The MacKinnon-Mintz Fiscal Prescription

Originally posted 13 December 2017

In late October, the School of Public Policy at the University of Calgary published a research paper co-authored by Janice MacKinnon and Jack Mintz.  [AB-Budget-New-Trajectory-MacKinnon-Mintz-final]  Janice MacKinnon is a professor of public policy and former NDP Minister of Finance of Saskatchewan.  Mintz is the President’s Professor of Public Policy at UofC and former Director of the School of Public Policy. Both writers have formidable reputations as commentators on public policy and also as academics who have worked at the highest bureaucratic and political levels in the formulation of budgetary and taxation policies.

Albertarecessionwatch.com has called on the Alberta NDP government to order a broad review of Alberta’s fiscal prospects, suggesting that MacKinnon would be an ideal candidate to carry out such a review.  Given the reputation of the authors, and the fiscal distress the Government of Alberta is still in, the 25 page report merits a close look.  Indeed, one might say this research study provides the provincial government with some free advice on how to bring the budget towards a more sustainable path.

Authors’ approach

MacKinnon-Mintz begin with a “tough-love” message on government spending:

Spending money is easy for governments. Spending can solve problems, delay difficult decisions and bring tangible benefits to current taxpayers, while the costs – accumulating deficits and debt – are borne by future taxpayers and governments.

This start may not be well received by a government whose nucleus and base are formed by public sector unionists who have viewed the Klein-era cuts and salary roll-backs as the black night for Alberta. Indeed, it is ironic that for some many years after the debt was paid off, the difficult decisions were left for the NDP to try to sort out.

The authors build the case that spending in Alberta is too high relative to other provinces, notably Quebec, Ontario, and British Columbia. Rather than cutting frontline services,  MacKinnon-Mintz suggest that labour compensation be constrained, better procurement practices, lower administrative costs, and more effective delivery of programs will better align spending with revenue.

Diagnosis

Their analysis rests on the problems inherent in a rapid build-up of public debt. It is not only the quantum of debt outstanding but the annual debt service costs that will cripple Alberta’s fiscal recovery.  Citing rather optimistic Budget 2017 oil price forecasts, they believe waiting for oil prices to increase is not an appropriate response to the crisis.  (This was of course policy of the previous government to rely on resource windfalls.)

According to RBC data cited by the researchers, Alberta’s per capita spending in 2017-18 will be between $3758  (Quebec) and $2522 (British Columbia) higher than the spending of its three big provincial peers. Using CANSIM data, Alberta’s 2015 capital spending is again $943 (B.C) to $785 (Ontario) higher than the other large provincial governments. MacKinnon-Mintz cite work by Gagnon et al showing that Alberta’s infrastructure is younger than Quebec and B.C. but slightly older than Ontario.  Future projections show Alberta capital spending slowing relative to B.C. but still remaining $300 to $500 per capita higher than Ontario and Quebec. Five hundred dollars per capita is $2.2 billion in annual spending.

Public sector compensation

Public sector wages in Alberta is reported using average weekly earnings (AWE) data from Statistics Canada. In educational services, AWE in Alberta is $3 less than Ontario but $123 and $82 higher than Quebec and British Columbia, respectively.  In health care Alberta’s AWE of $944 exceeds Quebec’s ($812), Ontario’s ($891) and B.C.’s ($850) AWE.  In public administration, Alberta’s AWE of $1,345 exceeds Quebec’s ($1,119), Ontario’s ($1,285), and B.C.’s ($1,239) AWE. Most interesting is their interpretation of recent jurisprudence on public sector bargaining.

A common misconception is that governments can only reduce public sector salaries of unionized employees if the unions agree. The misconception stems from a landmark Supreme Court of Canada decision in 2007 in which the court ruled that section 2(d) of the Charter of Rights and Freedoms, which guarantees freedom of association, protects collective bargaining rights.

MacKinnon-Mintz challenge this interpretation of the jurisprudence arguing that rollbacks are possible so long as the government consults its unions about the fiscal situation and bargain in good faith.

In establishing the appropriate mandate, factors that should be considered
include: the high level of Alberta public sector salaries, the dramatic drop in government revenue and the fact that since 2015 thousands of Albertans in the private sector have lost their jobs or had their compensation reduced. A reasonable mandate might be: minus two per cent in year 1, zero in year 2 and zero in year 3.

This recommendation would not sit favourably on 124 Street (home of the Alberta Federation of Labour) nor on the third floor of  the Legislature Building. This recommendation is expected to save about $500 million a year; not a large amount in a $50 billion budget, but still five per cent of the current deficit.  Each year of restraint would increase the savings. Such a proposal is obviously more popular in Calgary than in Edmonton. Calgary continues to endure a jobs recession and many of those in the oil patch “lucky to still have their jobs” have seen their pay and/or benefits cut.  Hence the question- why shouldn’t public servants share the pain if they still have their jobs?

Super High Salaries21-2-18 EJ

Solar panels would save board $4M a year-report21-2-18 EJ

Superintendents’ salaries up 10% while teachers’ pay languishes13-2-18 EJ

Time for Alberta to begin restoring its tax advantage23-1-18 EJ

Notley sets sights on trimming Alberta deficit15-12-17 GM

Robin Hood must seem ‘scary’ to Kenney-Notley19-1-18 EJ

Restructuring government

The writers focus on the largest source of government spending:- the health care budget. Relying on Statistics Canada, Canadian Chronic Disease Surveillance System, Alberta Health Services, and Government of Alberta data sources, they posit that per capita spending in Alberta should not be significantly higher than in the other major provinces. Alberta has a younger population and experiences the lowest prevalence of chronic diseases than other provinces. Despite the highest per capita spending of the four large provinces, outcomes are no better.

