Thursday, January 15, 2015

The $400M Deficit

The New Brunswick government is looking to cut $400,000,000 to balance the budget. Let's look at this logically.


Cutting Wages


Stacy Mowatt In the wage release the other day...so of the NB power employees were making more the the Doctors.... so by cutting at the top would be a big help

Do you really want to cut the wage of the person responsible for keeping the power running to your house in the middle of winter?

I would look at the tax breaks the previous governments have given to the largest corporations in the province. As well, we should look at things like the recent forest agreement, which essentially grants the rights to our provincial forest at minimal revenue.
Bruce Reade Gallant can cancel the 900 million he was gonna spend on roads to nowhere and we will be plus $500 million. lol They know what has to be done but can't do anything that might lose votes.its either kick butt or kiss butt!


p.s. I have no idea where "roads to nowhere" comes from (except U.S. neo-con politics). Gallant made no promise to build roads to nowhere (ergo, there are no such programs to cut). Could this be another contribution from someone who simply feeds Sun News stuff into discussion threads?


MLA Salaries

Tyler Godfrey A pay cut for the politicians and wage freeze for provincial employees until they have saved $250,000,000. The politicians are overpaid and provincial employees make enough that it won't put them in the poor house to skip a pay raise for a year.

Complaining about politicians salaries is just making so much noise, without contributing anything useful to the discussion.

Do some math. There are 49 ridings. Let's say each member makes $100K (they make less, most of them, but let's say). That's a total of $4.9 million in salaries.

If we cut their salaries to *zero* we save $4.9 million from a $400 million debt - - that is, we reduce the debt by maybe 1%. If we cut their salaries 10%, that's one tenth of one percent of the debt.


(Or another way of making the same point - the NB Government gave the Irvings a $5 million tax break on its facilities in Saint John - in one single tax break they gave the Irvings more money than they paid all provincial politicians for the year).


Shale Gas
Rick Daigle Let the fracking begin that will take care of the situation

Now let's examine the impact of shale gas, for those who (like the Atlantic Institute of Market Studies and, of course, Sun News) say it will solve all our problems.

The most optimistic report I've seen of revenue is the Deloitte Report, that came out in 2013. http://www.atlanticaenergy.org/.../NB%20Shale%20Gas... It estimates that 'high' production 55 wells per year; actuals will likely be lower) would yield an impact of $220M in additional ‘Direct” GDP.

Note that this amount of economic activity is lower than the deficit. But we don't tax economic activity at 100%. We tax it at 1.5%. So we're looking a a maximum revenue of $3.3 million per year. Against a deficit of $400 million per year.

If you don't like these numbers, you can run your own numbers. Suppose we taxed it at 50%. That would bring in revenue of $110 million per year. Against a deficit of $400 million.

So there's no point associating shale gas arguments with the deficit argument. We would need 100 times the 'high' level of activity (ie., 5500 wells per year, if you can imagine finding the labour and equipment to do it), royalties at greater than 100%.

And recall, the Deloitte report numbers were generated in 2013, when there wasn't a worldwide oil & gas surplus. Oil is about 60% what it cost back then, so you can reduce all the revenue numbers accordingly.

If you don't believe me, that's fine, I've linked to the Deloitte report, do your own math, if you can, and report your different results.


Bilingualism


Gerry Dionne Everything will be up for review except bilingualism and anything that's attached to that.

As for bilingualism, I've seen no report anywhere showing that it would save even $4 million, let alone $400 million. Once again, people raising this issue in this context are contributing nothing useful.

They're not dealing with reality. They have their own private issue, and even though it amounts for (at best) one 10th of 1 percent of the deficit, they trot it out s the cause of all our problems. It's not. Not even remotely.


To the person who said " NB went in2 a spiral of debt when it became a bilingual province."

NB became a bilingual province in 1867, when a specific section for New Brunswick was added to the British North America Act. Bilingualism in New Brunswick was a fact before confederation, and it remains so.


