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January 7, 2011
Limited Government in Saskatchewan?
WWHD (What would Hayek do?)
Originally appeared in C2C Journal, Canada’s Journal of Ideas (www.c2cjournal.ca)
Limited Government, quois?
As Friedrich Hayek says in The Constitution of Liberty “If we are to succeed… we must first of all know what we believe.” We must therefore define limited government prior to discussing whether the Saskatchewan Party government has successfully promoted limited government.
Hayek also argues that the ultimate aim of good policy should be liberty, and that means giving citizens the ability to plan future activities without concern of being made a “bare tool in the hands of another or others.” It is to exist in a metaphorical “sphere of liberty,” a zone where one’s choices are one’s own.
While there a number of limits to liberty, there is one type of incursion on liberty in particular that concerns us here. The arbitrary coercion by others through government is a constraint on liberty that can be lesser or greater depending simply on the policy choices a government makes. That is where the concept of limited government becomes relevant - it is the state where the activities of government are limited in order to maximize the ability of citizens to make their own individual decisions.
What follows is an examination of the current Saskatchewan government (soon to enter its fourth year in office), and in particular its success at limiting its own activities and therefore expanding the metaphorical spheres of liberty in which the people of the province live.
By way of background, the incoming government has adopted some very favourable conditions. Its predecessor had, for the most part, set a course toward limited government and was politically weak after a marathon sixteen year term in office. Global events were and are improving Saskatchewan’s terms of trade in a way that most jurisdictions in the world would envy.
The previous NDP government, during its sixteen years in power, had begun to reorient policy change toward more limited government. The New Democrats had inherited a bankrupt province from their Progressive Conservative predecessors, and they responded admirably.
The NDP government balanced budgets and halved the public debt to 13 per cent by the end of their term. They had dramatically simplified the tax system by reducing the top personal income rates and the business rate, phasing out the capital tax, and removing surtaxes. In short, they took Saskatchewan from having one of the most inhibitive tax regimes in the nation to one that is second only to Alberta’s for low rates and simplicity.
With the exception of the Saskatchewan Potato Utility Development Company (SPUDCO), a disastrous attempt to create a vertically integrated potato industry using government capital, the previous government was moving in the direction of limited government. Public expenditure was held almost to the national rate of inflation for its first decade under Premier Roy Romanow, and expanded somewhat faster under Lorne Calvert for a total rise of 72 per cent while national inflation was 34 per cent over the same period. In percentage of GDP terms, government spending was static over the period.
One final feature of the province that the Saskatchewan Party inherited was a weak opposition. After barely hanging onto power during two close elections in 1999 and 2003, the NDP was a tired government. Lorne Calvert resigned from the leadership after the election to be replaced by Dwain Lingenfelter, but not before a leadership contest plagued with scandal where it was discovered Lingenfelter’s camp had registered hundreds of new party members on a First Nation who either did not exist or did not know they had joined the party. While the NDP will no doubt recover eventually, it currently poses as a very weak opposition.
The current government in Saskatchewan, having inherited a good policy trajectory, strong economy, and weak opposition might be held to higher standards than others when evaluating its performance at promoting the principles it is supposed to have. It is to that task that we now turn.
The larger the amount of money expropriated by government, the less likelihood that people are to plan their activities by way of controlling their own funds. In the last financial year of NDP government, 2006-07, the Government of Saskatchewan’s all-in expenditure figure was $9.3 billion. In 2009-10 the same figure was $12.5 billion. In other words, over three years, the Saskatchewan Party government has increased financial outlays by around 34 per cent in nominal terms. In fiscal year 2003-04, expenditures were 7.7 billion, so the increase in expenditures for the last three years of the NDP government was around 21 per cent. The Saskatchewan Party has not only adopted the spending trajectory of the previous government, they have actually accelerated it.
Two possible defenses are that the spending is driven by factors beyond the government’s control, or that the spending is on better causes than previous spending. Healthcare, with its relentless cost increases that are driven by demographics and technology changes and the government’s policy of substituting provincial tax revenues for school board taxes, and the push to improve Saskatchewan’s notorious highways (which are also of greatest interest to the Saskatchewan Party’s rural base) could be cited as examples of these two defenses. Unfortunately, it is not clear that these arguments hold water. According to the summary financial statements, healthcare was 35 per cent of expenditure in 2003 and 36 percent in 2009. Transportation was around four percent in each and every year. It would seem that the spending increases are rather more across the board than driven by any particular policy direction or external condition.
