The Red and Blue Doors Open the Same Room

As promised in response to the budget/not-a-budget pre-election kick off, I thought it would be useful to take a deeper look at what the Liberals have accomplished in their four years in office. Halfway through the election campaign is as good a time as any.

Everything old is new again. As both the Liberals and the Progressive Conservatives have now released their “costed” platforms, it’s probably a good idea to think back to where we were when the parties went through this exercise in 2015.

Memories of Elections Past

In the spring of 2015, Progressive Conservative premier Paul Davis brought down an austerity budget in response to the collapse in oil prices and the sudden realization that the good times of the previous decade had gone bust.  Budget ’15 projected staggering deficits and proposed a series of tax increases (including a controversial HST increase) and a public sector attrition plan to increase revenue and reduce spending.

Horrible economic news, the growing realization that the government had squandered billions on Muskrat Falls, and a series of comical efforts to find a leader to replace Kathy Dunderdale did not bode well for the Conservatives’ plans to campaign on a new commitment to telling it like it (was).  Despite the Tories running what was a very obvious death march of a campaign, Dwight Ball— eager to win the most thankless job in Canadian politics—decided to ignore much of the bad news and promise that he could govern the province without austerity. Shamelessly, the Liberals rolled out a platform promising to roll back Conservative tax increases and that they would not “cut jobs” in the public sector.  

Of course, we all know the result.  Fresh from their electoral victory the Liberals quickly changed course and proceeded to spend their mandate implementing the policies they campaigned against.

On the revenue side, they raised taxes.  They reversed their reversal of the PC HST increase, they increased income taxes, and they imposed a bizarre deficit reduction levy which is being abandoned despite the fact the deficit is still there—the government is currently campaigning on a deficit of about $800 million in 2020.  On top of this they temporarily raised the gas tax, which is now a new permanent part of the province’s carbon tax system.

On the spending side, they retained the Conservatives’ attrition plan, and they cut. Central government agencies felt the axe particularly hard, but they’re not the only ones. The last three years at Memorial University have been dominated by trying to implement an 18% cut in funding from the provincial government.

Make no mistake about it: many good jobs have been lost.

The Liberal Record

Its old hat to talk about “Liberal-Tory, same old story” in Canada, but the truth is that while many people voted for the Liberals in the last election for a change in direction, what we got was largely the Davis Government’s plan, not some alternative “Way Forward.”

(It may or may not be worth noting that the multi-year plan advanced in the 2015 PC budget was also branded a “Way Forward.”)

While it’s hard to show this on the revenue and deficit side (the impact of the Hibernia Dividend money blurs the numbers), the spending side is much clearer.  Whatever we may think about the value of parties’ promises during elections, the Liberal record on spending cuts looks a lot like what the Progressive Conservatives promised.  While spending has gone up by 1.8% since 2014 it is important to remember that even the most austere governments in the world rarely achieve absolute cuts in spending over a five-year time frame.  Normal inflation over this period would have driven spending close to $9 Billion a year, and provincial governments are facing spending pressures that go well beyond inflation. The Liberals, by sticking to the Tories’ plans, have managed to take a big chunk out of Newfoundland and Labrador’s structural deficit.  Job cuts in the public service have made a leaner and more efficient government.

Take the healthcare sector, for example—far and away the most significant part of provincial government spending. Despite having the oldest (and therefore most expensive) population to look after in health care terms—and despite the geographic challenges low population density entails for cost-efficient health care—Newfoundland and Labrador has managed to close the gap in spending relative to other provinces. While we used to spend more per person on healthcare than any other province, according to the Canadian Institute for Health Information data for 2018, we now spend less per person than Alberta. Our spending levels are much closer to the other Atlantic provinces.

This is an important story. Austerity in terms of public spending cuts is having a big impact on the province’s finances.  Of course, we know what this will mean for the quality of public services—the drugs that keep your Nan alive aren’t going down in price.  Given the demographic challenges facing the province, the government has effectively decided to provide Newfoundland and Labradorians with lower standards of care and a lower quality of education services than will be provided in other provinces.  

To put it bluntly, Nan is not going to get the same quality of care in Newfoundland and Labrador as she would in another province.

Let’s not even talk about our kids.

This choice should concern us: not just because the province still faces difficult deficit problems going forward, but because action on the revenue side is being prematurely curtailed. In practice, the government has decided to manage our financial problems almost entirely through what are effectively deep spending cuts.

The 2015 PC Budget and the 2016 Liberal Budget raised taxes and fees and resulted in significant increases in revenues. But since that time, the government has begun rolling back many of its revenue measures. Almost all of the improvement in the province’s revenues over the past two years has been due to increasing offshore oil and gas revenues.

