Kill the balanced budget act

Hey there, time traveller!
This article was published 06/03/2010 (5780 days ago), so information in it may no longer be current.

In advance of the March 23 budget, the provincial government announced public servant salaries will be frozen for two years, and that all others paid by public funds should follow suit.

This is in reaction to the budgetary challenges this year, which are especially daunting thanks to the financial turmoil and subsequent recession that have wracked national and international economies.

Relative to other jurisdictions, the Manitoba economy has weathered the recent economic storm rather well, but the province is now facing a $555-million deficit for 2009-10.

No doubt, Finance Minister Rosann Wowchuk knows a wage-freeze policy is not to be taken lightly. But is this the best response to the present challenges? After all, there are other options.

The worst option would be to slash services through a reduction in program spending, which would cut services to Manitobans and see jobs lost. The loss of a job is a very high price for someone to pay, especially in a labour market weakened by the recession.

A salary freeze is less draconian — services are maintained and public sector jobs are preserved. However, there is again a degree of unfairness inherent in the proposal. Earnings of provincial employees are frozen, but not those of other workers. Within the public sector, other inequities arise. Workers with relatively new contracts may already be enjoying pay increases. Others whose contracts are about to expire are denied a chance to improve their wages. There is fertile ground for resentment.

The other, better option is to look at revenues, specifically increasing taxes. Taxes certainly are not popular and the tax system could indeed be improved with regard to fairness. However, the tax base is very broad. Meeting fiscal challenges through the tax system, especially a progressive tax system, has the benefit that it is sensitive to ability to pay. Furthermore, it can be applied on the principle that if everyone pays a little, no one needs to pay a lot.

Unfortunately, there is a procedural problem, and now we come to the villain of the piece. The province’s Balanced Budget, Fiscal Management and Taxpayer Accountability Act, introduced by the Filmon government back in 1995, prevents the government from raising overall income taxes, sales taxes and health and education levies without first obtaining approval for this by means of a public referendum. Thus, the ability of a government to use this vital fiscal-policy tool in a timely and efficient manner is unduly restrained.

Budgets are complex packages and involve a high degree of interdependence between revenues and expenditures. The outcome is, or at least should be, a balancing process, with innumerable adjustments and trade-offs. It is a poor and biased arrangement to have some options constrained subject to referenda, but not others.

Regrettably, the damage this piece of legislation inflicts is not confined to the question of taxation. It also imposes the restriction that the government consistently balance its budget according to a four-year moving average, ending with each new fiscal year. The government is thus denied the option of spreading the costs of economic adjustment over a more extended period.

It denies the government the latitude needed to sustain the economy through difficult times, nurse it back to health and then choose its own schedule for fiscal consolidation. By forcing adjustment to meet the arbitrary demands of ill-advised legislation, the legislation makes no allowance for the depth and duration of the downturn, nor for the speed and robustness (or lack thereof) of the recovery.

By compelling governments to prematurely rein in their expenditures, the act could exacerbate the economic difficulties and undermine the recovery itself.

Governments are expected to use their discretion and make difficult choices about economic policy. They need to have a full set of tools at their disposal. They need to be transparent and accountable.

But they should not be compelled to make sub-optimal choices on account of a shoddy piece of politically motivated legislation.

The balanced budget act should be the next casualty of the recession.

Fletcher Baragar is an associate professor in the department of economics at the University of Manitoba.