Thank you for the opportunity to present our views on the province's fiscal situation and the upcoming provincial budget. Once again this year we are preparing an Alternative Provincial Budget, which will be finalized and released in the months ahead.
Context
In last year's Alternative Provincial Budget we ran a modest surplus, which allowed us to increase the Fiscal Stabilization Fund by $18 million. We believe that it is important during periods of strong economic growth to put money away so that it can be spent during a slowdown.
Last year we argued that the then-expanding US economy was a bubble that was certain to burst sooner or later. Exports to the US had risen from 15 percent of provincial GDP in 1995 to 21 percent in 1999. This figure illustrates how the province benefited from the expanding US economy during that period, but was left more vulnerable in the face of the inevitable slowdown.
By September 11, business confidence in the US was already cracking, which meant that consumer confidence and spending were likely to follow in any case. The temporary closing of New York financial markets, the highly visible decline in these markets when they reopened, and the airline layoffs produced a sudden intensification of those trends.
It appears that the relative diversification of the provincial economy has so far helped shelter Manitoba from the most severe effects of the US downturn. However, we also believe that it is possible that the worst has not yet hit Manitoba, and so we assume modest growth for the purposes of preparing our alternative budget project.
The provincial government is of course limited in its power to fight shrinking foreign demand, but it can substitute growth in the domestic market by employing counter-cyclical fiscal policy. The government should not hesitate to expand provincial expenditure as the private and foreign demand for Manitoba goods and services shrinks.
In our Alternative Budget we have employed just such a counter-cyclical strategy. We roll back the already-announced tax cuts and use that money to increase government spending. We increase total government spending in excess of inflation, and we run a modest deficit, as is appropriate during a slowdown. This increased spending, if properly targeted, will both support consumption and help protect the most vulnerable in the face of a recession.
We recognize that the government has a number of serious fiscal constraints that cannot be ignored. These include the continuing sharp climb in health spending, expected lower equalization payments due especially to the economic slowdown in Ontario, the increased costs of social assistance payments during a slowdown due to the de-linking under the CHST, and the pressure to cut taxes in order to attract business and investment. While several of these are out of the provincial government's control, we offer responses to Health spending and the need for tax cuts.
We would like to emphasize that some of the government's problems are problems of its own making. Manitoba does not have a spending problem, it has a revenue problem, a problem exacerbated when you announce tax cuts three years in advance.
1. Tax Cuts vs. Spending: Informetrica Macro Simulation for Different Scenarios
We congratulate the government for not following the logic of its provincial counterparts in Ontario and more recently in BC, where a government has introduced tax cuts so severe that spending in most government departments must now be reduced by one-third.
We would like to stress that tax cuts are not the economic panacea claimed by business and "taxpayer" lobby groups. Evidence shows that, in terms of macro economic stimulus, tax cuts come out a poor second to spending increases on a dollar for dollar basis. While it is, of course, possible to stimulate the economy using tax cuts, the current provisions of the balanced budget legislation ensures that tax cuts will actually reduce economic activity as tax cuts must be accompanied by spending decreases.
In order to illustrate the effects of alternative macro policies, we have used an economic model developed by Infometrica to estimate the impact of three alternative tax and spending scenarios:
1) The impact of selected already-promised tax cuts in the 01/02 budget.
2) The impact of an equivalent increase in spending on goods and services.
3) The impact of a balanced budget decrease in taxes and spending.
If we combine the personal and business tax reductions that were promised in past budgets that were implemented in the 01/02 budget with the some of the larger new measures in the 01/02 budget, the tax revenue foregone is quite substantial.
