It’s The Economy, Stupid

This small business owner  in Fredericton wrote a very interesting op/ed talking about the need to cut small business taxes to the bone and suggesting it as the way to generate economic growth and pay down the deficit.   Much of his data was either wrong or out of context but I am interested in this broader policy issue that has been fundamental to the conversation around economic development here since I moved back 20 years ago.

There are those who absolutely believe the way to economic growth is to cut small business taxes and red tape.

I can’t figure it out.  I have looked at reams of data and reports on this and I can’t square it.  Here is the latest set of data I have reviewed. It is a list of the top 50 small businesses in New Brunswick defined as organizations with under 20 employees.   There are 1,002 privately incorporated doctors’ offices in New Brunswick, for example.  I want you to go down this list and tell me how many of these companies will expand if you cut their tax rate to the bone -say zero. 

If small residential construction firms get a tax break, will they expand?  How about fast food?  Lawyers? Auto repair?  Owner-operator truckers?  Electricians?  Plumbers?  Go through this list - almost all of them rely on local markets for their business.  Cutting their taxes won’t expand their market potential.

There may be some that are ready to break out - start exporting - build global markets and bring that revenue back to New Brunswick.  That is economic development but I would argue there are far better policy tools to reach that 1% than a broad-based tax cut for all.

Others have said that a deep small business tax cut will allow them to compete more vigorously with Walmart and foster more import substitution.  There may be - and I stress may be - some potential here but I am not completely convinced. 

If each of the 763 small construction firms all pay 10% in income tax - none of them are at a competitive disadvantage against each other.  If you cut their income tax to zero - the same thing.  No new advantage or disadvantage is created.  You have freed up more profit for them to reinvest but, again, there is no increase in market so they will continue to compete against each other for the same size economic pie.

You could argue they will invest in equipment and become more efficient but if that is your policy objective why not tie the tax break to capital investment? 

We should strive to be a jurisdiction with competitive tax rates but I can’t see any economic development reason for cutting them to the bone. 

But I am willing to debate this with anyone who wants to because I could be wrong about this.  I just see 25 years of enormous focus on the small business sector in this province and I see a stagnant economy and population.   The best thing the government could do for these small businesses is to expand the size of the pie they are competing for.  If we build an energy sector, grow mining, rebuild forest products, expand exportable ICT industries, etc. we create hundreds of millions in new income that is mostly spent in local markets - at the small businesses listed below.

Top 50 Small Businesses in New Brunswick (# of firms with under 20 employees) (Source: Canadian Business Patterns June 2010)

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In the James Cameron film, Aliens, there’s a scene where Sigourney Weaver is trying to calm down a distraught Bill Paxton.  Weaver says “this litle girl survived longer than that with no weapons and no training.”  At that point Paxton says “why don’t you put her in charge?”

There’s a woman in Riverview who is obsessed with attracting IKEA to Moncton. 

When it comes to attracting industry to New Brunswick, “why don’t we put her in charge”?

There’s nothing like a little passion combined with determination and perserverance.

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I had a long talk last week with one of New Brunswick’s foremost CEOs and his message to me was that for 40 years governments had made job creation - at all costs- their #1 priority and that now the focus has to fundamentally shift towards better quality economic development.   Buying low end jobs with taxpayer money, in his view, should be over.

I was reminded of that reading this story from PEI:

Golden Grain Bakery [moved] to Borden-Carleton’s industrial park in 2005 and has been struggling to find employees ever since. 

Snair says he does not want to leave, but fears there is no alternative. He believes businesses that pay high starting wages, and the Island’s unemployment insurance program, are part of the problem.

“I believe people can make more sitting at home on minimum wage,” he said. “So why would they work?”

Snair says he pays all of his employees higher than minimum wage, most a couple dollars higher, but says in order to compete with nearby businesses that pay $15 to start he would need financial help.

“I’ve lost a lot of workers to higher paying jobs,” he said. “We’re a small business, we simply can’t afford to do that.” He says he began turning to government for help more than two years ago and has yet to receive it.

