Wednesday, April 11, 2001
The Halifax Chronicle Herald

No province is an island in competitive climate

by Brian Lee Crowley

THE PROVINCIAL government has simply thrown in the towel on spending control. As a result, we swim in more red ink than we need to, and will do so for longer than necessary.

Worst of all, even when we eliminate the deficit in two years, we will be years behind in matching the attractive environment that our competitors are creating for investment and job growth.

Long gone are the early days of the new government, when a comprehensive program review laid out a strategy for reducing government expenditure in areas that weren’t a priority. The plan was that the government could balance its books in part thanks to a more responsible attitude to spending.

And there was lots of room to do just that – according to a paper by Prof. John Richards for the C.D. Howe Institute, Nova Scotia had only put in about 60 per cent of the effort of the average province to fix its deficit over the past decade.

But now, far from keeping a tight lid on spending, the province is using revenues from our buoyant economy to increase spending even further.

In the 2000-01 budget year, the extra revenue the province received from taxes and federal transfers would have wiped out half the budgeted deficit if the province had stayed within its own spending projections. Instead, it overspent by nearly $90 million.

In the budget just tabled, the spending spree continues. Despite anticipated increased revenues of $149 million, the Nova Scotia government will still spend $91 million more than it takes in. That’s what happens when you allow a $170-million increase in provincial spending between 2000 and 2002.

This in no way belittles the important milestones that will be achieved if the government extricates us from white elephants like NSRL and Sysco. But getting rid of yesterday’s mistakes is no reason to create tomorrow’s.

The reason why the high spending strategy is a mistake is not merely that all of the government’s new initiatives could have been financed within existing budgets. Governments are given the responsibility of choosing the priorities of the day, and that means winding up programs that have outlived their usefulness as much as recognizing new priorities. Nor is the fundamental problem that there may be a recession in the air, and the government’s fat revenue projections may not withstand a downturn.

Our real problem is that Nova Scotia doesn’t exist in a vacuum. We cannot decide in isolation what levels of taxation and public spending and deficit financing suit us. We are in competition every day with other jurisdictions that are trying to attract more jobs, more investment and a larger tax base. If we get out of step with our neighbours, we will get caught in a vicious downward cycle.

Taxes that are too high discourage investment and immigration, and mean that Nova Scotians derive less reward for their hard work than others. That means that not only do we not attract new industry, but the more mobile among us are easily enticed to more hospitable locales.

Look around, and what do we see? Those places that have balanced their budgets and moved on from there to cut their taxes are magnets for investment and growth. Some of them are far afield, such as Ireland and Holland. Others are quite close by. Everyone focuses on the fact that George Bush’s tax cut was less than he wanted. It’s still a massive $1 trillion in a country where government already takes substantially less of the national wealth than in Canada.

But we don’t even need to look at other countries. Just within Canada, the process is clear for all with eyes to see. If you put together a summary of provincial tax load, adding together things like the top marginal rates on personal and corporate income, payroll and capital as well as sales taxes, and compare provinces, some startling facts leap out.

Alberta leads the provinces on the attractiveness of its fiscal climate. On this index of tax effort, that province scores 33 points (the lower the number of points, the more attractive the tax climate). Ontario comes second at 40.5. Nova Scotia, at 48.7, lags Ontario by over eight points, and Alberta by nearly 16 points.

It gets worse. By 2004, Alberta is planning to drop to 21.5 on this measurement. Even if the Hamm government makes its promised 10 per cent cut in provincial personal income tax, our score in 2003-04 will only have fallen to 47. Thus even after a modest income tax cut, our ability to attract new investment will have declined: the gap with Alberta will have grown from 16 points today to 25.5 points.

Ontario is pledged to meet Alberta’s tax reductions, although with a lag. Alberta may eliminate provincial income taxes altogether. Neil LeBlanc thinks his budget represents progress. Measured against the competition, we’re going backward, not forward.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think tank in Halifax. E-mail: BrianLeeCrowley@aims.ca