With budget time approaching at the federal and provincial levels, finance ministers will try to solve the quandary of yawning deficits in the existence of slow growth. Should governments take on fiscal stimulus C more spending or tax cuts C that will boost the deficit and, hopefully, spur growth? Or whenever they undertake austerity to prevent the stress of high debt loads?
The concern is especially acute within the Atlantic provinces using their high indebtedness and slow growth. New Brunswick’s recent budget will reduce its top personal income tax rates to counterbalance the Trudeau tax hikes while raising the HST and corporate income-tax-rates by two points. With cuts to spending after last year’s hyped infrastructure plan, the province has selected the austerity route instead.
Fiscal stimulus or austerity alone won’t provide long-term growth. With the commodity market slowdown, the Atlantic provinces have to think of path-breaking structural reforms for their spending and tax habits to shock their economy into better growth. New Brunswick, for instance, has got the worst growth record in the country since 2010 as well as an economic development strategy that merely will not work.
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A little bit of history here could be instructive.
When Liberal Frank McKenna was premier of recent Brunswick, he understood so good tax, regulatory and spending policies can generate growth. For instance, by relating workers-compensation payroll contributions to some firm’s safety experience, New Brunswick’s call centre industry was spawned. Progressive Conservative Bernard Lord also understood that tax competitiveness can bring about better growth. Liberal Shawn Graham looked towards the Irish model by reduction of personal and company rates to become the best looking in Canada.
Unfortunately, the Graham government erred by cutting income taxes without a corresponding rise in the HST to avoid large deficits. Confronted with large recessionary deficits, laptop computer Alward government rescinded income tax reductions, a poor strategy compared to raising the HST, that is less bad for growth. With the Liberal Gallant government, New Brunswick has hiked its top personal and company tax rate to be certainly one of Canada’s highest in addition to raising the HST rate to 15 per cent, tied with Quebec to become Canada’s highest.
Gallant also froze shale gas development last year. Resource production is falling badly as Saskatchewan’s Potash Corp. is closing its major potash mine. Gallant is counting on the power East pipeline to become built to the Irving refinery as his major development strategy, a risky proposition at best.
The other Atlantic provinces, steeped in deficits, face similar fiscal dilemmas. Have the ability to corporate income-tax-rates above Canada-wide and OECD levels. Apart from Newfoundland and Labrador, they have French-like top personal income tax rates, and therefore are growing less than Europe’s snail’s pace of 0.7 percent.
Are the provinces doomed to a poor economic future or might another strategy succeed? A recent German academic publication around the Baltic Tigers, whose small populations resemble the Atlantic provinces, provides the clue. Estonia, Latvia and Lithuania happen to be enjoying strong economic growth since 2003 by pursuing different economic reforms.
When the three Baltic Tigers shook off their Communist tyranny two-and-a-half decades ago, they took on radical reforms including deregulation, privatization, trade liberalization, currency and inflation stabilization, balanced budgets and major tax and spending reforms. The Tigers not only shifted public spending towards infrastructure and education (Estonia presently has among the best education systems in the world), they also pursued tax reforms including a low-rate flat tax. Estonia has been particularly successful in rooting out corruption.
The Tigers grew at outstanding rates, around 10 % from 2004C07. When the global financial trouble pulled the rug out from under them, they resumed the early 1990s radical reform strategy, closing down failing banks without compensating former owners and rejecting the advice of Keynesian economists to take on fiscal stimulus. They adopted austerity measures to limit budget deficits, tax reforms, privatizations and labour market deregulation. The Baltic Tigers recovered using their deep recession with small fiscal deficits and reasonable debt levels by 2014. Growth has returned to levels four times higher than Europe’s since 2011, in excess of four percent.
I am sure the Atlantic provinces would much prefer growing at four per cent annually over their anemic performance. Rather than New Brunswick’s doomed high-tax, anti-development approach, the other three provinces should look at small jurisdictions such as the Baltic Tigers that demonstrate that low taxes, regulatory reforms and smart public spending yield good results.
Jack M. Mintz is the President’s Fellow, University of Calgary’s School of Public Policy, and Scholar-in-Residence at Columbia Law School. He has been an adviser on tax policy to four past New Brunswick governments.