School Buses


School busing costs challenged in AIMS report
Too much money is being spent on busing the... cbc.ca

School buses: as the article says, busing cost $58.7 million in 2014, up from $31.3 million in 1987. So the cost is increasing more slowly than inflation. We should be very happy about that; in 27 years the cost hasn't even doubled (compare that5 with everything else you buy!).

Still, it's a significant expense. If we save 10% we can cut the annual deficit of $400 million by $6 million. Nowhere close to what we need, but not insignificant.

Unfortunately, there's no obvious way to accomplish that, except maybe by doing nothing (since the cost of gas has dropped 30%).

The solutions proposed by the Atlantic Institute for Market Studies will actually increase the cost. Why?

- privatizing the system will roughly double costs, so this is not an option at all
- using city buses, where they exist, will cost money, because city transit systems run at a loss, and the capacity of city systems would have to be increase, new buses purchases, and routes added
- doubled bus runs and staggered school times increases wages paid to drivers, do not save on gas, and increase the cost of wages in schools to accommodate the longer school day

The audit isn't a bad idea, but the question is, is an audit of school buses a priority, given that these costs are rising so slowly.


Cutting Costs


It's useful to think about how we got into this situation in the first place. I refer you to a post I wrote in 2007 on the subject: http://halfanhour.blogspot.ca/2007/12/tax-cuts.html

In a nutshell: at that time we had a budget surplus of $79 million. At the insistence of the newspaper (and its owners) the then government instituted a range of tax cuts. When a new government was elected the following year, they too instituted tax cuts. That government was defeated in part because of the deficit it created. Then the next government instituted even more tax cuts.

In other words, we're in trouble now because we're not making enough money. We used to make enough money, but we cut taxes, did not increase growth, and this resulted in a deficit.

Why is this important? It's important because: cutting costs will not solve a problem that cutting taxes created.

Let me repeat that: cutting costs will not solve a problem that cutting taxes created.

Revenues and Expenses

So... what are solutions. Let's look at the budget (we'll make do with last year's, which also reported a deficit around $400 million). http://www2.gnb.ca/.../MainEstimates2014...

Revenues: $8 billion ... Expenses: $8.4 billion
So our deficit is 5% of revenue. Or, in other words, if we raised revenue 5%, we'd balance the budget immediately.

So: simplistic solution number one: raise all revenue sources 5%.

The problem is, this impacts growth and the size of revenues. If we raise everything by 5%, economic activity decreases, and we don't actually get 5%.

What about reducing expenses?

Simplistic solution number two: reduce expenses 5% (actually, about 4.8 percent)

The problem is, the same thing happens. If you cut back on spending, economic activity decreases. You immediately lose all the taxes paid by provincial staff, and cutting services makes it less attractive and harder to do business in the province.

So what's the point of this post? Well - twofold.

First - it's only 5%. So it's *manageable*

But second - we can't over-react, because we might do more harm than good in the process.

Tax Avoidance

Worth noting: most of New Brunswick is still owned by a series of tax-free Bermuda Trusts on behalf of the Irving family. http://business.financialpost.com/.../tax-avoidance.../
At $1 million a day (the article says "millions a day") this is $365 million. This is getting closer to our need of $400 million. And it points to what is probably New Brunswick's biggest base issue: the company that operates the vast bulk of industry in the province does so while operating essentially tax-free.
Tax avoidance becoming bigger than the U.S. economy
Diane Francis: Canadians and others should adopt... business.financialpost.com

Of course, sending the Irvings a bill for $400 million isn't a solution either. We'll call that simplistic solution number three, and it's impractical for the same reason.

Privatization (1)


In the U.S. the health system is privatized. Health care is still the large expense faced by state governments. Meanwhile, each individual person has to absorb thousands of dollars of health care insurance costs per year. So selling the health care system will end up costing us twice what we pay today for health care.

Similarly with schools. They've tried doing what what suggested in Pennsylvania, converting a large number of schools into charter schools, which are privately run. These schools are costing more to operate, a number of them have gone bankrupt (forcing the state to pick up some extra emergency expenses), they have adopted extreme measures (like having schoolchildren do the school maintenance), and the learning outcomes have been lower than the remaining public schools.