One of the things that happens when a government spends more money is that it is required to raise more revenue. For the most part, Saskatchewan’s booming economy, good harvests, and in particular the resource sector has achieved that for this government, with one major hiccup. In 2009, it was forecast that potash revenues for the year would be approximately two billion dollars. In the event, a worldwide market crash meant that the government was actually required to return $200 million to the potash companies as a tax refund.
What happened next could only be described as somewhat disingenuous behaviour by the government.
It dipped in the Fiscal Stabilization Fund, commonly known as the rainy day fund, then required Crown corporations to pay 100 per cent of profits as dividends (with the exception of SaskPower, which is particularly short of capital in view of increasing demand). Whatever one’s view of the Crowns may be, this unforeseen taking is a disturbance that makes it more difficult for their managers to plan future activities and therefore damages the entire Saskatchewan economy.
With a billion dollars of help from taxes and oil revenues being higher than forecast, the government then made the roundly lambasted claim that in actual fact they had not run a deficit but a $424.5 million surplus.
A final exacerbating feature of the fiscal situation the government has found itself in this year is their 2008 tax cuts. Tax cuts are only a step toward limited government if they are accompanied by a decrease in spending. If they result in deficits, then they are more accurately described as a tax delay. They can be seen as having behavioural effects, by reducing the penalty for wealth creation and therefore increasing economic activity.
The path that the Saskatchewan government chose in 2008 was to raise the basic personal exemption by $4,000 and the per child exemption by $2,000. The government boasted (correctly) that it was the largest single tax reduction in history and that it removed 80,000 taxpayers from paying Saskatchewan tax whatsoever.
What they could have done for the same fiscal cost is reduce all three personal income tax rates by two percentage points. In contrast, such an approach would have changed the marginal tax rate for practically every taxpayer, instead of the 80,000 who now effectively have a zero per cent marginal rate. Not only would it have had a marginal effect for more people, it would also have better preserved the fundamental underpinning of a free society, the rule of law. The tax cut approach that the government actually chose has created a greater division between taxpayers on higher incomes and non-taxpayers on lower incomes. Such a result creates the situation for predatory behaviour by low income voters who will happily vote for higher taxes on others knowing that they will not pay themselves.
Altogether, Saskatchewan’s government has ramped up spending faster than its predecessor, poorly forecast its revenues, run an effective deficit when resource revenues were found wanting, then covered it up by asset stripping the Crowns and dipping into the fiscal stabilization fund to claim they had actually run a healthy surplus. They cut taxes, but these were arguably structured in a way that widens the gulf between those that pay taxes and those who benefit from them.
Saskatchewan’s Crown corporations are a long standing point of political contention. The official Crown corporation holding company, the Crown Investments Corporation, controls 11 Crown corporations, including Telephone, Gas, Auto Insurance, Electricity companies. The Crowns are creations of the NDP, but the Progressive Conservative government of the 1980’s privatized several of them and attempted to privatize more. From a limited government perspective, privatizing the Crowns is an obvious move. By compelling all taxpayers to supply capital to firms they might not otherwise choose to invest in, the Crown corporation model is a limit on liberty and reflects a lack of limits on government. Opponents of the Crowns also argue that their taxpayer-subsidized capital allows them to undercut private businesses and so distort the entire economy. Privatizing them is not so simple.
The 2003 election had been the Saskatchewan Party’s to lose. It seemed impossible that the NDP could come back from their polling deficit until then leader Elwin Hermanson gave an honest but politically foolish answer that under certain hypothetical circumstances a government led by him would consider privatizing the Crowns. Two weeks later the NDP was back in power and introduced the Crown Corporation Public Ownership Act which requires that for a Crown to be legally privatized, a special Act must be introduced to the legislative assembly, and the sale cannot be concluded until 90 days after a provincial election.
In other words, any future privatization would be subject to a virtual referendum which could also cost the party that initiated it power. At the same time the process brings uncertainty quite unlike anything else in the commercial world, so it would be difficult to gain a competitive price for a Crown. The Saskatchewan Party block voted for this legislation, meaning that they conceded the battle over the Crowns in almost every way possible for the foreseeable future.
