening the application of the tax in last year’s budget).

Where the government ‘stars’ and is creative may be found in the fields of taxation and fees.

Manitoba’s payroll tax continues to serve as a drag on employment, particularly hurting job opportunities for lower paid workers. The government’s capital tax has been virtually eliminated for firms except for Manitoba Hydro, other Crown corporations and the chartered banks. With respect to Hydro, capital taxes, water rental fees (a tax on the dame water ad it flows through each series of dams), payroll taxes and the debt guarantee fees the government extracts from the Utility drive up electricity rates.

The land transfer tax is exorbitant and particularly difficult for first time buyers to meet – added to their mortgages the aggregate cost including interest over a twenty-five year period could be three times the tax. Even before this latest increase in the Provincial Sales Tax, consumption taxes and fees exceeded the government’s annual take for income taxes.

Again with respect to personal tax, exemptions are low and not indexed. While electricity rates are (at this point) among the lowest in Canada for residential service, the coldness of Manitoba’s winters make the bills of those households without natural gas (rural, remote and northern customers) service high. Leaving out professionals and those employed directly or indirectly by government, wages are low, far below those of the neighbouring provinces.

As to consumer costs, the rates and fees charged by government-owned utilities and insurance schemes reflect not only those costs that would be found with privately operated firms but also costs foisted on the Crowns to meet the government’s agenda, which is dominated by attention to its political and ideological goals not providing the best services at the lowest cost to consumers.

While the government regularly ‘brags’ that Manitoba is a low cost place to live, it fails to provide comprehensive comparisons of costs, which should include taxes and fees of every description. The government’s vow to keep a basket of costs involving electricity, heating costs and auto insurance premiums the lowest in the country fails not only to expand the ‘basket’ to include its fees and taxes, but even to explain the differences between jurisdictions with respect to the ‘basket’ it has chosen. Most particularly, the government also fails to note that Manitoba is a low disposable income jurisdiction (at least for those not receiving government or government funded cheques).

 

Implications for the Budget

A two-tier economy is found in Manitoba, an economy dominated by the provincial government. In such an environment, it could be surprising to some that the government has been and still is unable to manage its own finances, yet it seems to be incapable of doing so.

The reason for this incapacity rests with two realities – the NDP and government relies on the support and votes of unionized employees, and wants to be the perpetual government of the Province. To keep the support of the unions, it not only has to meet their wage and other employment demands but also must ensure that the base services all Manitobans rely on are maintained – this means not only no strikes, but also meeting the demands of not only government and Crown corporation employees but also those of healthcare professionals, the police, teachers and professors.

When deficits arise and further deficits are likely, the government seems to be ‘in a box’.

The choices are: bring down the deficit by raising taxes and fees, or, reduce the number of ‘workers’ and their overall compensation, or cut services and increase the workloads of ‘workers’, or borrow the money and run another deficit, or some combination of the options.

Quite the quandary for this government, not so much for more responsible governments living in the real world.

The problem is exacerbated when despite the government keeping its employees and their unions and associations happy, the public notices that provincial infrastructure is ‘not up to scratch’. This is the case in Manitoba, and not just on the topic of infrastructure, many of the core services government that should be expected to operate satisfactorily, don’t.

Manitoba’s government has long deserved a failing grade, not only on basic infrastructure, but also on social services administration, on health, on crime prevention.   As to the universities, which rely on government funding and its rules as to tuition fee increases, the University of Manitoba regularly places last in the an Hal survey of medical and doctoral schools, while none of Manitoba’s other universities place near to the top for their category.

On infrastructure alone, the Manitoba Business Council has estimated the overall provincial infrastructure deficit is in the range of $15 billion.  How much would it cost to fix health, fix social services, and fix justice? What would be required to do all of these things, cut towards eliminating the deficit and, of course, keeping enough of the party’s base happy to allow the government to be re-elected again?

If taxes and fees were low, this government could choose increasing both. But taxes and fees are already suffocating private growth. Another option is to grow the economy. Unfortunately, the government has not done well on that score either. With respect to industrial growth, the Province deserves another failing grade. It has failed to bring even one new major industry to Manitoba (despite having Hydro’s rates for industry be the lowest in the country). The last major industry government brought to Manitoba was the call centre industry – it’s then competitive advantages were Manitoba being a low wage economy and a very low Canadian dollar, below 65 cents American at one point. The dollar rose, the industry moved to India.