Borden-Kinkora MLA George Webster says he is aware of the issue, but that his government is not responsible for putting people in those jobs.  “I don’t think the P.E.I. government can make people go work there. They make their own choice to work in that field or not,” said Webster.

There are multi-layered issues here such as the minimum wage,  the trade off between working and accessing funding from government programs and the role of government in trying to create jobs.

Without going into all of it, I do think the PEI government is right not to prop up companies that are paying wages too low to attract workers.  Wage appreciation is a consequence of successful economic development.  Propping up companies who cannot pay market wages with taxpayer money is a consequence of bad economic development.

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Effective economic development is a lot like running a business.  You have to build products/services that people want.  You have to understand your competition.  You have to target markets where you are likely to have the most impact and you need to measure your results and feedback into the system.

One of the ways that small companies succeed is by being highly targetd.  Ford can market their cars far and wide with a very mass market approach.  Other smaller companies can be very effective but they need to be highly targeted to who they think are most likely to buy their cars.

This is why I think places like New Brunswick should (and should have years ago) look at potential niche markets for investment attraction and trade development rather than just follow the pack to China or India.  I worked a bit on a project to attract investment from France one time.  I was told that Quebec has nearly 100 staff in France working on investment, trade and tourism.  New Brunswick had (has) none.

Norway, Finland, etc. seemed to be places with affinity to New Brunswick (climate, culture, etc.) that have companies that are active in the North American market.  Not a pile but potentially enough carve some investment for NB.    If you get targeted you can hire Norwegians speaking sales guys, have Norwegian language collateral materials, align immigration efforts, etc. 

But we don’t do this and Quebec and Ontario end up attracting - by default - most of the companies that want to set up in Canada from Scandanavia. 

This is a specific example of a multimedia firm setting up in Quebec for its massive tax break which we can’t begin to compete with.

But it doesn’t invalidate my argument about focus.

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I guess I am just getting old and a bit curmugeonly but…

New Brunswick’s population grew 80% slower than the national growth rate since 2006.  Only two provinces registered a slower growth rate.  And this performance gets us:

“Some people say they’re ambitious goals. We feel that it’s important that we set high targets,” Arseneault, also the deputy premier, said in a phone interview Monday.

Trevor Holder, the Progressive Conservative critic for Post-Secondary Education, Training and Labour, said the latest statistics are a “good sign.”

Constantine Passaris, the chairman of the Population Growth Secretariat’s advisory board, said that’s something to brag about.

A high target we can brag about.  Even Trevor Holder is happy.  I guess when you set your expectations as low as you possibly can, anything can be considered something to brag about.

Of course, Passaris puts a cherry on top with this juicy morsel:

Finding ways to keep youth in the province, increase the birth rate and family friendly policies, and adopting aggressive immigration policies are keys to keeping on track, he said.

Passaris knows better.  In his little screed he should have led with the jobs and career opportunities to keep people here rather than the standard old line about ‘family friendly policies’.   As for immigration, we have definitive data that up to 40% of immigrants leave within five years - because of a lack of economic opportunities.  

Look, don’t get me wrong here.  This is much better than the outright population decline in the Lord years.

Oh and by the way, I have always cautioned these guys to limit bragging about population estimates.  They get revised every few years and every year since 1992 they were revised downward in New Brunswick.

I realize this is all politickin’ but there is a lot of work to do before anyone can brag about the New Brunswick economy.

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After reading the piece on Lise Ouellette this morning in the TJ  it got me back on theme I have written about before - what is a Tory in New Brunswick?

It seems to me that a fundamental opportunity would be for the Tories to take up the empowerment of local regions within New Brunswick mantle - a la the Finn Report but I have heard many Tories argue against the principles of that report.

David Cameron got elected talking about transforming the way government is done in the U.K. by pushing decision making and authority down to the local/regional level.  

The argument in New Brunswick has always been that we are ‘too small’ and you can’t have all that ‘duplication’ and that is why - take a stab at it - 95% of all government decision making is done in Fredericton.  Even municipal funding is primarily controlled by the province.

