It's The Economy, Stupid

Rereading my column this morning I realize that maybe I have been drinking too much of the Christmas elixir.  Of course, I take it sans booze but it still seems to be having some effect.  Here is the offending line from the column:

Critically, we should attempt to garner bi-partisan support in the Legislature for any new long-term vision. In fact, it would be helpful if the vision put forward by the Alward government was developed and published by a bi-partisan committee of MLAs. The government and opposition parties could (and should) vigorously debate the best tactics to achieve the vision, but they would all agree on the broad outline.

I forgot this is New Brunswick and if McKenna proposed it Lord must be against it and if Lord proposed it Graham must be against it and if Graham proposed it Alward must be against it and if Alward proposed it than Murphy must be against it.

I used to talk about how the basic formula for the Irish economic miracle was hatched with a whitepaper in the 1950s and the broad outline was followed by successive governments through the 2000s.   Too bad the Irish banks decided to blow up the economy over there by exposing themselves to billions in toxic assets alongside a massive housing bubble.  The underlying FDI, entrepreneurial and R&D mix in Ireland was truly amazing.

Maybe I am just too cynical.  Maybe there could be a bipartisan ‘vision’ committee that would come up with the next iteration of a broad ‘plan’ for NB.  Then the parties could haggle over the best way to achieve the broad vision (i.e. substantial new biz investment, repopulation of a younger demographic, productivity/innovation agenda, etc.).

As governments changed hands, this broad outline would remain in place.

Yeah, that’s crazy talk.

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After reading a few of my G&M Economy Lab blog posts, someone from out west sent me an email asking me “what do you want?”.

I guess for new readers of this blog or my columns it might be helpful to boil things down once in a while.

Essentially, what I am pushing for is a few main changes in policy and approach in New Brunswick – and with some differences in the other Atlantic Provinces.

One, we have to be more serious about trying to attract business investment – and the resulting jobs and taxes from that investment.   A chronic lack of investment here has led to the need for large scale federal transfers, higher than average personal tax burdens (including sales tax), ongoing out-migration – particularly of young NBers, an ongoing lack of immigration, an inability to amass personal wealth and savings anywhere near the national average (which will come back to haunt us in 10-20 years out), lower levels of education in the workforce (as out-migrants are more educated), timidity in the business culture/an unwillingness to take risks, etc.

Two, this business investment needs to be primarily tied to export-based industrial activity.  More Walmarts, local accounting firms, construction firms and other business activity that is focusing only on the local market is essentially just reshuffling the deck and not growing the pie.  Sure, there are efficiency gains in there and we want a robust, competitive local market but a serious growth agenda has to be tied to exports.

Three, I don’t believe that economic destiny is inevitable.  There are those – in the halls of power – that believe places like NB are destined to be chronic under-performers because of geography, lack of natural resources, back luck, etc.  I think this fatalism has actually embedded itself into much of our thinking – I can’t tell you how many times people have said to me “why would company x ever want to invest here?”.    That is a question with both a negative and a positive answer – the problem is the positive answer requires more work and creativity.

Four, I believe the federal government could be a far more important partner in regional economic development.  Not with more subsidies, not more transfer payments and not even the dreaded “picking winners and losers”.   The federal government does almost nothing to promote FDI into Atlantic Canada.  The feds have hundreds and hundreds of people working in trade and investment offices around the world and you can go ahead and ask the NB government how many investment leads from from the feds each year.   I haven’t asked recently but the last time I did, it had been ‘years’ since a bonafide lead for FDI came from the federal government.    This has always been stunning to me given that Canada has attracted billions in FDI in an average year from hundreds of multinational firms.  Almost all of that investment goes into Ontario, Quebec and increasingly Alberta, SK and BC.

The big provinces in Canada – all of them – have foreign offices promoting their provinces for trade and investment.  NB has none.  We have 600 people here in NB doing economic development but none out there where the actual foreign companies with the investment are located.  I’d like to see the feds – through ACOA – do far more to promote NB in foreign markets.  This should be done in very close collaboration with Invest NB.

Five, but they need something tangible to sell.  NB has been trying to sell cheap labour as its main feature for decades.  Now that is a very hard sell for a variety of reasons.  We should be developing specific opportunities – like natural resources, regional distribution/warehousing, specific areas of ICT where we are building strengths such as social media, and other sectors where we can clearly define a value proposition.

Six, we need to get our economic development focus off of “being a bank for industry”.  See many previous posts for my thoughts on this.

Seven, we need a large scale innovation and productivity agenda.  See many previous posts on this.

Eight, we need government spending to be aligned with economic development priorities.  As I have said many times before, NB spends the most per capita on pavement and asphalt and the least per capita on R&D.

