Can we fix the revenue generation problem?

“We will find efficiences and cut waste”

During election campaigns, political parties make various promises to the electorate. They seldom tell us where the money to fund the programs will come from, and, to be fair, when economies are growing quickly and tax revenue is flowing in, money might very well be available. These days, however, regional economies are not so robust and new dollars to fund new promises are hard to come by. Federal and provincial tax cuts in recent years have further reduced available revenue. Consequently, the new mantra is to make the promises and then state that funding will come from ‘finding efficiencies’ or cutting ‘waste’. It is rare for politicians to admit that certain taxes might have to be raised in order to fund their campaign promises.

Canadians expect to receive similar services from governments, regardless of which province they live in. Provincial governments have to find the revenue to meet those voter expectations. There is not much point in claiming we can eliminate a large number of those services and thus make large expenditure cuts – if you feel that way, you might find it more productive to go bark at the moon. As I showed in a previous post, when we adjust spending for inflation, non-healthcare government spending in New Brunswick has been fairly flat since the early 90s. Since then, the major contributor to rising spending has been growth in health care costs. That does not mean that new non-health programs have not been launched – it just means that they have been funded either by taking money from other programs or via debt financing. So it comes as no surprise that when Messrs Alward and Higgs promise to make spending cuts but not service cuts, they have a hard time doing so. Most of the ‘efficiencies’ have already been found over the past decade. That does not mean more can’t be found, but it can become increasingly difficult to do so.

How do provinces compare in terms of costs of service delivery? Provinces do differ in who delivers a particular service. For example, libraries are largely a provincial service in NB, but in ON are delivered by municipalities. Most provinces are divided up into urban and rural municipalities that deliver local services; in NB, services to the unincorporated local service districts are delivered by the province. The best and fairest way to compare provincial spending patterns is therefore to combine local and provincial government spending and then compare provinces. This is what was done to produce the chart below. Data are from 2009 (Statistics Canada Cansim 385-0001), but I am doubtful that much has changed since then in terms of relative differences between provinces.

 

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NB is near the provincial mean (about $12,700 per person). Some provinces are spending as much as $14,000 per capita, while some are down near $11,500. Apart from Quebec, the heavy spenders are those with significant oil revenues. Those provinces appear to be spending their wealth rather than saving for the rainy days to come. The rest of us just do not have anything to save.

Note, however, that if we ignore AB, SK, and NL (the big oil producers), the mean per capita expenditure (MEAN No Oil) is reduced to $12,200 per capita. That is less than NB’s spending and suggests that there are indeed some more ‘efficiencies’ that can be found – but they won’t amount to enough to fund new promises or much else. Much of that difference is probably in health care costs (hospital costs, for example, where we seem to spend more than a number of other provinces ) and perhaps service delivery to rural areas. That might explain why we have a new Health Minister in NB and why we have a new initiative to turn local service delivery over to Regional Service Commissions. We can expect to see fewer emergency rooms and higher property taxes in the future.

I would also note that Health Minister Flemming recently has heaped praise on the new Vitalité CEO for cutting administrative positions. This is being advertised as a fairly large cut, but administrative costs represent only about 2% of the total healthcare budget. I feel the Minister is sacrificing these admin positions simply to build up his credibility and prepare us for cuts to hospitals or other related services. Hospital operations represent nearly 50% of the budget and that is likely where he will look for cost reductions.

Since provincial spending is fairly similar across the country, and since NB falls in the middle of the pack, it is hard to see how spending can be cut significantly without cutting programs. If New Brunswick wants to cut the deficit and yet keep most of the program funding intact, it seems to me that more attention needs to be given to revenue generation.

Revenue generation means two things basically – raising more revenue through increased taxation and/or raising more revenue via increased economic growth.

On the tax side, there are various options such as adding a point or two to the HST, returning income and corporate taxes to 2008 levels, imposition of a carbon tax, and so on. I will leave discussion of those options to others for now. I’d prefer to focus on revenue generation through economic growth – specifically how to generate more tax revenue by creating more high-wage jobs in this province. A key to improvement in NB is increasing the proportion of jobs that generate high wages. Specifically, I will focus on research and development (R&D) as a source of these jobs.

