Matthew Lau: To Reduce Provincial Deficits We Must Shrink the Public Sector

This is the second of two prize winning essays by Matthew Lau, 1st place winner of the AIMS on Campus 2015 Essay Competition. Here Matthew argues growing provincial debt in Atlantic Canada is a problem in need of urgent addressing, and has been driven by a bloated — and still growing — public sector. 

public sector chart

With the federal government’s daunting $616 billion in net debt hanging over the heads of taxpayers, it is easy to forget that for many Canadians, their province’s finances are in even worse shape.  In fact, of the four Atlantic provinces only Newfoundland and Labrador has a lower debt-to-GDP ratio than the federal government.

Combined, the provincial governments of the Atlantic provinces hold $40 billion in net debt and there is little reason to believe this number will go down.  In 2014-15, Nova Scotia ran its fourth consecutive deficit, New Brunswick its seventh, and Prince Edward Island its eighth.  Newfoundland and Labrador, which will increase its debt by over $1 billion in the 2015-16 fiscal year, doesn’t plan to balance its budget until 2019-20.

A primary reason for the dismal financial state of affairs in the Atlantic provinces is the excessive cost of government.  Newfoundland and Labrador spends more per capita on government programs than any other province – in fact, its program spending per capita will exceed the thriftiest province’s, Quebec, by 70% in the 2015-16 fiscal year.

Overspending isn’t isolated to just one Atlantic province, unfortunately.  Program spending relative to GDP ranged from 20.2% to 26.0% in the Atlantic provinces in 2014-15.  For the other six provinces, it ranged from 14.3% to 19.4%.

While some have suggested that a lesser ability to take advantage of economies of scale (for example, in the area of infrastructure spending) may account for the poor financial performance of Atlantic provinces relative to the rest of Canada, this cannot fully explain away the excessive costs incurred by Atlantic provincial governments.

A report published in March 2015 by the Canadian Federation of Independent Business, which examined government wages in 2010, found that the average provincial government employee in Canada received a 21.2% premium over comparable private sector workers when both salaries and benefits were taken into account.

In each of the four Atlantic provinces, the premium received by provincial government employees exceeded the national average of 21.2%.  The largest discrepancy existed in Prince Edward Island, where compensation spending on provincial government employees was 28.6% higher than the cost of comparable private sector workers.

The high premiums paid by Atlantic provincial governments to public sector workers is only half of their problems when it comes to compensation spending.  According to the Atlantic Institute for Market Studies, in 2013, every Atlantic province had a higher number of government employees per capita than the Canadian average.  “The Average across Canadian provinces is 84 employees per 1,000 and Nova Scotia has 99 (85 for NB; 95 for PEI and 109 for NL),” noted AIMS president Marco Navarro-Genie earlier this year.

Compensation for government employees is becoming a hot topic in Canada.  Earlier this month, the Fraser Institute found that across all three levels of government in Canada, government workers received a 9.7% wage premium over comparable private sector workers despite enjoying much better pensions (almost all defined benefit), retiring several years earlier on average, being absent much more often, and enjoying significantly better job security.

If politicians in Atlantic Canada are serious about repairing the state of their provinces’ finances, they should take a serious look at compensation spending.  The fact that in each Atlantic province, both the number of government employees per capita and the cost premium per employee is higher than the national average, suggests that there exists a lack of fiscal restraint from Atlantic provinces when it comes to compensation spending.

By Matthew Lau

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Lessons from the Rock: Oil Revenue, Government Spending, and Public Debt

Newfoundland and Labrador has experienced tremendous economic growth in the last decade. GDP per capita, for instance, has increased significantly and is currently above the national average, personal earnings are at record-high levels, and most importantly, the province is no longer a “have-not” province under the federal equalization programme.

Largely thanks to booming oil production, Newfoundland and Labrador has set a benchmark for short-term economic growth. Yet, with oil prices plummeting, the provincial government has implemented a freeze on discretionary spending and placed additional restrictions on public sector hiring. Given the recent expansion of the province’s public sector, however, it is important to consider whether spending restraint is achievable, or whether the provincial government’s decision is simply too little, and too late.

nl public sector employment

In the past ten years, oil revenues have been a major staple of the province’s budget. The most recent budget, for instance, projected offshore royalties to bring in $2.4 billion, representing roughly 36.45 per cent of total projected revenue. Equipped with this enlarged, volatile revenue source, however, the government has continuously increased spending, rather than having enacted measures to improve the province’s position in the long-run, such as paying down the province’s public debt or creating a savings fund.

Between 2005 and 2011, for example, public sector employment increased by nearly 8,000 jobs–17 per cent in six years, which is a rate much larger than that of private sector job growth during the same period. Since 2010, however, offshore royalties have fallen and forecasts suggest a steady decline over the next twenty years. Ebbing royalty flows stem from the end of federalization equalization payments, as per the Atlantic Accord, and the falling value of oil production.