Revenue costs of selected tax cuts in the 01/02 budget (mils):
Ongoing
Personal 75 Business 19 01/02 Budget Personal Income Tax 42 Corporate Income Tax 46 Total 182 Option 1
If the tax reductions listed above were unaccompanied by decreases in spending, which is nearly impossible under the balanced budget legislation, it would provide positive benefits for the Manitoba economy. GDP would increase by 33 million and 590 jobs would be created in the Manitoba economy. However, it is also worth noting that this reduction creates 630 jobs in Ontario and increases their GDP by 42 million. In fact, Ontario receives 30% of the total benefit of the tax reduction, while Manitoba only gets about 26%.Option 2
In contrast, running a deficit by increasing spending on goods and services instead of tax cuts will yield a much more desirable macro outcome. Employment in Manitoba would increase by 1340 and GDP by 75 million. Manitoba also gets about 37% of the benefits of this form of stimulation, while Ontario only receives about 26%.Option 3
The situation becomes more problematic if spending is cut back to compensate for the tax decreases, an inevitability given the balanced budget legislation. If spending on goods and services purchasing by the government matches the tax cut, it would cost Manitoba 941 jobs and 52 million in GDP.Summary Table (change in employment and GDP)
Employment
GDP (mils)
Man
Ont
Man
Ont
Tax cuts of 182 mil
590
630
33
42
Spending Increase of 182 mil
1340
865
75
57
Balanced budget decrease of 182 mil
-755
-240
-42
-16
There are important points to be drawn from these simulations. The first is that, dollar for dollar, stimulating the economy through spending generates more bang for the buck. Secondly, it is important to highlight that the overly restrictive conditions of the balanced budget legislation virtually guarantee that tax cuts will actually create an economic contraction, hardly a desirable result when the economy is entering what seems likely to be an increasingly severe recession.
A Note On the "Tax Gap"
In 2001 the Business Council on National Issues called on the Federal Government not to implement future tax cuts if such cuts would mean a budget deficit. This position was notable because it was an acknowledgement that tax cuts do not pay for themselves by stimulating growth, that we cannot have tax cuts and then sit back and wait for the resulting burst of economic growth to pay for even more and better services. Such arguments were actually made throughout the 1990s by many business and tax-cut lobby groups. They often pointed to Ontario and Alberta, provinces that had booming economies and were cutting taxes, and claimed that the cuts had led to the growth.
These arguments have now been thoroughly discredited, as the BCNI has apparently conceded. (Our macro model, as described above, provides further evidence.) For conclusive evidence of the dangers of an ideologically driven anti-tax agenda, we need look only as far as BC, where the government is cutting as much as half of some departments to pay for its tax cuts.
We recognize, however, that the argument that intentionally confuses the cause-and-effect relationship between growth and tax cuts is different from the "tax gap" argument that you are no doubt hearing from Manitoba business groups. According to this argument, firms and individuals will readily relocate as a direct response to the tax differential between provinces.
As we have argued before, the evidence for this assumption is far from compelling. At best, it is usually anecdotal (along the lines of, "I know this guy who moved to Calgary ...") and "surveys of businesses" rather than hard data. In fact, there is evidence to show that taxes do not rank particularly highly in either corporate or personal decisions about where to live.
Clearly, people do not move like vagabonds across the country in pursuit of the lowest tax rates. Many business, such as those in the natural resource, agriculture, and service sectors, are inherently local, and simply cannot be moved to Calgary or wherever else taxes are low. Developing a highly trained workforce is more likely to lure the kinds of businesses the province would like to attract here; those businesses would be more interested in a skilled workforce than relatively small tax differences between provinces.
2. How to Finance the Deficit and What to Spend It On
Savings Bonds
Debt held outside the province means that interest payments constitute a drain on the provincial economy, so it is desirable as much as possible to finance deficits within MB.
We suggest aggressive promotion of Manitoba savings bonds, including the creation of bonds that provide interest free of PIT, and that are accepted at any time as payment in provincial taxes without loss of interest or penalties.
Social Assistance
While spending is better than tax cuts from a macro standpoint, spending -- and certain kinds of spending in particular, such as social assistance -- is also better from an equity standpoint. Such spending would help support demand, by putting money into the hands of the people who are most likely to spend it immediately on Manitoba goods and services, and at the same time protect the people who are most likely to get hurt during a slowdown.
Social assistance is also one of the "automatic stabilizers" that kick in during a recession, but changes made to the financing of social assistance mean that the federal government will not put a penny more into social assistance during a recession. Therefore, the extent to which the province benefits from this stabilizer depends upon its own actions.
We recommend the following.
- An immediate 20% increase in social assistance rates, and a commitment to review rates to bring them in line with an Acceptable Living Level.
- Recipients of social assistance should be allowed to retain the first $200 and 25% thereafter of earnings from paid employment.
- Low-wage earners could qualify for social assistance using the same formula. This measure should only be used in combination with a stronger minimum wage than the government has recently announced, so that employers do not use it simply to subsidize their labour costs.
- Social assistance recipients be allowed to retain more benefits, and for longer, after rejoining the workforce.
This last point is particularly important given that counter-cyclical fiscal policy does not replace jobs lost on the export market with identical jobs at the same firms, or requiring exactly the same skills. Initiatives that support movement within the labour market are needed.
