Afraid to tax, provinces face debt by a thousand cuts

Posted on June 13, 2014 in Governance Debates – Globe Debate
Jun. 13 2014.   Jeffrey Simpson

Seven years after the financial recession, its impact still weighs on Canadian governments.

Most provincial governments (Saskatchewan, Alberta and B.C. being the exceptions), remain in deficit, whereas before the 2008-2009 downdraft Ottawa and most provinces enjoyed surpluses. The federal government, after plunging into deficit, has just balanced the budget.

The result, best observed in Central Canada but evident elsewhere, is governments’ episodic struggle to curb deficits by reviewing or curtailing the increases in their spending.

Being consistently prudent has proven difficult-to-impossible. Governments are driven by all sorts of pressures to add spending and very few to reduce it. Over time, spending grows, usually faster than inflation or government revenues, until at some point a party in office calls a halt. The halt, it turns out, is usually temporary.

The new Quebec government, for example, announced last week the establishment of two commissions, one into the province’s tax policy, the other into spending programs. These will report in time for the 2015 budget, at which point the government promises to get really serious about balancing Quebec’s books.

Almost every Quebec government going back two decades has promised to balance the books and attack the debt. It happened only briefly. Quebeckers, it turns out, were unwilling to forgo advantageous social programs. Public-sector unions were hugely powerful, as were student groups. And despite higher taxes, revenues could not keep pace with spending, as for health care.

The Ontario government commissioned a very thorough spending review under economist Don Drummond. Since his report, the government has cherry-picked recommendations but has generally let the deficit rise. In fairness, program spending has been checked, but revenues have slumped.

The Harper government did not look outside for help, but gave Treasury Board president Tony Clement the mandate to reduce spending. This restraint came after the government let spending rise rapidly for the first four years in office. No sooner will the government show a surplus in 2015 than it will spend all or most of it in the form of new programs and tax reductions.

One way to deal with this systemic challenge, in theory, would be to raise taxes. We live, however, in a tax-adverse time. Politicians of every stripe are scared silly of even mentioning higher taxes, the assumption being that that way lies the political trap door. Voters have become conditioned to believe, apparently, that any additional money sent to – fill in the blank – will be wasted or absconded with by the profligate people in office of whatever political stripe.

So governments are therefore in a pickle. Their budgets are in the red. Economic growth, post-recession, has been disappointing, meaning less revenue than they expected or need. Some of their costs have been rising, because higher unemployment and slower growth puts upward pressure on certain social programs. They remain pressed on all sides to spend more, and welcome the publicity that comes with making spending announcements. Vested interests that already benefit from government programs relentlessly protect their previous gains.

So they begin, other options not being available, to cut themselves. But since eliminating or curtailing programs usually creates a big stink from the groups and communities that like the programs, they try to cut “administration.” Which inevitably means digging into the number of people they employ to deliver these programs. Which in turn puts governments in a conflict situation with their employees.

So the first thing governments do is freeze salaries for senior officials and elected officials, which makes a pleasing headline but very little difference to the bottom line. They ask for, or impose, restraint on their employees, which usually produces an unpleasant response from the employees’ unions. (See teachers in Ontario and British Columbia.)

There is no early end from this cycle, because the public has become so conditioned to believe that government money is routinely wasted that no amount of cutting will satisfy those who so believe. And governments soon discover that cutting their administrative costs doesn’t really get to the heart of their spending challenge, but still they feel they must chase their tails.

This dynamic will be with us for a long time. Provinces, much more than Ottawa, are employee-heavy because they deliver labour intensive programs (health, education), whereas Ottawa writes cheques to people and provinces.

The provinces, not Ottawa, will be up against the fiscal wall. They will try for a while to appoint commissions and seek administrative economies. But if they do not raise new revenues and/or cut or eliminate programs, they will keep kidding themselves and their electors.

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