Let the games begin: Campbell versus Bruce Round One

Alec Bruce is one of my favourite NB writers on public policy issues.  He has been skewering politicians and bad ideas for over 20 years - part Fotheringham – part Wells – all relevant to our public debate.

But in his latest screed, he says:

Still, for now, stop talking about strategy. New Brunswickers have 30 days to make up their minds (if they haven’t already) about whom they’ll tolerate in elected office. The youthful and grizzled, alike, want to know what, precisely, are the tactics involved in the job creation juggernauts of this and, indeed, all political parties in this province.

This comes one day after I wrote this in the TJ:

But this election calls for more of a focus on the big picture. The question you should be asking the candidates as they come to your door should be: where do you want to take this province?

Who is right?  The estimable Alec Bruce or the upstart challenger Campbell?  Strategy or tactics?

I’m convinced that in the 2014 election, we need to have leaders emerge that understand the serious strategic problems of a stagnant economy, a rapidly declining population under the age of 55 (down 15% in 20 years) and a province that is the second oldest in the country.  Instead of collectively looking forward to a bright and growing future we seem to be hunkering down and waiting to spend five months a year in Florida.

If the prospective Premiers – Alward, Gallant or the wanna-be-king maker Cardy – don’t have a clear strategic understanding of these underlying challenges, we will get another round of tactics – think Benard Lord’s 200 days of change and the promise to put more pencils in NB classrooms – while ignoring the iceberg we have been grounded on for the last decade.

I understand Bruce’s frustration.  He wants clear and decipherable plans for job creation.  But if they don’t get the strategic realities right, we’ll be back here in four years still arguing the same things.

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Curious: CFIB election priorities do not include economic growth

It’s a bit counterintuitive that the CFIB’s six focus areas for the NB provincial election do not include anything about growth – economic growth, population growth, nothing. The six are:

1. Improving tax competitiveness
2. Reducing “red tape”
3. Achieving long-term fiscal sustainability
4. Improving local governance
5. Enhancing productivity, skills, and training
6. Stabilizing and lowering electricity costs

Maybe I am missing something but it seems to me the average CFIB member might put growth of the economy ahead of electricity costs.   If New Brunswick’s GDP had grown by a modest 2% per year between 2008 and 2013 it would have added another $3.3 billion to the GDP (compared to what really happened).  This $3.3 billion would have resulted in hundreds of millions per year in new revenue to New Brunswick’s SMEs.  Still think local governance is more important?

Who knows.  Maybe the CFIB doesn’t think the government can influence population or economic growth.  Maybe they see it as a side effect of reducing red tape.  Not sure.

I would be surprised if you asked NB SMEs would they rather have growing local markets or less red tape – I suspect the answer would be growing local markets.

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Voodoo job creation schemes: NDP edition

I have said before that I am a fan of Dominic Cardy.  He is a sharp guy.  Cut his teeth outside NB (always a good thing) and speaks with authority about his ideas.

But I worry he falls into the same old trap when it comes to government job creation efforts.

In the NDP plan, Cardy would scrap the Department of Economic Development and “introduce a New Jobs Tax Credit which economists predict will create 15,000 and 20,000 jobs in our first term”.  This pledge will cost $29.3 million per year for four years.

I’m not sure what economists predicted that but it seems a little fishy.  If $29.3 million/year gets you 20,000 jobs why not double it to $58 million and get 40,000 jobs?  No government in history has ever witnessed 40k new jobs in one term.  It would be a miracle.  All for less than what is currently spent by the Department of Economic Development.

The problem is that the Department of Economic Development already spends more than $29.3 million per year mostly as grants to small and medium sized businesses to convince them to create jobs.

What will be different under the NDP?

My fear is that a lot of government funding to companies is mostly just substituting for private market funding.  Some may not but many firms will say government money is to be had for much better terms than the private market so why not take it?

The other point is that if a job creation scheme such as proposed by the NDP is available to all firms, it could just end up distorting the playing field for local market economic activity.  If you give Firm X a grant and you do not give Firm Y a grant and they both are primarily generating business only in New Brunswick, you are just giving Firm X a leg up on Firm Y as they compete for local business.

This is why the vast majority of government funding programs are for exporters – with the notable exception of the CBDCs – to avoid using government money to give some firms preferential advantages over others in the local market.

Now the Cardy job grant plan may only be targeted to exporters.  I’m not sure.

