There will be an acrimonious debate in the future as historians dissect how the political leadership in most rich world countries chose to manage Covid-19 by closing down their economies – throwing millions out of work and bankrupting businesses. The cascading economic carnage, surely predictable, has prompted frantic emergency bail-out and welfare programs, decimating public finances across all government levels in Canada.
This sledgehammer shutdown strategy, based on garbage-in garbage-out computer modelling (that dramatically overestimated fatality rates) is turning out to be a case of the cure being worse than the disease. The few countries taking a more nuanced approach – like Sweden which has focused on protecting vulnerable populations and not completely shutting down their society – will keep their economies and public finances mostly intact. Ironically, experts predict Sweden’s approach will produce roughly equivalent outcomes to the shutdown society countries – fatality rates equivalent to those occurring from the flu in a typical year.
The question of why so many governments chose to press the nuclear button, and so quickly, will be intensely studied in the future. But, that ‘why’ discussion is for another day.
Enormous damage has been done. Manitoba, swept up in the shutdown scramble, could be on track to insolvency within the next 18 months. Here is what’s coming. Multi-billion dollar deficits projected going forward, with $5 billion in new debt this year alone.
Tax revenues will fall sharply, further compounded by shrinking federal equalization transfers – as the global oil collapse devastates Alberta’s economy. Then, we have Hydro’s white-elephant Keeyask project – which will end up adding $10 billion to Manitoba’s already high debt totals. The province could be cut off from debt markets. It’s no mystery why the provincial government is taking up having the feds borrow money on the province’s behalf.
At some point, something has to give. Forget even higher taxes and fees – which would yield little but further damage to a drowning private economy. As the private sector takes it on the chin, the public sector, inevitably, will follow. Manitoba’s Premier is already talking tough about cutting public sector jobs.
One grim lesson of ruining an economy is that provincial bankruptcy removes discretion from the politicians. At that point, watch for massive, brutal public sector cuts. Not ‘Yes Minister’ style Filmon Friday type austerity gimmicks, but clumsy, big – say 25% – cuts across the board.
Bad choices got us into this mess. Could smart moves take us out of it? Is there a better way to confront a quick-coming chaos? Obama’s chief policy advisor Rahm Emmanuel once famously said: “never let a good crisis go to waste.”
History instructs us on the gigantic policy upheaval that occurred in New Zealand a few decades ago. Once among the wealthiest countries in the world it was approaching bankruptcy. After its major trading partner Britain joined the European Union in 1973, New Zealand’s major market for agriculture products disappeared. To compensate, NZ politicians embarked on a course of government interventions and investments to diversify its economy.
But trying to pick industrial winners failed badly, while growing the public debt. Public sector spending and the ‘regulatory state’ morphed out of control. Farmers became highly subsidized and manufacturers and industry operated behind import barriers and other protectionism. It added up to slow growth, big deficits, and an unmanageable public debt.
Finally, in July 1984, NZ voters kicked out a tired conservative regime. In came a Labour Government, which under extreme pressure from the country’s nearing bankruptcy, boldly proceeded to clean up the country’s economic and public finance mess. The economy was opened up, taxes and regulations reformed, and government spending sharply reduced.
In swift succession, the new government eliminated all farm subsidies, removed import barriers, and proceeded with a free trade agreement with Australia. To pay down debt, it sold off government assets and enterprises. Government departments providing services were converted into crown corporations, then privatized. Monopolies were broken.
NZ Telecom, then a crown enterprise, was sold into a competitive, deregulated marketplace. Similarly major electricity sector reforms were begun, while, as a result of new Cities legislation local government works departments were converted into companies and sold off. With mandatory financial and performance benchmarking, city councilors soon discovered that governments were poorly suited to be commercial operators.
The most sophisticated of New Zealand’s reforms occurred within the core public sector – the line departments. The main driver behind the country’s dramatic policy rescue was Roger Douglas, Labour’s finance minister. With his accounting background, Douglas asked the bureaucrats what government services cost to get the ball rolling.
He was appalled when the bureaucrats admitted they had no clue. Full private sector accounting was brought into the public sector so internal costs could be calculated. Civil servants were rewarded to buy services from outside suppliers if internal costs were not competitive. Departments were forced to value all assets and then pay something called a capital charge – effectively signaling to government managers that assets were not “free”.
Unsurprisingly, once departments had to pay real costs to use vacant or underused assets, they hastily stepped forward to sell off redundant assets. Hiring was opened up, decision-making was pushed down, and performance pay brought in – chopping out managerial layers while rewarding efficiency. As part of a massive decentralization which empowered front line managers, central agencies became smaller advisory agencies as power to manage was shifted to departments – they effectively became bottom-line oriented, customer-focused business units.
Thirty years later these unique core public sector reforms remain intact. In fact, they have worked so well that NZ political parties generally support continuation, understanding how foolish it would be to end them. Roger Douglas’s dramatic structural reforms saved New Zealand, now enjoying a thriving economy and long years of balanced budgets.
The Pallister Government faces very difficult choices. Very smart ones are available.
Peter Holle is president of the Frontier Centre for Public Policy, www.fcpp.org