Finally, there are very real needs in this area that the current government has done little to rectify.
CED Investment Fund
To facilitate the accessibility of equity capital for CED businesses, co-ops, and micro-enterprises, we propose the creation of a CED fund, administered by a Community Development Finance Authority (CDFA), which would be governed by a board of governors including representatives from the inner city and the CED community. The fund would obtain investment dollars from individual Manitoba residents buying shares in the Fund. The cost of such shares would be eligible for a tax benefit equivalent to that on a charitable donation. CED businesses that receive capital through the Fund would be required to participate in a Co-operative and CED Business Development Mentoring Program. (Please see last year's Alternative Provincial Budget for a detailed description of our proposed Mentoring Program.)
3. Education Funding on the Property Tax
Although the official announcement has not yet been made, the government has signified its plan to cut property taxes by gradually phasing out the Education Support Levy. We are very disappointed that the government has chosen such a path. While we support the reduction of the proportion of education revenues that are raised through property taxation, we feel that the province has chosen the wrong path. Simply eliminating the Support Levy is a piecemeal solution will do little to address inequities created by the current property tax regime, and indeed, by committing a greater proportion of general revenues to funding this tax cut, the government will find its capacity to make such progressive changes impaired. Moreover, we are very concerned that the most often cited method of funding the promised tax cut will make the system even more regressive than it is at present.
We believe that the Education Support Levy represents a generally fair and equitable, if out-dated, instrument for funding provincial support for public education. Because the Support Levy is collected at a uniform rate on all residential and commercial properties in the province and redistributed according to need, it is by definition a fully equalized, redistributive tax. Because this tax is assessed at a uniform rate, it creates no distortions in the value of real property. Although property taxes are generally criticized for their regressive tendencies, specifically the penalty that they impose on those who are cash poor and asset rich like young families and retired people, these regressive tendencies can be, and are, blunted by a system of generous tax credits.
We do not deny that the system of education funding in this province has resulted in burdensome property taxes and distortions in the value of real property. What we argue is that the proposed property tax reductions do nothing to address these inequities, and we would project that they may even amplify them over time. Quite simply, they target the wrong tax.
We would identify the primary problem with the current funding model to be the current over-reliance on Education Special Levies, or school board taxes. These taxes, which have risen dramatically since the early 1990s as school boards have struggled to make up for chronic under-funding of education by the provincial government, represent the least desirable form of property taxation. Because they are local taxes, the amount of revenue generated depends entirely on the assessed value of local property. The implication of a growing reliance on local levies is that local tax capacity, not local need, becomes the primary determinant of the quality of education offered in Manitoba's schools. Moreover, in addition to the inequities that they create within the education system, the growing reliance on local levies creates inequities for ratepayers. As school boards in low capacity areas struggle to maintain or improve educational standards, they are compelled to tax at much higher rates than in higher capacity areas. Higher taxes place an additional burden on ratepayers in these areas while at the same time depressing the value of their real property, further reducing the tax base.
The best remedy for the inequities created by the reliance on local education levies is to facilitate the reduction of these taxes by increasing fully equalized provincial contributions through general revenues. We believe that the decision to eliminate the Support Levy, by forcing the government to rely on other revenue streams to fund education, will inhibit the making of these necessary changes.
Another concern rests with how the government proposes to replace the revenues lost to the Public Schools Finance Board through the elimination of the ESL. We are very concerned that the most likely source for most of this money, and the one favoured by the province's business lobby, is the province's education tax credit program. While forgoing just over $200 million in property tax revenue and simultaneously reducing some proportion of the roughly $175 million spent on tax credits may appear to be an elegant solution, this apparent simplicity belies the actual effect; a significant tax shift from commercial to residential properties. The fact that commercial properties are taxed, in our opinion, impose no undue burden upon businesses, and the fact that this tax is applied uniformly across the province means that it creates no distortion in property values or costs of doing business from one community to the next.
The debates which swirl around educational funding in this province are not new. Indeed, there is a fundamental continuity from the 1959 Royal Commission on Education to the present. Then, as now, the focus of the debate lies with the adequacy of a system which is heavily reliant on property taxes to meet the educational needs of a changing society. This debate has been resolved in nearly every jurisdiction in Canada by funding education primarily through more progressive and more flexible instruments, and by flowing all or most the funds for education through the provincial treasury. We would strongly urge this government to do the same. Such a system might very well include a tax on real property, assessed at a uniform mill rate and offset by a tax credit program. Such a tax, however, need not be directed exclusively to education, but might instead form a part of the province's general revenues or might be usefully directed to providing some form of equalization to the municipalities for the provision of local services.