Or they may think that giving NB firms job grants will help them compete against the big, evil multinationals but if it is not tied to growing the size of the economic pie, it is still just chopping up the local market in a different way and it is hard to see how it will lead to much net new economic growth.

In the end, we need to hear how each of the parties plans to grow the GDP.  The real NB GDP is about $30 billion today and to get to a solid growth rate of about 3% per year the GDP has to grow by about $900 million per year.  What’s the strategy to stimulate private sector investment, stimulate incremental consumer spending or federal transfers to reach $900 million?

Waiting for the pols to tell us.

 

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Truth in economic impact advertising

An organization called Resource Works tweeted today the image below.  I thought I would post it as an example of what not to do when messaging the economic value of a sector such as forest products.  The graphic says “Last year, the forestry sector contributed $5.9 billion to BC’s GDP.”  “That is equivalent to the salaries of 54,000 family doctors.”
Trouble is that doctors don’t get paid with GDP, they get paid with tax dollars.  This seems to be a way to take advantage of peoples’ lack of understanding (what is GDP).  This would be much more powerful if it was tied to tax dollars.  “Last year the forestry sector contributed over one billion dollars in taxes and royalties – which is enough to pay for the salaries of 9,000 family doctors”. Sure 9,000 is a much smaller number than 54,000 but if we want to have an honest conversation about the value of key industries we shouldn’t try and hoodwink people.
Saying that $5.9 billion is the same as 54,000 doctors is the same as saying $5.9 billion is equivalent to 15% of the provincial government revenues – loosely implying that the $5.9 billion is government revenue. It implies something that isn’t true.

BrAYN2OCAAEsQEr

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Should we tax the rich to help reduce the deficit?

Tax policy in New Brunswick is always interesting.   Because the New Brunswick economy is weaker than most, we have to carve off a greater share of our GDP to pay for public services.  These day’s provincial government spending is roughly equivalent to 24% of provincial GDP.  That is higher than all other provinces except PEI.

But what’s a poor government to do?  The feds are squeezing transfers.  The economy isn’t growing.  The masses are fighting against natural gas development which might bring in some of those royalty revenues that engorge the AB, SK and NL governments.

So we come to tax increases realizing that we already tax the economy more than all other provinces except PEI.

So where is the low hanging fruit?  The Libs are proposing an increased income tax rate for those folks earning $150k and up.  They expect it to bring in a modest $28.7 million in new revenue (or about $4,400 per Richie Rich).

Is this a good idea?  Sorry to say I won’t answer that question directly as I’m not sure myself but there are a few points for consideration.

First, there are only about 6,600 NBers that earn more than $150,000 per year.  That is only 1.1% of income earners in the province.  And the Liberal realize that many of these earners are what I would call a ‘captive’ audience.  They include senior public servants, doctors, lawyers and others that really can’t pick up and move – or if they did they would face a similar high tax rate in NS, PE, QC or if they moved to BC, AB or ON they would face the tax-housing cost arbitrage problem.   I guess they could move to Newfoundland and Labrador which still has relatively reasonable housing costs and a low top tax rate.

I’m a little more nervous about the non-captive market – senior managers in the big firms, etc.  It will make it harder for firms to recruit in leadership earning over $150k but hopefully they will also milk the tax-housing cost arbitrage issue.

The other segment of the $150k+ folks (a.k.a. the ‘rich’) tend to be successful entrepreneurs.  That is a group that all governments tend to romanticize and they will  not be happy with this tax increase.  I have no way of knowing how many there are but it is likely a couple of thousand people.  Business owners have ways of sheltering income but ultimately if they take it out as income they will face the higher  rate.

I have discussed this issue for some time with economists and other policy analysts.  When Victor Boudreau cut the top tax rate back in his time (seems like a long time ago, doesn’t  it?) I made the same argument that it would most benefit those in the ‘captive’ market but my colleagues were more concerned with the entrepreneurs and highly mobile professional workforce.  Some of them saw it as a long term drag on the knowledge economy.

But it does comes back to the issue of choices. As stated above, NBers earning middle and upper income face among the highest tax rates in the country but people still expect a certain quality of public services and infrastructure.

What would you do?  As I have written about before, New Brunswick already spends less than SK, MB, PE and NL per capita on public services and similar to AB, NS and BC.  Because of our lack of urban scale and rapidly aging population it is hard to see that there is significant room for dramatic spending cuts without impacting services.  If you introduce more “user pay” it becomes a tax by another name.