This combination of increased spending and faltering offshore revenues spell fiscal trouble for Newfoundland and Labrador. It is, therefore, important for the government to consider important cuts to the public service to ensure sustainability, lest the provincial government compound the public debt.

If recent history is any indication, it is unlikely that the provincial government will pursue substantive reforms. Instead, projected expenditures are set to increase in the next decade. But with oil prices hovering roughly $40 lower than the budgeted $105 USD per barrel, fiscal consolidation is highly important.

The government attempted to curb spending in 2013 by cutting nearly 1,200 public sector jobs, implementing a long-term public sector hiring freeze, and announcing plans to conduct an efficiency review of postsecondary institutions. But after public backlash, the provincial government reversed many of these decisions, such as lifting the hiring freeze. The efficiency review was also never completed. In fact, the most recent provincial budget features rising expenditures, adding $808 million to existing net debt.

Of course, cutting the public sector is politically sensitive and it requires serious deliberation, but if the provincial government chooses to base spending on volatile revenue sources, it also needs to cut expenditures when receipts fall. These jobs would be lost in the short-run, but in the long-run, consolidating the province’s fiscal situation will lower the public debt burden and consequent spinoff effects will provide benefits for every resident of the province.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Applying “Do No Harm” to Politics

The Hippocratic Oath requires medical professionals to uphold certain ethical standards, the most famous of which is the mantra, “Primum, Non Nocere,” translated as “First, Do No Harm.” Because definitive diagnoses are rare, and since doctors can never really be sure what medical intervention is the best choice, this principle applies naturally in the face of uncertainty. Thus, the primary concern of all medical professionals is to ensure that they do not harm the patient.

“First, Do No Harm” parallels closely with the approval process for new medical interventions: they must be both safe (not harmful) and effective (clearly helpful). The treatment, therefore, must meet certain standards before use. However angelic the intentions of pharmaceutical companies may appear, for instance, it is clear that mistakes, bias, and even outright fraud are common and can be both injurious and fatal. As such, despite a drug representative’s best pitch, a new drug must still be tested.

In politics, however, the same standard is nowhere to be seen. When judging an intervention – that is, a policy proposal – too often good intentions are deemed a sufficient reason for adoption, regardless of whether the policy works, or harms. Needless to say, I deeply wish that politicians and bureaucrats would take a page from medical ethics and biomedical research.

The debate about ethicality in the political sphere raises important questions about public policy, chiefly concerning research integrity. Modern government, for example, is more expansive and comprehensive than its ancient counterpart. Because of this enlargement, lobbying the government for special treatment has become extremely profitable. This attracts all levels of “evidence” from lobbyists seeking to convince politicians of their view.

Consequently, legislation often features concentrated benefits for a defined group. However, the costs are dispersed to such an extent that it doesn’t pay anyone to fight against their fraction of a per cent of the harm. In this way, various interests can dominate the “evidence” landscape.

As the legendary economist, Ronald Coase, once quipped, “If you torture the data long enough, it will confess to anything.”

In this light, I have become skeptical over the years about whether truly unbiased research exists. Even randomized, controlled trials, in addition to systematic reviews, which are the highest levels of evidence, can be fraught with methodological problems, funding biases, personal ego, and other deformities. Thus, it remains unknown how to ensure “safe and effective” research in the public policy realm. Identifying the problem, however, brings it to the forefront.

Beginning at home, New Brunswickers may do well to pay careful attention to environmentally sensitive discussions. It is possible that both shale gas and a transnational pipeline could be very good, or indeed very bad. The important question is this: either way, how can we ever be sure? Other local issues that could use some solid evidence include the recent discussion around awarding the municipal policing contract to the RCMP.

Such shaky policies can also be found all around us. Here in Canada, I immediately think of the last vestiges of trade protectionism that serve special interests, including the so-called supply management of the dairy industry. Furthermore, on the environmental front, rhetoric from vested interests on both sides has clouded the discussion about such promising policies as carbon taxation. Further abroad, some public policies are either tragic, or laughable. Particularly, the United States has a history of interventionist agricultural policy that includes both paying non-farm landowners huge annual sums to avoid farming their land, as well as the outright burning of excess crops in accordance with production quota violations. Harkening back to the medical analogy, this seems akin to the old practice of  “bleeding” a patient in the vain hope of a cure.

When considering political intervention, the basic guideline of “First, Do No Harm” should be used to ensure interventions are both safe and effective. Government, however, has lagged consistently behind medicine, industry, and other fields in regards to evidential value, which seems irresponsible. I hope that the tide can turn before the trend continues for much longer.

Mike Craig is studying medicine at Dalhousie University and is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

*This piece appeared in the 27 January 2014 edition of the Telegraph-Journal