In essence, this is what I want.  I haven’t had much success but I continue to chip away.  Governments think if they carve off a few million a year and plow it back into the NB economy through grants and loans to local firms that is their role when it comes to economic development.  That has always been wrong-headed.  You have to start with your vision and grand objectives and then work down to tactics (such as grants to industry).  The current approach clearly hasn’t worked.

What do I want from Alberta?   An understanding that the “out-migration solves all problems” view of the world hasn’t worked.  For decades, the only economic development viewpoint I have heard from Alberta is that people should be encouraged-forced to move from places like NB to Alberta and that would solve all the problems.  However, we de facto followed that model for decades and all we ended up with is going from the second youngest province in 1971 to the second oldest in 2011.    If Albertans really don’t like equalization payments, they would be far more supportive of efforts to build a solid economic foundation down here.  In a country like Canada – with constitutional protections tied to the quality of public services, there is almost a presumption of regional economic development or far more transfers.

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My column in the Globe & Mail Economy Lab today is a straight forward review of average weekly wage data from Statistics Canada’s SEPH monthly survey.  There is not much narrative about implications or any broad judgement about what the data means – just an expose outlining how things are changing.    Go read the column for yourself and see if it is some kind of left wing diatribe.

With that in mind, I was scrolling through the comments and came across this one from a guy/gal in Calgary (most likely a guy but who knows):

What a surprise that this was written by someone from Moncton.  Someone who forgot to end his little tome with the signature salutation:  ”Oh, and please send money Mother.”  …articles like this, are just code for “send the oil money down east”.

This is so fun it deserves a response.

The data is the data.   This column could have easily been written by someone from Red Deer.   The only difference is that if it was written by an Albertan – it would look like gloating because the data is very pro-Alberta and Saskatchewan.  When it is written by someone from Moncton – for this guy/gal it is “code for send the oil money down east”.

I think I might have relayed this story to you but it is worth repeating.  Back in the mid 1990s (was it that long ago?) I was shortlisted for a job running the Economic Development department for the City of Red Deer.  They paid for me to go out there and meet with them for a day.  I was given a tour of the city, we had good discussions and I must have met a dozen or more folks for mini-interviews.   In the early afternoon I was taken out for lunch with a bunch of folks – city employees, etc. and I felt one of the guys was trying to ask me something but didn’t want to come right out and ask it.  Eventually, he said something like ” we do things differently out here – do you think you are ready for our pace of life?”.

I was quite surprised by the comment – I have always been a 60 hour a week guy – and I have to resist the temptation to work more than I do – even now in my old age and so I wasn’t sure how to respond to this euphemism for laziness.  I don’t recall what I said that day but I didn’t get the job.

The point is that it is easy and comfortable – and IMO intellectually lazy – to try and boil down highly complex issues to simple constructs.   New Brunswick is a have-not province therefore “someone from Moncton” must be angling for more oil money.    New Brunswick has a higher percentage of folks using EI so all New Brunswickers must be lazy.

In the end, the guy/gal with the comment should at least be consistent in his/her viewpoint.  If New Brunswick is so poor and lazy, I wouldn’t be able to ask my mother for money because she doesn’t have any.

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I have been reading a very interesting article in the Canadian Historical Review on the McNair government’s economic development focus for New Brunswick right after World War II.  It is a fascinating read on many levels (thanks to Kurt Peacock for the tip) and will likely provide fodder for several columns and blogs in the coming days.  It does reaffirm the old adage “the more things change, the more they stay the same”.

But one thing that has changed is where the provincial government gets its tax revenue.  The article includes a breakdown of tax revenue by source in 1952 (see the table below).  The amount of the provincial government revenue from property tax has only decreased a bit since 1952.  However, the amount of revenue generated from booze is down 83 percent.  Likewise, the 1952 government got a pile of revenue from car taxes and gas taxes.   In 2011, those taxes were marginal to the provincial revenue.  The sales tax – introduced in 1952 – immediately generated nearly 19 percent of provincial revenues – now it is only 15 percent.  This seems strange to me given the expansion of consumer spending in the intervening years but I didn’t go deeper into the data.

The feds contribution to provincial revenue has remained remarkable similar.  In fact, over the years I have looked at the data – fed transfer payments have been in a fairly close range of between around 34 and 40 percent of the total.

What can we learn from this?  I suspect if you increased liquor taxes 5.5 times – to get to the 1952 level – you would have a revolt on your hands.  Even though advocates of public transportation and environmentalists would like to massively jack up gas taxes, it is unlikely any government could ever get 16.4 percent of its total revenue from gas tax again.   We have talked about this in the past – you could dramatically increase gas taxes – or add a carbon tax or whatever – if you dropped other taxes to compensate – but no government wants to go there (although BC has a carbon tax).

