Manitoba’s Bad News Budget Ignores Grim Fiscal Realities

Commentary, Role of Government, Steve Lafleur

The Government of Manitoba has tabled its 2013 budget. There was no reason to expect bread and circuses, given the tough position of the provincial government, but there were opportunities to undertake long term reforms to put the province on a sound fiscal footing. Unfortunately, the Premier has opted to give the provincial credit card another swipe to pay for crumbs to throw at senior citizens with the remaining balance. It’s not much of a feast for anyone, but it will require a long fast for all to pay for it. Assuming the province remains solvent long enough to make the payments.

Manitoba’s deficit for 2013 is projected to be $515 million. The provincial debt was $14.5 billion in 2012, and the province is heavily reliant upon transfer payments to finance its bloated public sector. While some broad based tax relief would be nice – Manitobans face the highest income tax burden in Western Canada – it simply isn’t possible now, or any time soon, without getting the cost of the public sector in line with the Canadian average. Doing so would save the government roughly $1.2 billion each year. It could be done through attrition over the long term to avoid short term pain. Instead, the highlights of this budget are tax breaks to appease elderly homeowners, and tax increases for everyone. It is the kind of short term thinking that has gotten this province in so much trouble.

The province has committed to spending $50 million annually to refund the education portion of the property tax to homeowners age 65 and over. The education portion of the property tax should be done away with. Since municipalities don’t have access to sales, income, or fuel taxes, they rely on property taxes to meet their obligations. Having the province also collect property taxes crowds out municipal ability to raise revenue. It renders municipalities reliant on inefficient, politically driven transfers from the provincial and federal governments to provide infrastructure.

Indeed, the province could have financed the complete elimination of the education levy simply by reducing transfers to municipalities by $471 million per year. The goal of such reform would be more closely to align provincial and municipal spending and taxation. But simply eliminating the tax on seniors does something else altogether: it redistributes wealth to property owning seniors from everyone else and does so regardless of whether they will use the savings to put food on the table, or fly to Arizona for the winter.

In addition to spending $50 million on an ill-advised election promise, the provincial government has decided to repeal the law requiring a referendum for major tax increases, and will boost the PST by 1 per cent. While sales taxes are relatively better taxes, this move is off base for two reasons. First, Manitoba doesn’t have a revenue problem. It has a spending problem. Second, the province should follow virtually unanimous expert advice, and harmonize the PST with the GST. Studies have shown that residents of Ontario and the Atlantic provinces that harmonized their sales taxes saved money as businesses passed on savings from the more efficient taxes through lower prices. Indeed, analysts suggest that BC is going to take an economic hit from repealing its harmonized sales tax. Instead of harmonization, the province is moving in the exact opposite direction. They are exempting more goods such as diapers, car seats and strollers. Such boutique tax cuts force government to make up revenue elsewhere. The trouble with these exemptions is that you can’t exempt all of life’s necessities without rendering the sales tax useless. If we were only to tax bad things, we’d be relying exclusively on cigarettes and beer for tax revenue. Incidentally, the province has also increased taxes on those. 

Meanwhile, the government is recklessly pushing forward with its $20 billion hydro expansion gamble. The shale gas boom has decimated the export market for Manitoba electricity, yet the government is unwilling to change its grand plans. Their unwillingness to acknowledge changing economic conditions could well bankrupt the province.

The Government of Manitoba is in serious financial trouble. If Ontario doesn’t get its economy back on track, Manitoba is going to have to meet these challenges with diminishing transfer payments. The longer Manitoba puts off tough decisions, the tougher they’ll have to be. By the looks of this budget, they’ll have to be really tough, and really soon.