Structural approach needed for budgets

Hey there, time traveller!
This article was published 18/3/2017 (916 days ago), so information in it may no longer be current.

This is the season for taxes and brave promises. Taxes are inevitable, but is it not time to ask our finance ministers to stop spinning fairy tales?

On the left hand, many see government spending as good and taxes as financing the "essential" services of the modern public sector. On the other hand, those on the right advocate for reduced services and taxes, resulting in a dynamic economy that floats all boats and trickles in all directions.

These notions are simplistic bunk, as is balanced-budget legislation. It may appear wise to spend only what you raise, but what applies to a household does not translate to government. Manitoba is at the top in terms of public-sector spending per capita, and freezing wages and self-imposed "rules" that can be wiped out any time are but Band-Aids on open-heart surgery.

We need a structural approach to budgets.

Three proposals could contribute to a more efficient and effective government in the long term.

First, we need to apply the maxim, "equal pay for work of equal value" to the public sector. Evidence abounds on the increasing differential between public- and private-sector compensation.

It is worth understanding why public pay has outstripped private. This is especially interesting in light of the traditional "deal" where government employment offered lower salaries than private sector jobs in exchange for greater security.

In part, accelerating public-sector wages reflect the increasing complexity of modern government that needs to attract top managerial and technical talent. However, this does not explain why compensation in the private sector has lagged government pay.

The key is the role of unionization in the public sector. Before anyone concludes I am on an anti-union rant, the problem is not the unions, which are simply behaving as rational businesses, increasing their revenues through membership.

The problem lies with our politicians and the monopoly government has on many services. Occasionally, a government tries to take a hard line. Several years ago, the B.C. government took on the teachers, and after a prolonged strike appeared to "win" some concessions. The cost in terms of political popularity was steep, and the teachers’ union in that province seems to have regained its vigour.

The key is existence of monopoly where unionization has greater chances of organization. The monopolist (private or public) finds it easy to pass on increased labour costs to the customer/taxpayer. Enterprises that operate in a more competitive environment cannot, for fear of losing customers to their competitors. Politicians understand it is less politically risky to allow government wages to increase and pass on the costs to the taxpayer. It is not their money, after all!

Therefore, the solution is not to confront public-sector unions directly, but to strike longer-term deals where public-sector compensation links to private-sector pay. Creating this in legislation would not upset the collective bargaining process, although unions may disagree. It is also fairer to the taxpayer. Over time, we could see convergence in public-private pay.

The second structural reform is to prune the host of what economists call "boutique" tax expenditures. A tax expenditure is the revenue foregone through the exemptions, deductions and credits offered through our tax system. Popularly termed "loopholes," the federal government publishes a compendium of these expenditures, which in 2017 are likely to be around $200 billion. Examples include the basic exemption for all tax filers, to deductions for self-employed artists and work-related expenditures.

Many tax expenditures seem to have a sound economic rationale and are very popular among those who benefit. However, boutique tax expenditures result from myriad of promises littering the campaign trail. Politicians buy votes with our money. Economists such as Kevin Milligan of University of British Columbia and Jennifer Robson of Carleton University have argued that many of these loopholes are administratively vague, expensive to administer and regressive (that is, they work against low-income people). So, the next time we feel gooey as Hollywood actors grace Winnipeg with their presence for a weekend, remember all Manitoba taxpayers fund these film projects through the Manitoba Film and Video Production Tax Credit. Other taxes must pick up the foregone revenues.

Finally, all spending proposals should have a "sunset clause" that automatically eliminates the program after a specified time — say, 10 years. The only way to maintain the program is to reinstate it after an evaluation of the costs and benefits. Legislating termination in funding creates the impetus to ensure spending has value. It also overcomes the inertia of unconscious spending that marks so much of government activity.

So there you have it: three modest proposals to manage public-sector spending. Moving on this will need political vision and focus. However, let us not hold our breath — since so many benefit from the status quo.

Gregory Mason is an associate professor of economics at the University of Manitoba and a senior consultant at PRA Inc. His views are his own.