The Truth About Taxes

I know people don’t want to hear this. We have been told so often that our taxes are comparatively high and we seem to believe that broad tax cuts are the only way to diversify the economy. But the truth is that we have a revenue problem: our tax system simply isn’t as effective as other provinces in producing revenue. Call it leaky, call it poorly designed, whatever—but comparatively there is lots of room to address the province’s revenues.

While cross-provincial revenue comparisons are complicated by federal transfers and equalization, the important thing to understand is that compared to the other Atlantic provinces, Newfoundland and Labrador has higher “fiscal capacity.” Taxable incomes are higher here, and along with our resource royalties, this high capacity is why NL does not qualify for equalization.  

The problem is that despite the higher fiscal capacity, the provincial government fails to collect as much revenue per person as do New Brunswick and Nova Scotia—two “have-not” provinces. NL’s lower corporate and personal income tax rates result in less revenue, and this is not made up by consumption taxes on our province’s higher consumer spending.

For example, if we leave out federal transfers and resource royalties, if Newfoundland and Labrador’s other revenues were the same per person as New Brunswick (arguably the “poorest province” in Confederation), our revenue would be almost $350 million dollars higher per year. This is a big chunk of our structural deficit.  

And to be clear, despite our financial crisis, tax rates in Newfoundland after Budget 2016 are lower than they were in 2006.

The picture is even worse if we consider municipal tax revenues—and we should. Again, this will sound weird if you live in St. John’s and are looking at your current property tax assessment, but Newfoundland and Labrador has very low average property taxes.  To keep a long digression simple: in our province, we directly provide more services, in particular to rural residents, that are paid for by municipal taxes elsewhere. This makes “provincial government spending” look bigger and municipal spending look smaller, but the point is that the same taxpayers pay for those services regardless of whether they are provided by municipal or provincial agencies, a conclusion reached by the Government’s own Independent Tax Review.

In practice, low municipal fees and taxes have a big impact on the province’s finances. While on a per capita basis we pay, on average, about $700 less per year than people in other provinces, this translates into about $350 million in lost revenue.

I could go on here, but there have been lots of suggestions on how to address these issues, and they have been well documented in The Independent and elsewhere. Income taxes on upper income earners should be increased. Corporate tax revenues are abysmal, and the small business tax rate is a widely abused system that in our economy is largely a tax break to doctors’ and lawyers’ offices. A higher carbon tax would be an excellent idea. There is no reason for us to drag our feet on raising those taxes now—we will be doing it soon anyway, and the system will be more effective if the price signal is clearer. Government must also grapple with the reality of the municipal taxation mess.

None of these revenue solutions is easy. People don’t want to pay higher taxes, and parties don’t want to campaign on them. Having watched the recent furor over levying fees on rural garbage collection, I am sure we all get the challenge. But if we were led by serious people we might want to have a conversation over whether free riding on municipal services is a higher priority than Nan’s medical care.

Election 2019: we’re not going to have a grown up conversation, are we?

The Progressive Conservative and Liberal campaign platforms for this year’s election are basically the same.  They have committed to many of the same small spending initiatives. Sadly for a province that had trouble issuing bonds last year and has just received a bailout from the federal government, their platforms compete to deliver the same tax cuts and rollbacks more quickly.

For example, both parties are promising to remove the last vestige of the Deficit Reduction Levy (which currently is only charged on incomes over $50,000). The Liberals want to do it by the end of the year, and the Tories want to do it immediately. Make no mistake: the Levy was a bad piece of public policy, but cutting taxes on higher incomes is a really bad idea without some plan to replace that revenue. We are borrowing money and cutting Nan’s access to health care to pay for it.

Even on Muskrat Falls, both parties are making similar promises. However they work out the details, their plans are to subsidize lower power rates by using general revenue. This will only further complicate the province’s difficult financial situation. Let’s not pause too long to think Nan won’t get that health care because the money is being spent to prop up Muskrat Falls.  

To put it plainly, both parties are offering the same plan. They will continue with austerity in public spending, they will not address the province’s revenue problems, and they are both banking on oil revenue going up to help us “return to balanced budgets” in the future.

Always Look on the Bright Side of Life

As Prime Minister Kim Campbell famously quipped in the 1993 Federal election, “an election is an awful time to talk about policy.”  She was en route to leading the Tories into a two-seat rump in the House of Commons, but she had a point.  

Think about it this way: the Liberals won the last election and chose to give you the Progressive Conservative platform instead. Maybe we’ll get lucky, and whoever wins this election will also give us something completely different than what they’re offering in the campaign.

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