A city manager of one of the big three municipalities in the province once told me he hadn’t seen a single official from the provincial department overseeing local government in three years.   I won’t say which city or which government but I think you get the point.  

While that seems like a relevant point - that scale matters and that is why everything is done in Fredericton - the reality is that people live in communities.  Economic development happens in communities.  Schools are in communities.  Hospitals are in communities.

When I went on my cross province interview tour last year for a project I was struck by just how quick everyone from Saint John to San Quentin was quick to blame Fredericton (and secondarily Ottawa) for their problems.  It seemed to me that it has become easy and convenient to do this.

I’d like to see the Finn Report debated, maybe tweaked and then brought into power.   What do we have to lose?  When the county system of government was scrapped back in the 1960s, Northern New Brunswick’s population was growing at a healthy rate.  Now it’s in fairly steep decline.  We have equalized government service delivery, yes, teachers in Tracadie now make as much (within a range) as teachers in Moncton but we have extracted any control over the destiny out of these areas and placed it in Fredericton. 

The hope is that a beneficent leader will come along and save us (whomever us is). 

I think it is worth a try.  I don’t want a situation where the government sets the Acadian Peninsula apart like a seperate administrative district such as Northern Ireland.  We still need the horsepower and capacity of the provincial government in Fredericton to work for all areas of New Brunswick.

But we need to find a way to have the local community put skin in the game.  They need to feel like they own it and they have some control over their destiny.

And I think that’s at least partially the message of Lise Ouellette.

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The People’s Alliance Party is really tapping into a small but poignant populist sentiment.  This bit about not wanting to vote for “those who have destroyed us” is taken from a column written by a PANB candidate in the Miramichi.

There in government money spent in the Miramichi than ever before.  Almost 20% of total income in the Miramichi comes directly from government transfers - a rate well above most other small urban areas across Canada and that doesn’t include all the non-transfer government spending on new hospitals, roads, whatever in the area.

But the truth is that people don’t want to live in an area that is going down and I feel for that.  I want people to fight for their communities.

But I think Mr. Gullison risks falling into the same trap with his focus on “private woodlot owners, farmers, small business, and seniors”.    I don’t know enough about the first two on his list to add much to the debate.  I am not sure what government policy can drive up the price of private woodlot owner wood. I have said that I think the farming sector in New Brunswick might make a comeback and I support efforts to promote the use of local produce and agricultural products - even at a higher price.

Chronic economic challenges create structural changes in the business environment.  We need to forceably change the narrative in the Miramichi and one of the ways that is done is by achieving some measure of economic development success.

I guess the point of this ramble is has government really ‘destroyed’ the Miramichi?

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I see that New Brunswickers want more doctors and more health care workers.  At some point we are going to have to realize that the health care system cannot be fixed by massive new cash and new hires.  The system just absorbs all new resources like that weird looking vortex in the original Star Trek series.  The number of workers in the health care and social assistance sector is up by over 24% in 10 years.  Actually it is up 27% in eight years if you want to be specific.

It seems to me that the ‘fix’ to health care will be elsewhere.  I think governments should commit to providing stable, inflation-level increases to the system each year (it’s been close to triple the rate of inflation in recent years) and then look to innovation in service delivery, systems, and even revenue models.  It’s no secret that I support some form of nominal user fees for those that can afford it as a moderating force on the system.  I don’t think that wil fix the system but it will make us think about health care costs a little more directly.

Health Care & Social Assistance Employment Growth in New Brunswick

Source: Statistics Canada Labour Force Survey.

Here’s a neat little thought experiment/forecast that will never happen but it is interesting to look at trends.  Right now there is one health care worker and social assistance worker for every 10.5 other people in the population.  To put it another way, when you attended the Paul Anka concert, more than one person in each row was a health care worker.  By 2050 following the same trends there will be one health care worker for every three other people in the province.  That gives the term ‘family practice’ a whole new meaning when there is a health care worker per family.

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There’s an interesting story in the TJ today about New Brunswick’s debt and a poll done by CRA to find out how New Brunswickers want to pay for it.

