Proposed tax cuts keep Manitoba on path to financial peril

Hey there, time traveller!
This article was published 08/09/2023 (771 days ago), so information in it may no longer be current.

The problem with cutting taxes as much as the Progressive Conservative party is proposing in this provincial election is government will eventually run out of money.

This government anyway, given its chronic deficits, the record debt the Tories have racked up over the past seven years and the real possibility federal transfers could plummet in the near future.

It’s hardly the kind of fiscal climate that lends itself to aggressive tax cuts.

Manitoba Finance reported in a news release in June 2022 government cut taxes and fees by more than $1.1 billion annually between 2016 and 2022. It made the announcement on the Fraser Institute’s “tax freedom day,” when the right-leaning think tank issues its annual report on tax competitiveness among the provinces. Manitoba’s was the best in the country.

Despite that, the Stefanson government cut taxes further in 2023, by an additional $495 million, mostly by raising the basic personal amount on income taxes and substantially increasing tax bracket thresholds.

These were big tax reductions, ones which will benefit high-income Manitobans the most.

That brings lost government revenue from tax cuts to $1.6 billion annually — which would be fine if the books were balanced, the province was paying down debt and front-line services were well-funded.

Sadly, the opposite is happening.

The Tories have posted cumulative deficits of $5.2 billion from 2016 to 2023 and racked up nearly $10 billion in debt (net summary debt is projected to hit $31.1 billion this year, up from $21.9 billion in 2015-16). Some of that is from the COVID-19 pandemic, but only about a quarter.

The Tories barely made any progress on the deficit this year ($363 million, largely unchanged from $378 million last year). And the province’s debt-to-GDP ratio is up in 2023 to a projected 34.6 per cent (from 33.5 per cent last year).

If this were an NDP government, the Tories and their political supporters would be lighting their hair on fire.

That’s not the end of it, though.

The Manitoba PC party promised this past week it would cut taxes a further $185 million, if re-elected Oct. 3, by chopping the tax rate for the first income bracket in half and eliminating the land transfer tax for first-time homebuyers.

That would bring total lost revenue from tax cuts to almost $1.8 billion annually — a fair chunk in a $22-billion provincial budget.

Much of the money for tax cuts will have to be borrowed, which means it must be repaid — with interest — by future generations. It’s the kind of financial recklessness that would have been unheard of for a once-fiscally conservative party (the PC party from the 1990s).

In addition to borrowing, the Tories have used record increases in federal transfer payments to cut taxes. Between 2016 and 2023, transfer payments to Manitoba have jumped a staggering 71 per cent, to $5.88 billion from $3.5 billion, well above the national average of 39 per cent. Most of that has come in the form of equalization payments, which are not guaranteed over time.

Equalization is based on a province’s fiscal capacity relative to other provinces. The payments fluctuate.

In a 2022 report, the Parliamentary Budget Office cited Manitoba as one of several provinces whose fiscal circumstances are not sustainable. The PBO projected Manitoba’s equalization payments would continue to rise until 2027, but fall sharply into the 2030s.

It’s happened before. Manitoba had its equalization payments plummet from just over $2 billion in 2010 to $1.74 billion in 2016. That’s around the time Ontario began temporarily collecting equalization (it hasn’t since 2020), which lowered Manitoba’s share.

That can and probably will happen again, whether it’s Ontario or some other province dipping into the pool of federal cash.

The PBO also projected Manitoba’s debt-to-GDP ratio is on track to hit 79 per cent by 2046, more than double what it is today. That’s beyond the level the federal government reached in the mid-1990s, when it had to balance the books “come hell or high water” because it was facing a fiscal crisis.

The Tories’ decision to make tax cuts one of their main 2023 election planks is curious. There appears to be little public support for it, mostly because of how absurd it is to cut taxes under current circumstances.

Most polls, including the provincial government’s own pre-budget surveys, show people want health care fixed, public schools properly funded and infrastructure rehabilitated. What good are tax cuts if your government is living on borrowed cash, hospitals are falling apart and kids are getting a substandard education?

Winnipeg Free Press | Newsletter

Head Start

Weekday Mornings

A quick glance at the news for the upcoming day.

Sign up for Head Start

Sign Up

I agree to the Terms and Conditions, Cookie and Privacy Policies, and CASL agreement.

Sadly, the Tories have set the tax-cut narrative in this election, prompting the NDP to accept most of what the PC party has proposed (at least those included in the 2023 budget).

The NDP doesn’t want taxes to become a wedge issue in the election, so it’s playing along. The provincial Liberals appear to be the only sane major party that has rebuffed the notion of deep tax cuts.

If all these tax reductions go ahead, the Manitoba government could be in for a big surprise in a few years when the federal windfall dries up. The province will have no choice but to make deep spending cuts.

It’s never pretty when government runs out of money.

tom.brodbeck@freepress.mb.ca

Tom Brodbeck
Columnist

Tom Brodbeck is an award-winning author and columnist with over 30 years experience in print media. He joined the Free Press in 2019. Born and raised in Montreal, Tom graduated from the University of Manitoba in 1993 with a Bachelor of Arts degree in economics and commerce. Read more about Tom.

Tom provides commentary and analysis on political and related issues at the municipal, provincial and federal level. His columns are built on research and coverage of local events. The Free Press’s editing team reviews Tom’s columns before they are posted online or published in print – part of the Free Press’s tradition, since 1872, of producing reliable independent journalism. Read more about Free Press’s history and mandate, and learn how our newsroom operates.