In the absence of a plan to review the system and to fund education entirely through general revenues, we offer that the province would be better advised to leave well enough alone. The elimination of the Support Levy not only has significant regressive potential, but it reduces the province's room to manoeuver with respect to education funding by compelling the province to commit a greater proportion of its general revenues to education at a time when general revenues are constrained by the current balanced budget legislation, declining federal transfers and promised tax cuts.
4. Health
Anyone interested in government policy knows that Health is the largest and fastest-growing sector of the provincial economy. In part, however, this increase is simply catch-up for under-funding during the early 1990s, and so current trends are not evidence that the system is heading full-speed into unsustainability. Still, we recognize the acute fiscal pressures that this places on the province, and suggest the following approaches to improving both quality of care and efficiency.
From Acute Care to Community Care, With Better Integration
The government should reduce the public's reliance on expensive hospital-based care when it is not necessary. However, earlier discharges from hospital, more reliance on day surgery and more patients recovering at home requires a corresponding increase of resources in the community. The programs in the community where they exist are underfunded and there continues to be a lack of coordination between hospitals and community health programs. One of the results of underfunding community programs is the much lower pay provided to people working in community care. The inability of community programs to retain staff is exacerbated by the current shortage of health care professionals--they can work for a much higher rate of pay in the hospital sector or even more should they be recruited to another province.
Patients who are discharged from hospital often find it difficult to obtain the services they need in the community and are confused as to where to turn to request services. Another significant burden on patients being discharged from hospitals is the high costs of drugs. While an in-patient, drugs are provided free. Once the patient is discharged, the burden for drug costs is on the consumer. With the ever-increasing cost of drugs, this has become more and more of a burden. The current Pharmacare program is inadequate for many seniors or people with low to middle incomes who do not have the luxury of being covered by private drug plans.
The costs of integrating the acute care sector and community care should include bridge funding for the transition period. This is vital in order to create a true transition from the reliance on hospital care to more community-based care.
Emergency response teams and outreach and prevention programs.
We need innovative ways to divert patients from emergency when they can be better treated elsewhere.
Personal Care Homes and Home Care
Many families in this province rely on personal care homes to provide long-term care to the frail and the elderly. The funding levels for personal care homes has not increased in several years and personal care homes have been forced to do more with less. Just as in hospitals, residents in personal care homes are sicker than in previous years and have more serious behavioural problems including violence against staff.
Doctors on Salary and Multi-Disciplinary Health Clinics
We would investigate health care centres with multi-disciplinary teams who treat not only the ill but have the resources for preventative health measures such as nutrition, smoking cessation and physical fitness would become a priority. The hours of service of health care centres must be flexible to recognize the reality of families who do not have the ability to seek medical service during the tradition nine to five hours of operation.
Staffing
Manitoba needs not only to look at recruitment of staff, but how staff should be working in a new system. Administrators and physicians have a lot of power in the hierarchical structure of hospitals while the skills, contribution and knowledge of nurses, technical, clerical and support staff are underused. Hospital staff need to be consulted to determine how they can be part of a program that includes preventative programs and monitoring of patients past the point of discharge.
We would work with the Regional Health Authorities to develop mechanisms for the true involvement of citizens in the planning, development and evaluation of health care structures, and the move toward increased community care. A strong community development approach would ensure that Manitobans do not just see health services as provision of a hospital bed when one becomes ill.
Preventative measures
The Manitoba Centre for Health Policy and Evaluation, among many other researchers and organizations, has demonstrated that the richest people are healthier than people with middle incomes, and that those with middle incomes are healthier than those who are the poorest. Manitoba has one of the highest rates of child poverty in Canada. Babies born to poor families have twice the rate of infant mortality and disability as children living in affluent families. In Manitoba, the child mortality rate in the Aboriginal population is several times higher than in the population as a whole, reflecting their economic status.
Low-income people disproportionately enter the health care system at the acute care stage. In other words, in the most expensive way possible. An increase in social assistance allowances, new housing and job creation initiatives, increases in the availability of child care, conservation measures that improve environmental health--all of these measures must be part of an effective, long-term strategy to reduce the stress on our health care system.