Folks like me argue for an aggressive pro-growth agenda but that is a longer term proposition.  In the short term governments do have to grapple with the cost side and the tax side.  We did get a boost from the Feds this year but I’m not sure if that will be replicated in the coming years (particularly with all the griping out of Ontario).

 

 

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Attracting Amazon women, and men, of course

I have read several articles recent about the increasing number of big e-commerce fulfillment centres popping up all across North America. In fact, this is becoming a serious real estate trend. Amazon.com alone has invested $14 billion in them since 2010.

Someone should be trying to attract this sector to New Brunswick – particularly Moncton.  I know the Maritimes population is stagnant and aging but there is still something like 1.8 million living in the three provinces.  Anyway, as online shopping starts to really take off we need to be thinking about how it impacts regional economic development.

Attracting the big fulfilment centres is one opportunity. Attracting back office and corporate support is another.  There should be potential for start-ups both on the product side and on the services side.

Someone in New Brunswick (a guy named Kevin Bulmer) spotted the 1-800 trend back in the late 1980s and that led to a pretty good story for New Brunswick.   Someone should call, tweet, poke or something – Jeff Bezos or whomever runs  his shop in Canada.

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Puttin’ on the Writz: Twisted Sister edition

Hugh John Flemming served as NB premier from 1952-1960. LJR served from 1960 to 1970. Richard Hatfield served from 1970 to 1987 and Frank McKenna served from 1987-1997 – but he won three times – he left because of a promise to stay as Premier only 10 years (after Hatfield’s 17).

In my opinion, something changed after McKenna. I realize that former Premiers got the boot from angry constituents but there was always the sense that once in power in New Brunswick you could expect at least two terms. This tradition goes back 100 years for elected Premiers.

But Bernard Lord almost lost in 2003 after one term. This despite an economy that was doing comparatively well and a fairly solid fiscal situation due to a variety of factors including the turning up of the transfers tap from Ottawa. Lord did lose in 2006 after a half-hearted three year second term. Shawn Graham lost by a fairly large margin after only one term. The polls are suggested that David Alward might be the next one-term Premier.

Thinking back to the polls in 1999, I would suggest this is not a certainty but the general trend points to what I have come to call the Twisted Sister attitude in New Brunswick these days. The one-hit wonder from the 1980s sang “we’re not going’ to take it” and I feel that New Brunswickers have taken that song on as an anthem.

The politicians have yet to catch up. The Alward government ended up making a number of pretty big changes but their ‘review’ of government took nearly two years. The Liberals government has talked about an 18 month review if they get in.

I would suggest in a Twisted Sister world, governments would be wiser to “hit the ground running” rather than position themselves as embarking on a slow, thoughtful process. They will wake up from this process and it will be the next election cycle and they will be on the run.

The other issue in a Twisted Sister world is that NBers have little tolerance for change. We saw that with the proposed NB Power sale and we are seeing that with natural gas development. In an alternate universe people would be thrilled to find out about the tens of billions of dollars’ worth of natural gas under our feet that could provide jobs and tax/royalty revenues for a couple of generations. Instead, many of them are “not going to take it” and will fight that opportunity tooth and nail.

In the Twisted Sister world, the successful politician will be able to convince her/his constituents that New Brunswick needs big ambitious efforts to get its economy back on track. This includes a bold new immigration focus, urban development and, yes, natural resources development. Everyone seems to be lined up against these things but it is the job of a politician to convince constituents to see the bigger picture.

Also in the Twister Sister world, the successful politician needs clear eyed focus. If fixing NB’s economy was easy it would be done by now. It will be hard and governments need the wisdom to understand their role – what they can and should not do – to foster more private sector investment.

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A taxing affair

The Federation of New Brunswick Faculty Associations takes issue with the NB Business Council’s call for an increase in the HST as one tool to bring the provincial government budget to balance.

The FNBFA’s problem is one of decimal points.  It suggests that a one point increase in the HST would generate an additional  $11.6 million annually.  This is obviously a boo boo as the real figure is somewhere north of $100 million – the NB government currently generates $1.06 billion from HST (2013-2014) or about $133 million per point of HST.

The FNBFA goes on to say that “one additional percentage point of Income Tax would generate $14 million annually, whereas one additional percentage point of Corporate Tax
would bring in an additional $2.36 million annually”.  The FNBFA goes on to rant that high income earners and wealthy corporations don’t pay their fair share in New Brunswick.