As an example, let’s look at the Fredericton region. David Campbell had a recent post on changes in the Federicton region economy in recent years. Government spending is the major economic driver here – government departments, universities, and CFB Gagetown are all major employers. That reliance on government spending was fine when spending was reliable. Now it is a different story. Deficit-fighting means tough times for the region and things will get worse before they get better. Despite the gloom, there are some bright spots in the local economy. A handful of hi-tech companies, a number with roots in (or at least inspiration from) the university community have been established. Some have done so well that they have been purchased by major players and provided a decent ROI to investors, some of whom were government agencies. If the region could follow the example of the North Carolina’s Research Triangle Park, we’d be on the right track.

Given that the average R&D salary in ICT, for example, can be nearly 50% greater than the average wage (http://www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it07229.html), the impact of R&D employees in local economies can be significant. High-wage employees have more income to spend and that stimulates local service and cultural sectors. Want a new Playhouse in Fredericton? One way to get there is via the higher tax revenue that will come from having more R&D employees in the Fredericton region. R&D investment also leads to innovation and that can lead to new products and new industries based on those products.

How well does NB do now in R&D spending? Let’s look at some numbers. The table below is derived from Statistics Canada Cansim Table 358-0001. It shows the both total of all public (Federal) and private sector R&D expenditures per capita for 2010 in the Natural Sciences and Engineering sector TOT EXP / CAP), as well as the Federal component broken out by itself (FED EXP / CAP). Provinces are also ranked, where 1 = greatest expenditure and 10 = least expenditure.

 

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Note that NB ranks last for both Federal government expenditure and for the total R&D expenditure. Given the relationships between R&D, economic growth, and competitiveness, that should be worrying. Perhaps we should be asking our local Federal MPs and provincial MLAs why they have not done more to ensure that NB gets its fair share of Federal R&D expenditure. Perhaps we should also be asking the large corporations active in this province why they are not investing more locally in R&D. Are they performing those R&D activities elsewhere? If so, why? Those R&D jobs are both highly-paid (i.e. they generate significant tax revenue and discretionary spending) and they are a source of innovation that can lead to new products and services. NB has relied on resource extraction with minimal processing of those resources. Why can’t we use R&D to get more dollars out of those resources? Are we doomed to hew wood and haul water?

There have been a number of commentaries and letters-to-the-editor in NB media over the past few months claiming that the way to build a sustainable economy is through greater reliance on agriculture, tourism, and small business. This approach seems unrealistic to me. Agriculture and tourism tend to produce low wage jobs and will therefore produce little in the way of tax revenue given the input costs. Nearly all small businesses in the province provide local goods and services; they re-circulate money rather than bring new revenue into the province. We imports billions in goods and services each year and we need to export in excess of that amount to get the province on a sound economic footing. That means supporting industries that export goods and services (large or small) and that produce high-wage jobs while doing so. Industries that export goods and services based on innovative R&D is one way to get NB moving forward again. Spending by high-wage employees of those industries will in turn stimulate local agriculture and tourism sectors.

Here are my recommendations to stimulate the R&D sector in NB:

1. Demand that our federal and provincial politicians lobby Ottawa to get NB’s fair share of federal R&D investment.
2. Encourage corporations in the province to spend more R&D here in NB.
3. Use payroll tax rebates and similar measures to encourage innovation-based industries to relocate or establish here.
4. Work with the federal government to re-align ACOA funding such that the ‘community’ funding in ACOA’s budget is replaced with support for R&D – based industry. Sorry, folks, but if you want rinks and cultural centres, you should be using local funds for that purpose.
5. Re-align our universities in order to put more resources into science and engineering R&D. Universities are under fiscal strain; the province lacks the funds to invest more in R&D. In order to encourage university research that leads to innovative products, we need to re-align our universities and free up some dollars that can be re-allocated. Do, for example, we need two separate universities in Fredericton? Can the province afford three public anglophone universities with separate administrations? Are these universities duplicating programs rather than differentiating themselves? Is there an opportunity for Maritime universities to be more collaborative in program offerings?
6. Improve the use of venture capital funds to foster the move from the lab bench to products.
7. Develop an innovation culture in our schools, not simply by offering better science/technology programs, but also by fostering the creativity that comes from music and art education. The latter are not frills; they are keys to a creative population.

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