One of the most important functions of an independent think tank is to inject controversial ideas and thinking into the public dialogue. Several years ago, the Frontier Centre for Public Policy, along with a handful of newer policy research organizations located in Canada’s so-called “have-not” provinces began to examine the adverse effects of federal transfer payments on the economic performance of the “have-nots.”
A starting point was an interview I did with the Nobel Prize winning economist James Buchanan in 2002. He had written a ground-breaking paper in 1948 which argued that governments should bribe people in slower growing regions to stay where they were. He observed that Canada, one of many countries in the world with a system of equalization transfers, had actually not followed his advice about how this should be done—which was to cut taxes for individuals in less affluent areas. Buchanan was nervous about government to government transfer systems on the grounds that they create a major source of inefficiency that would be fiercely defended by beneficiary politicians and bureaucracies. Indeed, during the last few years various think tanks, including Frontier, have revealed a perverse result where large federal transfers to Canada’s “have-not” provinces are supporting public spending levels that are substantially higher than those found in the paying “have” provinces. Where politicians get to spend money without being responsible for taxation, spending has increased.
A strong case can be made that Canada’s transfer payment system is harming the economic prospects of recipient have not provinces, particularly Manitoba in Western Canada. The problem is that the flow of transfer money from taxpayers elsewhere has artificially enlarged the size of the public sector in the recipient provinces. By reducing the need for recipient provinces to generate their own source tax revenues, transfers have lessened their need to have competitive tax rates. Higher taxes mean less investment and less job creation which, over time, has led to lower living standards.
Manitoba’s inflated public sector has also concentrated substantial resources in the hands of a comparatively few politicians who make decisions that impact the performance of entire sectors of the economy. What has emerged is a society that is politically driven and reliant on discretionary and unpredictable grants of largesse from government. It is a less dynamic society where individual choice, effort, creativity and initiative are suppressed. The following series of commentaries by University of Manitoba Law Professor Bryan Schwartz explores the debilitating politicization that Canada’s well intended equalization system has produced across various areas of public policy in Manitoba and offers some alternative paths forward. Professor Schwartz proposes ways in which by creating greater freedom in the governmental, business and non-profit sectors individuals and groups can better express themselves in distinctive ways and innovate to achieve their objectives. He argues that these reforms would produce a more democratic, diverse and dynamic Manitoba society, and enable the province to move towards self-sufficiency.
The topics of the optimum size of government and transfer / equalization payments needs to consider how revenues derived from natural resource exploitation are dealt with.
In my opinion, revenues derived from one-time conversion of natural resource assets to cash resources should not be considered as a revenue. Instead, it should strictly be considered as an accounting entry that shifts one type of asset to another. Only a net gain or net loss on the conversion should be considered for revenue measurement purposes. Extraction of petroleum or minerals in my mind is comparable to selling gravel or top soil from the land. The action of converting the asset into cash depletes the natural resource that should be accounted for in government revenue measures.
Extracting natural resources and converting them to cash can also be considered as the equivalent of delaying maintenance on assets such as public road, buildings or infrastructure such as water utility systems. Failure to invest in maintenance and rehabilitation of assets leads to their depreciation, so cutting the short term expenses is a zero sum game because at the end of the day, the depreciating asset is slowing eroding in value. Cutting maintenance and rehab expenses simply accelerates that process.
The problem perhaps extends to the issue of public sector accounting in general. While we are gradually shifting to accrual accounting in the public sector, I think there is still a long ways to go to eliminate the cash accounting culture that has permeated the system in past generations. The past system encouraged a culture “asset stripping” where the accounting system appeared to reward those who choose to rapidly convert or depreciate public assets to grab near term cash instead of maximizing total economic value and wealth.
Within that context, the greater proportion of an economy that is put under the domain of the public sector, the greater the risk because they are using dysfunctional accounting measures to guide decision-making processes. If there is no means to measure total wealth production or consumption within the public sector, how can we expect those managers, decision makers and elected leaders to make good choices about how to maximize economic value?