I think we have to engage in good debate on these issues.  I welcome the FNBFA’s contribution but they should get their decimal points right.

Here is the challenge.  Corporations already face one of the highest income tax rate structures in Canada among the 10 provinces.  Look here if you don’t believe me.  The problem the FNBFA doesn’t realize is that corporations with a national or international footprint pay a distributed income tax based on a formula that is based on the end markets and on where they have their manufacturing and services activity.   So McCain Foods, for example, likely pays more corporate income tax globally than the entire corporate income tax take of the NB government but that is because McCain would pay a relatively limited share of its taxes here because NB is only a small part of its global empire.

You could jack up corporate income tax rates here but in order to get the same revenue as a two point increase in the HST you would almost have to double the total tax take.  That would hit the beloved small businesses – who don’t have a global footprint – very hard – you might end up with a CFIB-led revolt.

You could increase personal income tax rates but again NB is in the highest tier of Canadian provinces for persons with incomes over $75,000/year.  In order to raise the same revenue as a two point increase in the HST you would have to significantly raise tax rates – and not just on the ‘rich’.   And the tricky part is that the average salary for a full time university professor and lecturer in New Brunswick in 2010 (from the NHS) was over $93,000 per year or 91% more than that for the average full time worker across the province.

So, a huge increase in personal income tax rates for the highest two quintiles of income earners would take a big bit out of the FNBFA members.

Tax policy is complicated.  My position has been we need to set tax policy as much as is humanly possible in such a way that it doesn’t negatively impact business investment – which is the crucial foundation of a strong economy.  Also, I am sympathetic to the idea that we can’t tax our professional class too highly or we may not be able to attract computer programmers, engineers, etc. to live here.  But the money has got to come from somewhere.

At least with the Biz Council’s idea, people seem to be less sensitive to sales taxes.  Income and property taxes seem to be the most likely to get people up in arms.  If I had my way we wouldn’t raise any taxes but we do have this little problem of a $500 million – sustained – annual deficit.

It will likely take some combination of spending restraint, tax rises and economic growth to get the NB economy back to a position where it is generating enough tax revenue to cover the NB portion of the cost of public services and infrastructure.

Let the debate, with the proper decimal points, begin.

 

 

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Welcome to New Brunswick, BCE Inc.

From a recent TJ column:

How are we going to build and strengthen New Brunswick’s relationship with BCE Inc.?

This was the question that I had after reading about BCE Inc.’s absorption of Bell Aliant this week. BCE Inc., Canada’s largest provider of telecommunications services, is planning to buy the remaining shares of Bell Aliant it doesn’t already own.

BCE said it would be looking for $100 million worth of “synergies” from the absorption. It’s hard to see how “synergies” means anything other than a loss of high wage, specialized jobs in Atlantic Canada.

Several people have spoken to me about the BCE/Bell Aliant story since it broke on Wednesday. They are former employees of NBTel who lament what the region has lost since New Brunswick’s telephone company was merged into an Atlantic Canada-wide firm and now watch the remaining levers of power shift to Montreal.

The NBTel myth has persisted. I have been a purveyor of this myth as it is a compelling tale of success and innovation right here at home.

But now I have moved on and you should too.

We now have to treat BCE as just another central Canada headquartered firm with a tiny share of its overall revenue coming from New Brunswick. We can’t expect head office jobs or even middle management jobs. We can’t and shouldn’t expect special treatment or influence.

What can we expect? Just like any other big national or multinational firm, we need to make the case to BCE that this province is a great place to invest. We should use BCE’s vestigial ties to the province to open doors.

BCE subsidiary Bell Canada also announced it was buying two call centres in Moncton and Saint John adding a total of 700 new employees.

We should make every effort to convince Bell Canada to grow its national customer contact and back office activity in the province. Maybe New Brunswick could become a customer service, back office and finance centre for the entire company. Verizon, the second largest telecommunications firm in the United States, consolidated much of its back office and financial services activity in Florida a few years ago.

Back when BCE first bought a controlling interest in Bell Aliant, I had hoped the firm would have seen the value of keeping Saint John and New Brunswick as a national innovation hub. At the time, NBTel was easily one of the most innovative companies in the industry and that technical and entrepreneurial capacity could have been nurtured and expanded.