Provincial Government Revenue (% of Total)

Sources: 1952 – Canadian Historical Review LXIX, 2, 1998; 2011 – New Brunswick Government Main Estimates.

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In order to assess the relative change in wage rates across Canada I set the national average wage rate (for all industries and specific industries below) equal to 100 and then assessed where the province’s stood relative to the index.  For example, in October 2002, NL had an index of 91 (or was 9 percent below the national average) and by October 2011 the province was at 101.9 – or above the national average.  The charts below show the breakdown for a number of different industries.  A few highlights:

-New Brunswick’s wage environment has been remarkably stable – the wage spread between NB and Canada in 2011 across multiple sectors was similar to 2002.

-The only provinces to lose ground in a significant way were Ontario, Quebec and surprisingly BC.  NS dropped slightly  as well.

-Public sectors in Ontario – public administration, education and health care have widening their wage spread with the rest of Canada (but not by a wide margin) since 2002.

-Manufacturing wages in Ontario – relative to the national average – have been declining steadily since 2004.

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Paul Wells is probably my favourite political journalist.  I have been reading Inkless Wells and his columns for years but I think he made a tiny error in his otherwise important analysis of the new federal/provincial relationship that is emerging under PM Harper.

He says:

But he [Harper] will spend ever more money on jets and jails, while taxing less as a fraction of GDP than any federal government has since the 1960s, and sending a constantly-increasing share of money to the provinces, which can spend those dollars as they like. You can hear the air going out of the federal government’s —any federal government’s — ability to “encroach upon legitimate provincial jurisdiction.” From day to day this prime minister zig-zags in ways that would break a snake’s back. From 2001 to 2011 the line is as straight as a ruler.

I guess depending on how you interpret the statement “sending a constantly-increasing share of money to the provinces”.  I read that to mean ‘more money’ to the provinces but I guess if the top line revenue is decreasing then the share could also decrease.

But the bottom line is that in the New Brunswick government budget of 2001-2002, the province received over 40 percent of its budgeted revenue from the federal government and by 2011-2013 that share was down to 37.6 percent.  And it looks like that share will decline again next year and in subsequent years.  So, for at least New Brunswick, the ‘flat tire’ federalism that Wells speaks about isn’t about more money to the provinces it’s about less.

At a time, I might add, when the needs are increasing.    New Brunswick is facing a tidal wave of boomers hitting the prime health care years and we are down to 37 percent and decreasing?

I come back to my previous analysis.  The massive explosion of non-renewable natural resources revenue – to provincial and federal governments – is changing the landscape in fundamental ways and the flat time vision is not likely to work.

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Lots of chatter over the federal government plan to move health transfer payment increases to the rate of overall growth.  Most of the pundits – looking back at history – are saying the provinces are looking a gift horse in the mouth.  Under Cretien, transfer payments were cut – now we gripe about a minimum of 3 percent growth?

However, the landscape has changed.   The underlying main cost driver of health care – boomers – were not a factor in the early 1990s.  They are now.  They are moving full force into the years they will need health care and they will not stand for a weakening of the system (and they will fight tooth and nail against any effort to means test health care).

The other thing that is somewhat worrisome is the feds posture towards the provinces during a time of structural change in the economic base of the country.  When Ontario was in an immediate crisis – Ottawa came in like the Knights of the Roundtable with billion dollar bailouts, a new ACOA in southern Ontario, etc. but the slow burn – they are signalling less interest in doing anything.

I know that Harper railed against ‘side deals’ with provinces while in opposition but I think he will have to revisit that idea.  Each province has different issues – weaknesses – challenges – opportunities – and a passive and disinterested federal government is not the right posture now.  The vision of the federal government doling out per capita cash like an ATM – is not the best way to strengthen the federation.

I’m a ‘states rights’ kind of guy – because of the big differences in regional economies.  Quebec is in many ways fundamentally different than Alberta.  But there are national issues – health care is one of them.  We want a national system that is more or less robust – more or less equivalent, etc.

Hold your nose, but equalization is also one of those national issues.    Thank the great Budda Stephen Harper didn’t make good on his promise to take non-renewable resource revenue out of the equalization formula.  Every province east of Manitoba would have been hit hard by that (except NL).

Other countries go to war over the equitable sharing of natural resource revenue (think Sudan, Iraq) – in Canada we have equalization.

I’m not the great champion of equalization – as I have said many times I think it has been a hindrance to long term economic growth and prosperity in the Maritimes – I think it should be viewed as a transitionary program as governments work to renew their economic base – but I don’t seem much wisdom in cracking down on it now – when we are in the midst of this new economic reality.

