Background on Provincial Finances

By Mike Bell, MTS Economic Analyst


It has been frequently asserted that public education (but not private education in charter schools) is in crisis and the performance of the current system is in question. For example, neo-liberal academic economists (see the work of Eric Hanushek) like to cite the number of potential years of education lost due to the ‘gap’ in standardized test scores. In the case of Manitoba, our students’ test scores equivocate to the same level as Germany. No right-minded person would dare say that Germany’s economy is threatened by its education system. In the case of Manitoba, we benchmark close to other provinces who are amongst the leaders in the world in education if we are to take the OECD’s PISA test scores with the same seriousness as education reform proponents. So why create the false scenario of a crisis in public education?

So what are the education policy goals of governments who style themselves as market reformers … neo-liberals as we call them today? As mentioned cost cutting and deriving a new value for money proposition for taxpayers tends to be job number one. Making investments in children takes a backseat, even to the priority of building new schools as evidenced in our province’s 2019 education funding announcement whereby more incremental dollars will go into new schools than to serve an expanding student base.

Bill 28 enacts real wage cuts for public sector workers, including teachers. Cutting membership ranks and the ability of unions to deliver what their members need, improvements in their standard of living and working conditions, not only serves as a cost containment measure but strikes an essential wedge between the union itself and its membership as the union is unable to deliver what its members most desire. The Manitoba Teachers’ Society estimates that if inflation averages 2% a year over the so-called fiscal sustainability period demarcated by Bill 28, the average teacher will lose a cumulative purchasing power amount of almost 7% of their annual salary as it stood in 2018.

Since Manitoba is not in a fiscal crisis, a fair wage settlement should look like something that approximates the private sector. MTS has tracked data pertaining to wage settlements in Manitoba’s private sector and salary increases in-line with the cost of living increases would seem to be fair to teachers, public servants and the public.

Manitoba’s story is one of growth and quite a remarkable one at that. For those who can remember the 1990s, the economic environment was challenging, not just here but across Canada. In Winnipeg, we lost our beloved Jets hockey team and much of the reason why was because of the prevailing economics that existed a generation ago, but as the Winnipeg Free Press so noted (Geoff Kirbyson, “Thriving ‘Peg ready for the NHL”, March 9, 2011) the times have so changed for the better.

(annual averages during the period) 1991-95
(5
years)
2018-20
(3 years)
 

Nominal Economic Growth (GDP)

 

2.3%

 

3.6%

 

Real Economic Growth (RGDP)

 

0.25%

 

1.7%

 

Average Family Pre-tax Income (real 2017$)

 

$73,720

 

$108,300

 

Employment Growth

 

0.1%

 

0.7%

 

Unemployment Rate

 

8.8%

 

5.8%

 

Fiscal Budget Balance as % of GDP

 

-1.1%

 

-0.6%

 

Prime Lending Interest Rate*

 

8.65%

 

3.95%

The chart above comparing provincial economic metrics of the early 1990s with the period that coincides with the Province of Manitoba’s fiscal sustainability period for teachers provides us a telling story. The early 90s provides us with hard evidence as to what an economic and fiscal crisis would have looked like. Clearly, the hard statistical evidence shows that the Winnipeg and Manitoba of today is nothing like the Winnipeg and Manitoba of yesterday. Overall, economic growth is on average 50% higher and this has translated into better labour market outcomes for Manitobans including higher employment growth rates, a lower unemployment rate and much higher family incomes.

A further look at the growth in real incomes of Manitoba families does tell the real story as economic growth has translated into a higher living standard for the average Manitoban. The mean total pre-tax family income in Manitoba by 2017 was up by 47% compared to the average family in the 1991 to 1995 period. A similar result occurs if we broaden the analysis to all Manitobans, regardless of family status (note: according to Statistics Canada figures about 80% of all Manitobans live in an economic family).

 Average Total Income for Manitobans

So if Manitoba has so improved its economic record and population growth this past decade has been unmatched since the end of the baby boom in the 1960s, which has given the Province an additional boost, why has not the state of the Province of Manitoba’s finances reflected this?

The short answer to this question is that our province has the fiscal capacity to meet the major needs and demands of our society. In our view, it is not because Manitobans are over-taxed but more a question of the willingness of the Province’s leaders to acquire the resources to provide for publically demanded goods and services. The Government of Manitoba’s primary responsibility, as historically delineated in our Canadian constitution, is to provide for health and education services. The demand for these services consumes almost 70% of the provincial budget annually. In Manitoba, while our economy is growing, so is our population and the number of both and aged persons. A growing populace and changing demographic profile has put pressures on both our major cost centres, health care and education.

With respect to allegations of mismanagement, the PC line has been to point at deficits, a rising net debt-to-GDP ratio, and the opinions of bond rating agencies. In response, the role of bond rating agencies is to provide opinions to lenders whether they will be paid in full when they lend out money (in our case, buy Manitoba debt instruments or bonds). Quite simply, there is no risk that Manitoba will default on its financial obligations and its credit rating is amongst the highest investment grade in the world when one looks at comparative debt tranches and relative risk assessments. With respect to rising debt levels, approximately one-half of overall (summary financial statement related) debt originates with Manitoba Hydro which is considered a self-sustaining entity (i.e., that is why you pay monthly hydro bills for gas and electricity). What is unique about Hydro is the fact that two massive multi-billion dollar mega-projects (Keeyask and Bipole 3 projects) were simultaneously undertaken due to the opportunity to build during a period of historically low interest rates. Mega projects are extremely expensive investments that in our case substantially increased the debt profile of both the crown corporation and the Province. As of this year, the net debt-to-GDP ratio, regarded universally as the key financial metric with respect to indebtedness, will have peaked at 34% and will slowly come down as the economy grows and the high level of Hydro megaproject investment recedes. Like the Red River Floodway for which Duff Roblin was severely criticized, Manitobans will see the wisdom and benefits of these projects far into the future as we continue to expand not only our population but business activity as well.

Now, with Budget 2019 the Pallister government has reduced the PST back to 7% which translates into a potential reduction of government revenues by $325 million annually. Looking back on past budgets by the Pallister government one finds that measures to provide tax relief to both households and businesses has resulted in a substantial drain in government revenues. In no way can the whole issue of tax cuts be solely be placed at the feet of the Progressive Conservative party as the Doer and Selinger governments annually committed to measures which reduced the levels of taxation on big and small business alike, as well as Manitoba households. Think how much lower class sizes could be and what kinds of additional supports and programs could be offered to needy Manitoba students whose families want them to have a head start in life.