Rather than gaining high value industry and jobs, some of the ones Manitoba has have been cutting back or closing. Vale, HudBay and Tembec have all either cut back or ceased operations in the Province, despite low electricity rates. And, no new major industry is on the horizon.

In the absence of attracting new industry or major expansions of existing industry, the government has relied on growing the government-funded sector of the economy, that now relying on borrowing to be sustained.

 

Problems with Changed Circumstances

Unfortunately, Aesop’s fable of the grasshopper and the ant is being played out in reality. As the story goes, the grasshopper played and played and made no provision for winter, while the ant gave up some of his leisure time to squirrel away provisions. In the end, the grasshopper has to seek the generosity of the ant to survive.

Here, the province’s government plays the role of the grasshopper, but, unfortunately the ant no longer appears ready to bail the grasshopper out. For Manitoba, there was, the federal government, but not a sure thing anymore it would seem. (The federal government did not bail out Manitoba for all of its politically-motivated decisions related to the 2011 flood, and the equalization formula is due for review in 2014 (increases in the annual health transfer are to fall by half in 2016).

It was steadily increasing federal transfers that allowed the Manitoba government to post so-called balanced budgets until 2008.  However, the environment for federal transfers is changing. As one consequence of the credit crisis and subsequent recession that followed the collapse of Lehman Brothers in 2008, the federal government, following a few years of ‘fuelling the economic pump’ , has indicated that it plans to slow the torrent of ‘new money’ that has been flowing to the charter members of the  ‘have not’ province club, including Manitoba.

It was that ‘torrent’ of new money that had allowed Manitoba’s NDP government to increase its own spending by more than the growth in the provincial economy from its first budget after being elected in 1999. Increases in equalization grants and other federal transfers kept Manitoba’s ‘books’ in the ‘black’ until the ‘music’ stopped, The unexpected happened, the global credit crisis and recession – the private sector and the tax revenues generated from it stalled. The provincial government, unwilling to prioritize and hold spending, was left with continuing its relentless spending momentum by relying on federal transfers and borrowing.

Now, Almost 40 percent of the provincial government’s revenues comes from Ottawa, and further growth in tax and fee revenue becomes more difficult when that well has been ‘pumped’ almost dry. (After this year’s increases, what is next?)

 

Problems, Actions and Blaming

The problem is that the provincial government acts as if it is still at the fair and on the merry-go-round, choosing to keep on spending well beyond its revenue capacity rather than truly cutting back.

The government has mostly jettisoned the ‘balanced budget’ legislation, ignored its prior pledges not to increase taxes, acting slowly on its pledge to reduce education taxes for seniors and farmers (as its last election promises offered), while borrowing more and more to keep its favoured subjects (unions, government operations and ideology) ‘in the pink’.

Ahead of the last provincial election, the Province obtained a wage freeze from its largest union, the MGEU, but at the cost of delivering much higher than inflation increases two years later (and a no layoff clause). Much of the same for all the unions that rely on the government – short term wage restraint, then back to the ‘good times’.

Even when the government was reporting ‘balanced budgets’, it was borrowing more, accounting conventions allow capital expenditures to be amortized over decades rather than expensed in the year of disbursement. As well, the government ‘s then so-called balanced budgets, and all since, include the annual net incomes of all government enterprises, not only those of Manitoba Hydro and Manitoba Public Insurance (even though those surpluses cannot, in law, be expended by the government), but also any surpluses recorded by the universities and hospitals.

Blaming others, events and even the weather has become regular fare.

In the elections that followed its initial return to power in 1999, the NDP has continued its diatribes against the main opposition party, the government for 1987-1999, blaming the now-opposition for actions it took during its tenure to bring about ‘actual’ balanced budgets – balancing the budget was praise-worthy on the federal scene, but not here, in Manitoba.

Given its past behaviour, it is no surprise that in its latest deficit-laden budget the government continues to blame events (floods – southern Manitoba is a flood plain, has been since the pre-historic lake shrank), the past recession, etc. for its anticipated deficit, rather than take responsibility and lay out a plan to bring its revenues and expenses into balance (before credit downgrades occur).

Next, I will review the specific choices the government has made in its new budget.

 

2013-2014 Budget

The government has chosen to increase consumption taxes and fees (as it also did in last year’s provincial budget), and to continue spending (albeit at a lower rate of increase).

