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January 16, 2010
Easy federal transfers have made Manitoba Western Canada's Outsider
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 BC, Alberta and Saskatchewan are cooperating 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.
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 (including the Frontier Centre) and Chair of the Ontario Institute for Public Policy, a newly established think tank that examines Canadian economic and financial issues from an Ontario perspective, observes that Manitoba’s “biggest business by far is getting money out of other Canadians via the federal government”. He’s right: almost 40% 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; meanwhile. 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 and communicating 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. Designed to fit in a person’s front shirt pocket, we submit the following “smart green” policy agenda to re-invent Manitoba and bring it back into the Western Canadian mainstream:
Healthcare - 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. Work to maximize housing market supply by moving away from regulatory policies that artificially boost house prices.
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. Institute a purchaser-provider split where possible to maximize competitive service delivery. Replace balanced budget law with one that limits spending increases to population plus economic growth.
Crown Corporation Reform - Eliminate hidden subsidies: require Crowns to pay industry cost of capital and equivalent taxes paid by normal companies. Remove the monopoly privileges that restrict other suppliers from operating in markets that Crown corporations supply.
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.
Ending Federal Transfer Dependency - Replace federal equalization subsidies with swaps of the federal GST and transfers of provincial debt that reduce interest payments.
Tax - 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 (and Saskatchewan’s planned) 10 per cent flat income tax.
Local Government - Shift funding model away from property taxation towards user fees, land taxes, and a portion of a harmonized GST/PST. Legislate managed competition model which requires in-house work force to compete with outside
Rural Development - Create a positive environment which promotes widely available, affordable and reliable rural high-speed Internet. Expand the agriculture economy by pushing the federal government to phase out supply management.
Without a vision there is no path and you don’t know where you are going. Accordingly you can’t get there. Frontier’s path definitely knows where it’s going. We welcome your comments. Send them here.
is the founding President of the Frontier Centre for Public Policy, an award-winning western Canadian based public policy think tank. Since its founding in 1997, Frontier has brought a distinctive and influential Prairie voice to regional and national debates over public policy in areas such as core public sector reform, housing, poverty, aboriginals, consumer-focused health care performance, equalization, rural policy and much more. Of the nearly 100 recognized think tanks in Canada, Frontier is one of only 5 to make the 2008 global "Go-To Think Tanks" list published by the Think Tanks and Civil Societies Program of the Foreign Policy Research Institute in Philadelphia. Mr. Holle has worked extensively with public sector reform and has provided advisory services to various governments across Canada and the United States. His publications have appeared in various newspapers and journals including dozens of newspapers, the National Post and the Wall Street Journal. He has a Masters of Business Administration from the University of Wisconsin at Madison. He is a member of various organizations including the Mont Pelerin Society, an international organization of classical liberals.