However, it may also be that the Crowns are benefiting from the fact that the current government is almost entirely rurally based. With a few exceptions, the Saskatchewan Party does not win urban ridings in Saskatoon or Regina, and the rest of the population is more sparse than perhaps any other province. Delivering the kinds of services the Crowns provide to those locations is costly, and the Crowns are an ideal vehicle for cross subsidizing rural constituents who support the Saskatchewan Party at the expense of urban constituents who vote for the NDP.
Only the Saskatchewan Party itself knew the extent to which that last motivation is relevant, but it is a commonly heard one. The government has also introduced its “Saskatchewan First” policy, which by and large prevents the Crowns from investing in ventures outside the province. The party rightly points out that many of the out of province investments were money losers, and such commercial activity is not a role for government in any case. There is a counterargument to be made that to be competitive some Crowns, particularly SaskTel, require economies of scale that cannot be found within the province, and Saskatchewan Government Insurance has been allowed to continue pooling its risk by with operations out of the province.
One noticeable shift in the Crown position is the introduction of two private liquor stores with mandates to sell wine. This brings the province in line with Manitoba and is far away from fully liberalizing the liquor retail industry, but it is a significant shift in principle.
In total, the government is in a frustrating corner with the Crowns. In the interests of limited government it should want to privatize them, but it has already conceded the argument. What is left is difficult manoeuvring around what the Crowns should be allowed to do and how much of their profits they get to keep.
If the topics of fiscal management and Crown corporations are somewhat disappointing to people who like both limited government and the Saskatchewan Party, the area of labour law reform has seen somewhat more traction. The government has introduced several bills which variously require that workers deemed to be “essential” are not able to strike, that certification must be approved by a secret ballot, and that building trades will no longer each have a monopoly union but any union will be able to organize on any building site.
The essential service legislation could be seen as an abuse of a worker’s autonomy, no better than what advocates of limited government see as the compulsion practiced by unions. However the secret ballot requirement and the removal of restrictions on which unions can organize on building sites are clear advances for limited government and individual autonomy.
Crown corporations and organized labour loom large on the Saskatchewan medical scene, but no policy issue looms larger than healthcare. As the home of Tommy Douglas and Medicare, socialized medicine is as steeped in the province like no other policy position. From a limited government point of view, it certainly shouldn’t be illegal for a willing seller to provide healthcare services to a willing buyer in a private market. It shouldn’t be unusual for services provided by the government to be subject to competitive tendering and purchased from the best bidder regardless of whether they might be public or private. Ultimately, a taxpayer should not be compelled to fund a medical scheme when they might not have otherwise chosen to do so.
However, the Canada Health Act, and the federal healthcare funding which is tied to it, make such reforms next to impossible. The Saskatchewan Party government has, however, done two things. In the 2009 throne speech, it promised that all surgical waiting times would be reduced to three months within four years, a bold target at a time when waiting times of over a year were not unusual. They have also been very bullish (considering the context) about contracting our healthcare services to private clinics, including MRI’s and some knee surgeries. Altogether the current government has moved toward a limited government paradigm about as rapidly as is practical for any government in its position to do so.
Optimist or Pessimist?
The Saskatchewan Government was elected into the best possible times, and yet, despite the favourable conditions they have only made incremental steps towards limited government. That is the pessimistic view for advocates of limited government, which has been presented so far. However, there is an optimistic view to be had if you’ll think longer term. Saskatchewan has been a place where radical and activist governments have not always respected rights. Changing that is not an overnight affair, and in any case sudden legislative change, even if for the better, has the effect of diminishing the people’s ability to plan their activities and is effectively a less limited government. What the Saskatchewan Party is doing is carefully installing itself as the natural party of government. If you take the optimistic view, the Saskatchewan Party has merely been preparing for the time when the politically impossible becomes the politically inevitable. Time will tell.
direct the Centre’s Saskatchewan office from 2007 to 2011. He holds degrees in Electrical Engineering and Philosophy from the University of Auckland, where he also tutored Economics. In four years working for the Frontier Centre, David carried out extensive media work, presenting policy analysis through local and national television, newspapers, and radio. His policy columns have been published in newspapers in every province as well as the Globe and Mail and the National Post. David has produced policy research papers on telecommunications privatization, education, environmental policy, fiscal policy, poverty, and taxi deregulation. However, his major project with the Frontier Centre is the annual Local Government Performance Index (LGPI). The inaugural LGPI was released in November 2007 and comes at a time when municipal accounting standards in Canada must improve if the municipal government sector is to reach its potential as an economic growth engine for Canada. David is now a policy advisor in Wellington, New Zealand.