This is what austerity looks like

 

Opinion

THE 2016 Manitoba election ousted an unpopular NDP government in favour of a Progressive Conservative government committed to greater fiscal responsibility. The popularity of the NDP had fallen sharply after Gary Doer’s departure, especially following the decision to increase the provincial sales tax in 2013 and the fierce challenge to Greg Selinger’s leadership that ensued.

Despite the PST increase and reasonable economic growth, the Selinger government continued to allow expenditures to outpace revenues as the core deficit soared to $865 million in the 2015-16 fiscal year, abandoning balanced-budget promises and legislation in the process.

The electorate could hardly be blamed for a desire for political change. The NDP had been in power since 1999, and the PCs promised “Lower Taxes, Better Services, Stronger Economy” in their election manifesto. Better services meant better health care, emphasizing unspecified improvements in front-line services, and better education, emphasizing general support for teachers in the classroom.

Although other promises were included, health and education were inevitably emphasized, since these sectors constitute almost two-thirds of all program spending, with expenditures in other areas — infrastructure and transportation, jobs and the economy, justice, municipal government, and even social services — paling in comparison.

In earlier columns for the Free Press, I examined data on provincial finances developed at the University of Calgary school of public policy to assess Manitoba’s budgetary issues. One issue was that Manitoba’s per-capita spending, overall and specifically in the areas of health and education, had grown much faster than in other provinces and, in that sense, Manitoba had a spending problem.

That problem was commensurate with rapid growth in revenue per capita, but there should have been concern about the heavy reliance on federal transfers.

Using the same data for Manitoba, updated to the 2019-20 budget, we can see what has happened in the transition from the Selinger government to the first term of the Pallister government, prior to the harsh reality of the COVID-19 pandemic. Spending growth averaged 3.7 per cent per annum from 2010-11 to 2015-16 under Selinger, with spending growing 4.1 per cent in health and 3.3 per cent in education, but revenues only increased by 3.3 per cent.

Most areas of revenue — personal and corporate income tax, the PST, and revenues from natural resources and other sources — showed robust growth of five per cent to 13 per cent but, as feared, federal transfer growth faltered, declining by an average of 0.3 per cent per year.

True to his word, Pallister reduced the rate of growth in spending from 3.7 per cent to 2.2 per cent over the budgets from 2016-17 to 2019-20, and cut the deficit on core government services to $274 million, which produced the widely trumpeted consolidated budget surplus of $5 million. That reduction, however, came disproportionately at the expense of a reduction in health spending increases, from 4.1 per cent to 1.9 per cent over the four Pallister budgets.

Since health consumes 45 per cent of all program spending, this is perhaps not surprising; it is the one area in which austerity makes a big difference. Continued health spending growth of 4.1 per cent would have added $831 million to a deficit which would have climbed to $1.1 billion. Even slowing health spending to the same rate as all other spending, at 2.6 per cent, would have added $186 million to the deficit.

Reducing the deficit to current levels without relying on excessive cuts to health spending growth would have required substantial cuts in other smaller areas. Education, as the second-largest sector, consuming 20 per cent of the budget, grew by three per cent. Had growth been limited to 2.2 per cent, it would still have contributed only $79 million to deficit reduction.

On the other hand, limiting growth in all other areas but health to 2.2 per cent would have allowed health expenditures to be $86 billion, or 1.4 per cent, higher in 2019-20 with the same fiscal outcome.

It is perhaps too much to expect a program of austerity to focus on specific areas where government spending is less important in order to conserve spending in areas where it is most needed. Fiscal responsibility is more likely to involve alignment of spending with projected revenue growth across the board, but the biggest areas of spending, especially health care, provide an almost irresistible source for special attention.

This strategy worked well politically, as the Pallister government honoured its commitments to get the books in order and reduce the PST before the 2019 election, where it retained most of its seats and share of the vote.

The pandemic, however, has obliterated plans to control spending, pay down debt, and cut taxes such as the PST. And it has also shone an unanticipated bright light on the health-care system and its ability to respond to the needs of the public during a period of fiscal austerity.

The conundrum, then, is whether Manitoba’s fiscal improvement could or should have been achieved without a disproportionate contribution from the health sector.

Wayne Simpson is a professor of economics at the University of Manitoba and a research fellow at the University of Calgary School of Public Policy.