Manitoba: Beware the Puffball Economy

Commentary, Equalization, David MacKinnon

The Manitoba and federal governments have recently disagreed on the population of the province, a dispute that could lessen the transfer payments Manitoba receives, overwhelmingly from taxpayers in other provinces.

Manitoba Finance Minister Jennifer Howard feels Statistics Canada underestimated the provincial population by 18,000 people, a discrepancy she feels will cost the province about $100 million annually in transfers from other Canadians in coming years.

While her concern is understandable in some respects, it is also immaterial in others. In either case, federal transfers will continue at levels that have enabled public services in Manitoba to be far above the levels experienced by people in Alberta and Ontario, the provinces whose taxpayers are the principal contributors to the transfer system. Independent commentators have noted this is a serious problem that could lead to envy, anger and resentment. Manitoba should be very conscious of these risks.

There is another major risk that should worry everyone who thinks about the province’s economic future.

This is that federal subsidies have enabled the growth of a bloated public sector in Manitoba that is among the largest in the developed world. In 2010, 28 per cent of the Manitoba labour force was employed in the public sector, mirroring Saskatchewan’s. Yet it is 22.4 per cent in Quebec, 20 per cent in Ontario and 17 per cent in Alberta.

For many years, Greece was cited as the example of an overdone public sector. However, in 2008, before the impact of the EU crisis was felt, the public sector in Greece employed about 20 per cent of the labour force, far below Manitoba levels.

One of the first conclusions that can be drawn from this is the finance minister is crying wolf when she talks about how hard it would be to reduce provincial budgets to reflect the Statistics Canada estimate. Judging from the sizes of the public sectors in contributing provinces, relative to population, achieving significant reductions in Manitoba would be a piece of cake.

An overdone public sector can also generate a distorted view of the performance of the provincial economy. As citizens look around, the economy seems on the surface to be doing reasonably well. However, this is largely enabled by massive transfers of wealth from citizens elsewhere to Manitobans.

Transfers from the federal government account for about 28 per cent of Manitoba’s expenditures. Equalization alone is about 12.5 per cent of the province’s outlays. Without these, Manitoba would be performing at levels well below the troubled economies of southern and Eastern Europe.

This is the Manitoba puffball: The surface prosperity looks good, but the prosperity is not supported by competitive strength.

The great tragedy is the transfers necessary for short-term stability do fundamental damage in the medium and long term. It is, for example, very difficult for entrepreneurs to thrive in an economy where the core business is government.

There is a general consensus in most of the world that economies that are primarily driven by the culture of government and its ecology of rules, regulations and top-down management are less likely to perform well than those that emphasize markets, entrepreneurship and well-managed but minimally necessary regulation.

In a sentence, transfers from others at anything close to their current level prevent Manitoba from achieving its potential and sharing fully in the vibrancy of other western provinces.

For this reason, achieving financial self-sufficiency should be the single most important goal of the Manitoba government, and the finance minister should back off in the population dispute to help achieve this goal.