While this is not news for those following health care policy development, it must be sobering for both Alberta Health officials and government ministers seeing this poor record persist. Citing her own research for the Macdonald-Laurier Institute, a small-C think tank, cost per case between the Qu’Appelle Regional Health Authority and Surgical Centres Inc, and Aspen Medical Surgery Inc. , MacKinnon and Mintz suggest that private delivery of surgical services is more cost-effective.  This policy advice would go nowhere in Alberta, given the current government, despite any merits the proposal may have.

As for physicians’ salaries, which are about 23 per cent higher than in comparable provinces, the authors observe that Alberta has done the least of any provinces to alter its predominantly fee-for-service model.  By 2014, only 14 per cent of physicians’ payments were alternative payment plans versus 19 per cent in B.C., 36 per cent in Ontario, and 23 per cent in Quebec.

Besides health care, there are few suggestions for restraining the growth of other costs including education, advanced education, and social services. The authors do suggest that regulations impose costs on businesses and households having negative unintended consequences.  These include “minimum wage hikes, higher property taxes and new labour regulations affect business competitiveness with few other policies to compensate for higher business costs.”

Economic Growth and Taxation

In assessing opportunities to reduce the deficit, the authors pay considerable attention to creating a revenue structure that spurs economic growth. They are critical of the early moves of the NDP to raise corporate taxes and personal taxes on high-income earners and increase the minimum wage. “Taken as a package, the message to potential investors is that doing business in Alberta is becoming more difficult and more expensive,” they observe.

Jack Mintz is a internationally-recognized expert on taxation and served as an Assistant Deputy Minister in the federal Finance Ministry.  Mintz is also a director of Imperial Oil and Brookfield , large private sector corporations. He is known for his strong advocacy of lower corporate taxes and recommending that Alberta consider bringing in a sales tax. In the revenue section, the following premise is outlined:

For each dollar of tax raised, an additional cost is imposed on the economy by discouraging work effort, investment or risk-taking. This economic cost is the “dead-weight loss” of taxation and is indicative of the loss in the value of consumption or production resulting from tax distortions. Adding this dead-weight loss to the cost of raising a dollar of taxes is referred to as the marginal cost of taxation. Additionally, if administrative and compliance costs were added to the marginal cost of taxation, which are more difficult to measure, the overall cost is even higher. Thus, the cost
of taxation is not just one dollar being raised but also the economic and administrative/compliance costs associated with each dollar of tax revenue.

While appearing reasonable on the surface- that taxes dis-incentivize work or “risk-taking,” -this premise is, in actuality, a value judgment about taxes writ large.  This statement pre-supposes that “risk-taking” is good,  that taxes are a “burden,” and that there is a “deadweight loss” associated with distortions in the tax system.  MacKinnon and Mintz cites work by Mintz and colleagues which use the “marginal cost of taxation (MCT)” to justify tax policies favouring lower corporate and personal income taxes. Based on quantitative analysis, Mintz and others have shown how relatively low the MCT is for a harmonized sales tax than for corporate and personal income taxes. Thus, the formulation of a harmonized sales tax, combined with lower personal and corporate taxes, is recommended. MacKinnon-Mintz also urge some of the new carbon levy be applied to lower corporate taxes further “instead of providing subsidies”- the latter word a red flag for many economists.

The form of analysis used on taxes, held in high esteem in southern Alberta policy circles, ignores the benefits of collective public action which necessitate taxes.  Centralized tax collection is an efficient way of providing public services at the lowest cost by using a broad revenue base to spread costs of providing basic public services, such as roads, sewers, water, health-care, or education.  Surprisingly, these authors do not make consideration of a Harmonized Sales Tax, a centrepiece in their recommendations.  They simply state that a consumption tax does the least harm to economic growth.

Summary

By focusing on reducing spending and reducing corporate and personal taxes, MacKinnon and Mintz offer an unpalatable menu of fiscal choices. Other than salary restraint, there is little overall guidance on how much revenue and spending measures should contribute to deficit reduction. The analysis generally ignores Alberta’s existing tax advantage and discounts the huge loss of resource revenue contributing to the province’s gaping hole. Unfortunately, the formulation of this “free advice” will be discounted, in spite of the real need for operating and capital spending to be reined in AND a consumption tax levied.

Free spending NDP leaving huge debt- Letters20-2-18 E

JProvince has changed its accounting method-report15-2-18 EJ

NDP says return to flat tax would benefit the rich12-1-18 EJ

UCP will consider return of flat tax for Alberta11-1-18 EJ

UCP still vows to repeal carbon tax increase2-1-18 EJ

Public libraries are not the place to cut costs16-12-17 EJ

Ways to trim costs without being ‘reckless’12-12-17 EJ

It won’t be easy, but Alberta can achieve fiscal sustainability3-11-17 EJ

This entry was posted in Budget on by .

About albertarecessionwatch

Former Director, Institute for Public Economics, University of Alberta and currently Fellow of the Institute. Former executive with Alberta Treasury Branches. Worked for the Alberta government for 12 years with Federal and Intergovernmental Affairs and Alberta Treasury. Areas of focus: financial institutions legislation and policy, government borrowing, and relations with credit rating agencies. Ph.D in Political Science (Uof A), Masters of Public Administration and BComm. (Carleton University). Author of Politics and Public Debt: The Dominion, the Banks and Alberta's Social Credit. Presently working on study of Alberta provincial agency board appointments.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s