Column: Brian Lee Crowley on Atlantic Canada
Tuesday, December 14, 1999
Is Brian Tobin a fiscal conservative? The idea that a premier of Newfoundland and Labrador, the poorest province in the land, is actually a careful and prudent manager of tax dollars may appear hard to swallow to many people in the rest of the country. Rightly or wrongly, people often picture the Newfoundland government as always having its hand out, bemoaning the province’s victimization by outside forces, unwilling to take charge of its own fate.
Yet the truth is rather different. Look at what Mr. Tobin, and his predecessor, Clyde Wells, have done in steering the fiscal ship of state: They have taken some tough decisions and made significant progress in managing their debt in the face of some truly daunting circumstances. Take into account the collapse of the cod fishery, cuts in federal transfers and the loss of nearly 7 per cent of the population over the past few years, and the province’s finances stand revealed as among the best managed in the country. Take that, Mike Harris and Ralph Klein.
Don’t get me wrong. Public finances on the Rock are still in a mess and it will take generations of effort to set them right. The provincial per-capita debt is the highest in Canada at nearly $16,000 — a total of $8.62-billion, up by about $400-million over the past two years. This total includes the pension promises made over many years to civil servants and teachers. Unfortunately, the government saved almost no money to fund those pensions, leaving an unfunded liability of about $3-billion. And, this year, the debt is going up, too, because of a deficit of $25-million.
Dismal as all this sounds, what really matters is not the absolute position, but rather where the trends are going.
It is from this angle that the government’s performance has been fairly impressive. In spite of the collapse of the cod stocks and the associated social and economic problems, St. John’s has reduced spending on all government programs to about 24 per cent of the province’s GDP from more than 26 per cent. The province is taxing the economy more lightly, taking less than 16 per cent of Newfoundlanders’ production of goods and services this year, as opposed to more than 17 per cent five years ago. That means that the government is taking the difficult, but ultimately saner course of dealing with its fiscal problems by controlling spending, not by raising taxes. This year’s deficit is the first in five years.
More subtly, Mr. Tobin and his finance minister, Paul Dicks, have been very disciplined in using windfall revenue. Nova Scotia and New Brunswick have used recent unexpectedly large equalization adjustment payments from Ottawa simply to finance current spending, leaving them vulnerable to a growing deficit when these extraordinary payments dry up in future years. Not so Newfoundland, which used the revenue to pay down the accumulated debts of hospital and school boards. It also gave incentives to municipalities to put their books in order.
The province is facing up to the unfunded pension liability problem, too, making special payments into the funds each year. It also stopped borrowing in foreign currencies, a practice that had exposed taxpayers to huge risks as the value of the Canadian dollar slid, especially against the U.S. greenback. It still has an uncomfortably high 39 per cent of provincial debt in foreign currency (down from a high of just over half), so it’s far from out of the woods, but again, it’s the general direction that counts.
The biggest challenge Newfoundland faces, though, is a different trend: outmigration. While the Newfoundland economy is growing nicely now, the province has lost more than 40,000 people since 1992.
Most of those people were highly productive workers who are now paying their taxes in places such as Alberta and Ontario. Yet they didn’t take with them the debt that Newfoundland took on to educate them, or provide them with health care. As a result, those who have remained behind face a per-capita debt that is more than $1,100 higher than it would have been.
Stanching the outflow must be Mr. Tobin’s top priority. That’s one of the reasons the government has just announced that it will slowly lower its absurdly high provincial income-tax rate to 49 per cent (of federal tax payable) from 69 per cent over three years, bringing it more in line with other provinces. Unfortunately, the province will also increase high-income surtaxes. The fact that “high income” starts at $20,000 shows how absurdly out of touch the tax system is. And the increasing mobility of highly productive knowledge workers means that high taxes for them don’t mean higher revenues for St. John’s. They mean fewer people to be taxed, and a growing debt burden for those left behind.
Mr. Wells and Mr. Tobin have dragged to province’s debt back from near junk-bond status to two upgrades from the rating agencies, a feat matched by no other province in Atlantic Canada in recent years. Further progress will be harder and harder to achieve, though, unless the government does more to make productive high-income workers feel their efforts are rewarded, not punished, on the Rock.