Five Easy Pieces:
Solving the deficit puzzle
SO YOU THINK THAT it’s hard to cut $500-million from the spending of the province of Nova Scotia? That the government’s huge annual deficit can only be eliminated by painful cuts to vital public services, or by putting hundreds of public employees on the unemployment line, or by jacking up taxes? Think again.
In fact it is relatively easy to eliminate that $500-million deficit within three years, thus bringing the budget into balance. And it can be done without cutting a single public service that Nova Scotians regard as essential to their well-being, without raising a single tax or imposing any new health care charges, and without firing one single employee of the public sector or forcing anyone to take unpopular unpaid leave. Moreover, certain classes of underpaid civil servants will get raises and, at the end of the three years, there will be room for tax cuts or debt reduction.
Sceptical? Our five-point plan is based on conservative assumptions and policy innovations that have proven themselves many times over in other jurisdictions:
¨ an ironclad hiring freeze in the public sector;
¨ selling off or closing industrial white elephants;
¨ getting government out of activities, like liquor retailing and distribution, where it performs poorly;
¨ eliminating useless grants to business and other special interests; and
¨ achieving efficiencies through compulsory competitive tendering, ending needless overlap and duplication of agencies and departments and hedging our foreign debt exposure.
Here’s how it could work:
1. Let attrition work its magic.
Year One, $84m; Year Two, $168m; Year Three, $252m. Total: $504m
BY MOST ESTIMATES, about 70 percent of public program spending goes on wages and benefits – for teachers, civil servants, hospital workers, etc. Somewhere between 2.5-5 percent of those workers leave the government’s employ in any year. People retire, move away, go back to school or get a more attractive job with another employer. If we accompany that normal attrition with an airtight hiring freeze, in the first year alone it would eliminate anywhere between 10-15% of the current $500-million deficit.
Using conservative figures for the total wages and benefits of all public sector workers (approximately $2.8-billion annually out of program spending of roughly $4-billion) and an assumed attrition rate in public service of 3%, we arrive at payroll savings of $84-million in Year One, $168-million in Year Two, and $252-million in Year Three. Thus, through a purely volunteer process, government could realize significant benefits without a single lay-off or unpaid leave day.
Furthermore, government should devote any savings from departure rates over 3% to civil service pay increases. For instance, if attrition rates were in fact 4% in a year, the additional savings would total $28-million annually. That money should go into a special fund and be used to increase the pay of those classes of public employees found to be underpaid relative to private sector pay for similar work.
Why talk about increasing public servants’ pay at a time of budget restraint? Because with fewer people in the government, those who stay will have to work better and smarter. As noted in Prof. Peter Aucoin’s article for AIMS “We Can Get There From Here”, “the capacity of the public service to make its required contribution to good governance is at risk”. This is due to a number of factors either directly or indirectly related to inadequate compensation, including the early departures of experienced staff, and the diminished attractiveness of the public service as a career option. Moreover, the Nova Scotia Auditor General recently remarked that inadequate pay rates were causing valuable people to leave the public service in favour of the private sector. To address these concerns fairly, government could set up a non-partisan external group to look at civil service and politician pay levels to determine areas of highest priority.
Voluntary departures plus increased compensation for those public sector workers who remain is a powerful program for reducing public sector workers’ understandable fear of deficit reduction.
2. Unload those white elephants.
Year One, $107m; Year Two, $107m; Year Three, $107m. Total: $321-million
INCREDIBLY FOR A government in such a precarious financial position, Nova Scotia continues to subsidize the making of steel that no one wants, and continues to spend millions of dollars playing at the natural gas exploration and development game in which it has no expertise. The benefit to the province of Sysco and Nova Scotia Resources is negligible, and the costs huge. In the last three years alone, the operating losses of these companies have averaged a total of $107-million every year. If their operations were to cease tomorrow, average savings over the next three years would therefore add up to $321-million. Without even considering the possibility of selling either company’s assets, government could instantly relieve itself of an enormous financial burden by closing their doors. We would end taxpayers’ exposure to future liabilities from these white elephants, and end their drain on the public treasury once and for all.