In my alternate universe, BCE would have positioned its New Brunswick operations as a centre of excellence in telecommunications innovation. New products and services could have been tested here first and then rolled out nationally. Instead of call centre agents we would have had a few hundred highly skilled engineers and programmers.

This is not as crazy an idea as you might think. The big U.S. telecommunications firms have specialized engineering and R&D facilities scattered around the country from Florida to California.

It’s not going to be easy to convince BCE to expand its economic footprint in New Brunswick. The former head of Nova Scotia Business Inc., Stephen Lund, once told me it was harder to convince Toronto-based executives to invest in Nova Scotia than those in Bermuda or Chicago. The Canadian executives, he said, bring all of the negative Atlantic Canada stereotypes to the table.

The longer term risk is that BCE and other telecommunications firms view Atlantic Canada as a stagnant or shrinking market for them and slowly chip away at the operations that remain here.

We need to convince these firms that New Brunswick’s best days are ahead of us. We need national and international firms to continuing investing in our province supporting population growth and expanding the tax base needed to pay for public services.

Welcome to New Brunswick, BCE Inc. I look forward to a long and prosperous partnership.

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We need a stronger Mittelstand in New Brunswick

From a recent TJ column:

Twenty-five years ago in the first year of my MBA program at university, I wrote a paper on Germany’s mid-sized manufacturing firms known as the Mittelstand. At the time Germany was known for its large multinational brands such as Siemens, Volkswagen and BASF, but I learned the Mittelstand were considered the backbone of the German economy.

These mid-sized manufacturing firms are dispersed throughout the country and tend to be family owned. They specialize in the production of specific, niche products that feed the supply chains of other larger manufacturing firms around the world.

More than two decades after I wrote a glowing paper on this group of manufacturers, they continue to be the engine of the German economy. According to a recent article in The Economist, government officials and business leaders from around the world are flocking to Germany to learn the secrets of the Mittelstand and try to foster such a cohort of ambitious firms in their own countries.

New Brunswick has historically had its own version of the Mittelstand. According to Statistics Canada there were 191 manufacturing firms across the province with between 20 and 100 employees in 2012.

Thirty-six of these firms are in the food manufacturing business. There are 22 firms in the fabricated metal product manufacturing sector. Seventeen firms in the machinery manufacturing sector and 11 firms in the furniture manufacturing sector are part of New Brunswick’s Mittelstand.

But this group of manufacturers is in decline. According to Statistics Canada there were 271 of these manufacturers in New Brunswick a decade ago. Employment in New Brunswick’s Mittelstand is also dropping. In 2002 there were nearly 7,100 persons employed by manufacturing firms with between 20 and 99 employees. By 2013, the number was down to 4,800.

There are a number of reasons why we should be concerned about the shrinking number of Mittelstand manufacturing firms.

When a manufacturing firm is large enough to require 40, 50 or 100 employees they are far more likely to be exporting. Exporters are critically important. Our economy is heavily dependent on imports – from consumer goods to services – and we need a healthy mix of exports to bring some balance to our trade position.

Mittelstand firms also have the scale to be able to invest in research and innovation. Once a firm reaches a certain size they can afford to develop good human resources programs and offer their staff formal training programs. Critically, most Mittelstand firms should find it easier to attract capital.

Why are mid-sized manufacturing firms on the decline in New Brunswick?  There are many possible causes. Increasing global competition means these firms need more sophisticated operations and market development capacity.

The tightening labour market is making it harder for firms that built their business model on salaries at or around the minimum wage. Successful firms are using technology and better business practices to drive down unit labour cost while simultaneously increasing wage rates.

I think demographics plays a role. Many of New Brunswick’s mid-sized manufacturers were started by ambitious entrepreneurs back in the 1970s and 1980s. We are not seeing a new crop of ambitious entrepreneurs – particularly in the manufacturing sector – step up to the plate.

What can we do to beef up the Mittelstand in New Brunswick?   Our smaller firms need the capital and ambition to be able to scale up. Of the nearly 700 manufacturers with fewer than 20 employees scattered around the province, there must be a few dozen that have the potential to break out.

We should also look at immigration to fill the depleted ranks of the Mittelstand. I am sure there are ambitious entrepreneurs from Albania to Zimbabwe that are eager to break into the North American market. We should pitch them on the merits of setting up in New Brunswick.

If the New Brunswick’s economy is going to rebound in the coming years, we will need increased economic activity from many sources. The Mittelstand could be an important source of growth.

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