The big news in this year’s budget is that the Provincial Sales Tax rate is to rise to 8 percent from 7 percent, as of July 1. The increase, which requires a legislative amendment (which will allow for a debate and require a vote in the legislature) is projected to increase the government’s annual revenues by $277 million.  The government suggests the added 1 percent may be dropped after ten years. (By the way, while the increase in the PST matches, as to the amount, a recommendation of the Manitoba Business Council, the intended use of the new revenue may not.)

Miscellaneous fees are, once again, to rise, while personal exemptions (with respect to provincial personal income tax) are to increase by $250 (the government has again chosen not to index personal exemptions). With these changes, consumption tax and fee revenues will further exceed revenue from individual and corporate taxes (a rather unusual situation for a socialist government),

Despite the significant hike in PST, tobacco tax and other fees, the government still projects another annual deficit, $515 million (slightly lower from the revised estimate of a $583 million deficit for 2012-2013).

The budget details will need to be known before the expected deficit on core government operations can be known (the announced deficit forecasts, for both the current year and for 2013-2014, have been provided on a summary basis, ie. not disclosing the expected aggregate net incomes of Crown corporations, such as Manitoba Hydro and MPI).

As anticipated, the government’s budget lauds its attention to families, while attributing the continuation of a string of annual deficits to the global crisis and slowdown, ongoing flood issues and the ‘infrastructure deficit’.  And, how did the infrastructure come to exist – past priorities?

The government again promises relief from education property taxes for seniors, the relief to be implemented over two years, starting next year (2014).  The cost of actualizing the latest promise will, one would assume, increase the difficulty of trying to balance 2014-2015’s budget?

The summary budget information does not provide further light on the government’s borrowing, which has increased sharply over the years. With the expected continuation of deficits, particularly taking into account that the government’s core deficit may be expected to be much higher than the $515 million projected on the summary account, and the approach taken to accounting for current capital expenditures (which are amortized over their expected service lives), government debt can be expected to rise by an amount considerably more than the $515 million deficit projection.

As well, the budget information published on April 16 does not provide an estimate for the government’s need to borrow more funds to allow Manitoba Hydro to continue to expend funds on its capital development plans ahead of a final approval of those plans.

 

Conclusion and Initial Assessment

First, it is important to realize that the government has regularly failed in its forecasting; so, it is a fair comment to note that the government’s forecasts have been, regularly, materially, wrong.

Until the full budget documents have been released and reviewed, it is impossible to come to an interim conclusion as to whether the projected deficit for 2013-2014 is ‘reasonable’ or not. Of particular importance are the government’s projections with respect to federal government transfers and the financial forecasts for government-controlled enterprises (Crown corporations, etc.).  As to the expense forecasts, particularly for health, social services and justice, this observer would be amazed if the government held actual expense increases to its forecasts.

As to the government’s expectation of achieving a balanced budget for 2017, two years after the expected date of the next provincial election, no confidence is warranted (particularly for the government’s core operations), and a structural deficit seems to be apparent. Any hope for PST dropping back to 7 percent in ten years, is likely to come to naught, if this government remains in power.

As for the budget for 2013-14, the government has chosen, once again, to try to keep its employees, direct and indirect, and their unions and associations ‘happy’. Behind the screen of being focused on ‘families’, what seems most certain is its focus on pleasing its supporters and staying in power.

It has chosen to draw more ‘blood from a stone’, and, given that the ‘blood’ is insufficient, to borrow more. As well, with respect to Manitoba Hydro’s ‘bet the farm’ gamble on electricity infrastructure expansion and projected long-term export demand and prices, it shows no indication of pausing, with Hydro’s ratepayers and provincial taxpayers to carry the real risk.

Given the Province’s growing debt load and seemingly endless stream of annual deficits and tax and fee increases, the prognosis from this observer for the future of the Province is not good. Manitobans can anticipate a continuing stream of the young, professionals and wealthy senior Manitobans headed out, largely to the west.

As things look, anticipate the credit agencies downgrading Manitoba’s debt. The growing debt load, more information is required to project just how much debt the Province expects to accumulate, seems to be moving inexorably to the point where future generations may well be unable to fix the situation and, like Greece, Manitoba will have to rely on ‘big brother’, the federal government for a bail-out.

When will ordinary Manitobans reach the breaking point and demand a new government?