We are already seeing the impacts.  The feds cut their portion of the HST and Nova Scotia feels it has to take those two points.

The ‘have nots’ will have only so much wiggle room on the tax revenue side and on the expense management side.  If the feds through action or inaction foster even deeper gaps between rich and poor provinces – it will not end well.

Of course as has been pointed out a million times in the past few days, Ontario is now in the have not club.  That changes everything.  Over 70 percent of the population – of the voters – are in have not provinces.  Eventually Ontario will wake up to this fact and then the sparks will fly.  We are not talking NEP again but you can bet the cream skimming will continue.

Look for equalization negotiations to pick up in 2012 before the 2014 deadline.

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“…New Brunswick has nearly 50 per cent more elderly people in its population compared to Alberta and there will be no accounting for this fact in federal health transfers.”

Someone sent me an email questioning my math so here is the raw data.  In the column I say Alberta has 15.3 persons over the age of 60 per 100 in the population when the actual number is 15.7 (a slight difference) but the 50% figure remains the same.

As I have said before, we don’t have good data (public) on the cost of health care per person over the age of 60 but we do know the majority of spending occurs later in life.  Ergo, NB is at a distinct disadvantage in this area.

Ah, do you remember the good old days when Ralph Klein was threatening to opt out of federal health care dollars altogether?  Good times.

Population 60+ – NB Versus Alberta

Source: Statistics Canada. Table 052-0005 – Projected population, by projection scenario, sex and age group.

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As 2011 winds down, I took a look at some of the changes occurring in the national economy.   We are through the latest recession and into a growth curve – albeit a tenuous one.   Exports are up, employment is up, government revenue is starting to grow at a stronger clip.  There are certainly risks – particularly Europe – but as of now Canada is moving into a new economic reality.

This new reality is one that is heavily reliant on non-renewable natural resources revenue.    We are starting to see a Canadian version of Dutch disease emerging where resource sectors boom while manufacturing declines.

I have put together two charts – one shows the change in export intensity from 2001 to 2011 (based on the first nine months) and the second shows the change in employment patterns (2011 based on the first 11 months of the year).

This structural change in our exports profile will have an impact on many areas of society – foremost will be government revenue.  Those provinces with lots of non-renewable natural resources to exploit are well positioned, those without are not so.

 Exports by Sector (per $1,000 total exports)*

*2011 – using total exports from January to September.  Source: Statistics Canada.

Employment by Sector (per 1,000 total Employed)*

*2011 – using the average monthly employment January to November.

Source: Statistics Canada Labour Force Survey.

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We have discussed this at great length on this blog.  I am talking, of course, about how the federal transfers system works.  The naive camp suggests that we don’t really have to worry about economic development in New Brunswick because we have a Constitutional guarantee that the feds will always transfer enough cash from other provinces to pay for equivalent quality public services.   The bottom line is that ‘equivalent’ is open to wide interpretation.

The last time there was a change to the social transfers – Ontario and other fast growing provinces argued the formula needed to be adjusted to accommodate provinces with fast growing populations.  It was unfair, that places like New Brunswick, with stagnant populations, received the same.   So the program was changed to favour McGuinty’s position and NB took a something like $60 million/year haircut.  Now, places like New Brunswick are arguing that they have faster growing aging populations and that should mean more per capita health transfers.    Good luck with that.    What’s good for the Goose is only good for the Goose.

Now Finance Minister Flaherty is going to peg health transfer payments to overall economic growth (i.e. if the economy grows 4 percent, the provinces get a 4 percent increase).    That sounds reasonable – I have been arguing for years that the growth curve on health care is unsustainable – but it is unlikely that provincial governments will be able to bring down health care spending increases within the overall GDP growth rate – so they will have to make up the difference.  This will put a far greater burden on the ‘have not’ provinces because their ability to raise more revenue is more constrained compared to a place like Alberta.

Even equalization – I talked with Finance rep a few weeks ago that said something like “Ontario moving into the Equalization pool is scary because that province could end up eating into NB’s share in a big way”.

The point is these things don’t happen over night (not usually).  The Harper government has already guaranteed the 6 percent health funding increase through 15-16.  They are now talking about after that.

The bottom line is that New Brunswick will not be able to rely on federal transfers to the extent it has over the past 15 years or so.

That brings us back around to own source revenue generation.  That comes from pulling more blood out of the stone (or turnip as my dad used to say) – through higher taxes – or from building a stronger and broader economic base from which to extract tax and royalty revenue.

Hence, my raison d’être.  

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