There was almost no appetite for any new tax increases and very low interest in cutting government services and spending.

Go figure.

The problem with polls, as I have said many times before, is they don’t force a hard choice on people (usually).  For example, a typical poll will ask whether something is a good idea - without setting it in a context.

Would you like a cut in taxes? - will get you almost A 100% YES response but Would you like a cut in taxes? if it means we have to close your local hospital will get a completely different response rate.  Of course, the direct line between tax cuts and hospital closures is never really there but the respondent to a poll should at least be given a set of outcome options.

But back to the debt issue.  The truth is our debt load is manageable - relative to most other provinces.  As I shown elsewhere it is growing faster than most other provinces so we will catch up within 5-7 years if we don’t get it under control but right now it is not as bad as Nova Scotia, PEI, Quebec, etc.

And people don’t connect the dots on this stuff because the “every New Brunswicker owes $11,500″ is not exactly true.

Every natural gas user in New Brunswick ‘owns’  over $15,000 worth of Enbridge Gas NB deferral account exposure because that is the per customer amount sitting in that account - which, by definition, will be paid down through future revenue taken from said customers.  But people don’t connect those dots because they can just walk away from Enbridge and go back into the loving embrace of NB Power.

I would argue that at a basic level, people see NB’s debt the same way.   Canada is a free country.  People are mobile.  If I don’t like what is happening here, I will just move to Saskatchewan or Alberta just like my siblings, my cousins and my great uncle Pete.

Alberta has something like $60 billion in the bank.  In other words, if I move to Alberta - using the logic of this story - I immediately have $12,000 in the bank.  Lucky me.  I leave my $11,500 in NB debt and immediately claim my share of the Alberta surplus just by moving from Moncton to Hinton.

My point is we need to connect people at a different level.  We need them to think about their community and think about whether or not they want their government to do things that will help it survive and thrive into the next generation.  If you could get 90% of New Brunswickers to feel strongly about this, you could get buy-in for a whole lot of decisions - including a broader focus on economic development.

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I’m surprised that economic development is getting fairly heavy play in this election.  Don’t get me wrong, in every election the parties will have an economic development component but so far it seems to be more of an issue.  Starting with the NDP calling for BNB’s demise and the Tories’ plan to set up an InvestNB organization.

It’s a good thing that economic development is on people’s minds and it’s a good thing the Tories are actually talking about attracting investment.  You will recall in 1999, the Tory plan was for a “made in New Brunswick” approach to economic development.  Now, it seems, they realize we need to be a province that has both a strong focus on local entrepreneurship and the business case to attract national and international investment.

The NDP plan is not particularly realistic although they haven’t told us the mechanism they would use to push forward economic development.

I think there does need to be a serious debate in this province about taxpayer dollars being used to ‘retain’ or ’save’ jobs.    In the wake of the recession, that terminology is all the rage but we really have to think this through.  There may be times we want  to ’save’ a company but that should be rare.  In general economic development has to be about growth and moving ahead - not holding on to the past. 

Think about UPM.  It is clear now they received millions of dollars in taxpayer funding just to prolong the inevitable.  I have talked to folks in the ‘Chi who told me the same thing - including the final $5 million given by former Premier Lord to get them to hold off through the last election.

If there were structural business case issues with UPM that made it uncompetitive to operate in New Brunswick -access to fibre, infrastructure, energy costs, etc. - then the role of government is to decide what, if any, public policy tools could be used to address these issues - industry wide.  For example, I have no problem with NB Power having a large industrial rate as an economic development tool or I have no problem with taxpayer dollars invested in crown forestry development, etc.  That, it seems to me, is a far different thing than giving $5M, $10M or $35M to a firm in the hope it will stay open a few years more.

At the end of the day, economic development investments must have a payback to the taxpayer - a clear, financial payback to the taxpayer or why do it at all?    I have heard all this crap about how “it would have been worse” without us - in several contexts.  I don’t buy it. 

We need a tad more ambition for our economic development organizations than just “it would have been worse” without them.

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