Manitoba’s zombie economy

January 16, 2010

By Peter Holle
President
Frontier Centre for Public Policy

Peter Holle
Peter Holle

WINNIPEG, MB, Jan. 16, 2010/ — The most recent issue of Maclean’s should be a wake-up call for Manitobans. In the article, Manitoba Can’t Get Any Respect, the magazine positions the “Keystone province” as an outsider in Western Canada, one increasingly disconnected from the real economy.

It describes how B.C., Alberta and Saskatchewan are co-operating to integrate their transportation links and create the largest barrier-free trade and investment market in Canada. Also the three westernmost provinces occasionally host joint cabinet meetings, among efforts to align their policies and political strategies. AWOL from all of this is Manitoba, although the other provinces have, as a courtesy, sent copies of the paperwork from their discussions to the palace on Broadway.

Existing on federal transfer payments

Where things get brutal — and honest — in the Maclean’s article is the discussion about what drives the Manitoba economy. The province is an outsider because its policy fundamentals are considerably out of line with its three western neighbours. It has an old-style policy model based on heavy regulatory burdens, high taxes and, most critically, big, sprawling government spending. David Mackinnon, a senior fellow at several Canadian think tanks and chair of the Ontario Institute for Public Policy, observes that Manitoba’s “biggest business by far is getting money out of other Canadians via the federal government.” He’s right: almost 40 per cent of provincial revenues come from federal transfer payments.

The problem with these supercharged transfers is summed up well by an anonymous Saskatchewan cabinet minister in Maclean’s who observes that this high level of dependency has made Manitoba into an “economic la-la land”. For example, Manitoba awards its nurses a 10 per cent increase making them among the highest paid in Canada — this in a province with a much lower cost of living than British Columbia, Ontario or Alberta.

Civil service spending figures disproportionately: Compared to an average of 838 provincial civil servants for 100,000 people across Canada (and only 555 per 100,000 in Ontario), Manitoba employs 1,425 per 100,000, a figure that is 70 per cent higher than the Canadian average and a whopping 256 per cent higher than Ontario.

The Maclean’s piece ends with the observation that Manitoba’s recent boom has been funded almost entirely by public spending, to the point where “economists warn that growing government will crowd out private investment entirely.”

In such adversity lies great opportunity. The good news is that the storm clouds for long overdue change in Manitoba have finally reached a critical level. We can expect beleaguered Ontario and federal deficit concerns to create strong pressure to trim back the over-the-top federal subsidies at the root of Manitoba’s transfer payment-dominated “zombie” economy. Tax competition from other provinces is also rising. The biggest provinces are moving to harmonize their sales taxes with the GST, which will attract private investment away from Manitoba. Saskatchewan is likely to match Alberta’s 10 per cent flat income tax soon, leaving Manitoba with a top rate 74 per cent higher than the other two Prairie provinces. And B.C. now has the lowest income tax among all provinces for those earning under $118,000.

Clearly, things can no longer be business as usual, where obsolete, old- style public policy models drift along courtesy of outside money. Manitoba needs to transform its policy models in a creative way. During the coming year, the Frontier Centre will be constructing a comprehensive public policy “blueprint” that improves public services and dramatically reduces spending levels while moving to a smarter, growth-oriented taxation and electricity pricing framework. It will include the following “smart green” policies to bring Manitoba back into the Western mainstream:

Health care — Replace the present global budgeting hospital funding model with one based on payment for results; separate the purchase and provision of services to introduce competitive pressures for more effective and better quality services.

Education –Provide more choice to parents of all income levels. Support academic excellence with content-based curricula and standardized achievement tests.

Housing — Replace rent controls with a housing voucher plan that allows low- income earners broader choice in the normal rental market. Sell public housing to tenants.

Environment — Remove government subsidies, which keep hydro prices artificially low; cancel the west-side power line; do not require nitrogen removal in Winnipeg wastewater upgrades.

Core Public Sector Reform — Adopt successful policy models that maximize transparency of costs, neutrality of delivery and separation of elected officials from government operations. Replace balanced budget law with one that limits spending increases to population plus economic growth.

Manitoba Hydro — Move to fair market pricing for electricity; require prices to include normal cost of capital and taxes. Deploy revenues to lower taxes. End subsidies for wind, biofuel and other so-called “green” but uneconomic energy projects.

End Transfer Dependency — Replace federal equalization subsidies with swaps of the federal GST and transfers of provincial debt that reduce interest payments.

Moving to match Alberta

Tax SEmD Swap equalization transfers for the federal GST on the condition that PST and GST are harmonized, giving one per cent to local government on a per capita basis; use extra Hydro revenues to eliminate payroll tax, capital tax, the school portion of property tax, and move to match Alberta’s 10 per cent flat income tax.

Without a vision there is no path and you don’t know where you are going. Accordingly, you can’t get there.

Channels: The Winnipeg Free Press, January 16, the Calgary Beacon, January 17, Portage La Prairie, January 27, 2010

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