For essential services, the most efficient system is a single funder system. This has been proven time and time again. Privatization results only in higher costs and lower quality service.

Servicing the Debt


Just a cautionary note, too: Service of the Public Debt costs $685 million a year - this expense is larger than our deficit (that's why it was idiotic to cut taxes when we had a surplus, and why our last three premiers should be held to account).

If interest rates double, this cost doubles. Our $400 million deficit becomes a billion dollar deficit overnight. And interest rates are more likely to increase as the dollar falls... hitching Canada's star to a petro-dollar risks ruining NB's economy - *really* ruining it.

That's why we can't just cut our way out of this problem. KEY: we have to figure out how to make more money. Cuts are at best short-term measures to stop some of the bleeding, but they will NEVER fix the deficit.


Privatization (2)


I hear this a lot as a justification for privatization: "governments tend to run bloated departments with overpaid management."

I work with governments and business every day. I can tell you from personal experience that large businesses become as bloated and inefficient as large governments.

They pay their top executives millions and millions of dollars, they waste money on unnecessary luxuries ("business class", anyone?) and they make stupid decisions that often ruin the whole company.

If we let companies like Enron, Blockbuster, Blackberry, etc. run government, we would be in a very bad situation.

When a government service is privatized, costs go up (roughly double). Americans pay twice what we do for health care. When the Canadian telecoms were privatized, we ended up (over time) paying twice as much for telecommunications. When Alberta liquor stores were privatized, the selection dropped and prices doubled.

Businesses are not only just as inefficient as government, they are less ethical. Sure, there's corruption in government, but it's rampant in business. And when a business runs some service,we *always* have to have a separate government agency overseeing the business to make sure they don't break the law.

So the claim that business is more efficient than government is empirically false. There is no evidence to support the claim, and a lot of evidence that refutes it.

Jobs


Part of the solution lies in increasing the size of the economy. That's why it's so devastating that we lost jobs over the last few years. If we can grow jobs (good jobs, not minimum wage jobs at WalMart) we can attack the deficit.

A person making $100K pays roughly $20K of provincial tax a year (I'm including income and sales taxes; this is +/- a lot). 100 such people pay $20 million of tax a year. So if we generate 2,000 new jobs, we've eliminated the $400 million revenue shortfall with their taxes alone.

In fact, about 1,000 new jobs would do it, because of the multiplier effect: a person making $100K in the province not only pays $20K in tax, they spend another $60K locally (again, +/- a lot). They may also generate additional revenue through imports, because people making $100K are probably not selling locally, they're selling internationally.

Some thoughts on economic development: http://halfanhour.blogspot.ca/.../real-economic...

Half an Hour: Real Economic Development, Not Slogans
halfanhour.blogspot.com

The Plan


So, given all of this, what would my plan be?

1. I would target about $100m in expenses for cuts. These would be from the existing economic development portfolio (which currently spends $98 million), Invest New Brunswick ($17M), Natural Resources ($101M), and 'other agencies' ($446 M).

2. I would target about $100M in revenue increases by rolling back some of the tax cuts implemented by the last three government; this would be done gradually so as not to shock the system, and these would be targeted (eg. some of the corporate taxes) where they can be absorbed without economic impact (because when the tax cuts were first made, they generated no increased economic activity).

The case I would put to *existing* NB industries is that these taxes will continue to rise to offset the deficit *unless* we can bring in new industry to spread the load. Why would I do it this way?

Because the biggest barrier to new industry in NB is existing industry in NB. We have to remove this barrier.

The most obvious case is the Irvings - because they have such a hold on the market, they squeeze any sort of competition. We have to change the economics of this - we need to make it clear that they will have to pay the full costs *unless* there is competition.

3. I would begin to employ some of the economic development initiatives described above in the previous post. I would *budget* (not necessarily believe, but budget) for increased activity (ie., 500 jobs) creating the remaining $200 million of the deficit. Yes, we'd probably fall short. But we set that as a target.

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