3. End alcohol abuse by government.
Year One, $0; Year Two $54m; Year Three, $54. Total: $108m
THE GOVERNMENT OF Nova Scotia isn’t a heavy drinker, but it abuses alcohol nonetheless. Its abuse lies in keeping warehousing, distribution and retailing of liquor in the hands of a cozy little government monopoly that costs the taxpayer a bundle, yet is hugely inefficient compared to the private sector. It doesn’t even realize maximum revenue for the provincial government, it limits employment in liquor distribution and retail and restricts choice for consumers.
Privatization allows retail operators and liquor distributors to let the market drive liquor prices, rather than government policy. In Alberta, getting government out of pricing policies had the effect of actually decreasing most retail prices, due to competitive market factors. Moreover, without a regulatory agency determining the product list and allowing suppliers to bring in any liquor products they want – based on customer preferences – product choice in Alberta increased by over 300%. The intrinsic benefits of privatization outweigh the status quo of having government run liquor operations in the province.
In 1999-00, Nova Scotians are projected to pay approximately $50-million in Liquor Commission operating costs, ending up with net revenues of $133-million. If the Liquor Commission were privatized, this level of annual revenues could easily be maintained through licensing or franchising fees.
Significant fiscal benefits would come in two forms. Most important would be eliminating the expense of running the Commission. By getting out of the business, taxpayers could save the $50-million paid in 1998/99 to meet simple but costly operating, warehousing, and administrative requirements.
The second saving would arise out of a one-time revenue from the sale of Commission assets, whose book value stands at about $72.4-million. Apply that money directly to the principal on the provincial debt, and the government would save about $4-million each year on interest payments. Add this to the $50-million in operating costs eliminated and you’ve got an annual contribution to deficit reduction of $54-million. Realizing that it could take up to a year to complete privatization, we count only the potential savings in Years Two and Three.
4. Derailing the subsidy train.
Year One, $40m; Year Two $40m; Year Three, $40m. Total: $120m
THE DEPARTMENT OF Economic Development and Tourism (EDT), as it was then known, doled out $33.3-million in grants and assistance to individuals and businesses in 1998. On top of these discretionary expenditures, Economic Development spent an additional $24-million under the obscure heading of “Other”. While some of the items in this category appear to be part of day-to-day operations, others seem to be more unnecessary corporate welfare in disguise.
Keeping taxes high for everyone while giving away subsidies to a politically favoured few is a completely discredited approach to regional development. There are only two possibilities. Either the business is sustainable on its own, in which case the subsidy creates no economic activity, but is a gift to business at the expense of taxpayers. Or else the business is not sustainable, and will fail when the subsidies dry up, as they inevitably do. Moreover, such subsidies tax successful businesses in order to support weaker ones, often with the effect of dragging both down.
The government should end all discretionary loans and grants. Furthermore, EDT should be expected to pare its “Other” spending by at least 30% immediately. The combination of implementing these strategies, beginning in fiscal year 2000/01, would save just over $40-million a year, or nearly $120-million over three years.
5. Less is more.
Year One, $137m;Year Two $152m; Year Three, $152m. Total: $441m
JUST AS WE cannot hope to tackle the deficit without tackling the cost of public sector employment, we cannot control spending without looking at the largest and fastest growing budget item: health care.
Contrary to what many people believe, Nova Scotia spends too much on health care, not too little, when compared to other jurisdictions. Our health care spending is 34% of total government spending, whereas every other province in the region spends less than 30% of their budget on health. Yet their health care systems are certainly every bit as good as our own, if not better. The difference in spending is very significant. If we were able to reduce spending to 31% of the provincial budget, Nova Scotia would still be devoting a larger share of its budget to health care than any other Atlantic province.
Could this be achieved without cutting medical services to Nova Scotians? We believe so. There is huge scope for efficiencies in the hospital sector alone, for instance by requiring that all non-physician service provision be put out to compulsory tender. The rule of thumb in the research literature is that if such services (laundry, food, maintenance, construction, equipment supply and maintenance, information technology, etc.) are put out for tender, the savings range from 20-35 percent.
Take as an illustration the Sisters of Charity. This religious order, a not-for-profit community-based group, applied to the government for permission to offer long-term care beds at $600 a day. The larger hospitals in this province estimate that it costs them $1200 a day to provide comparable service. Why is Nova Scotia not taking advantage of such opportunities to reduce costs while ensuring a high level of quality? The government’s role should be to ensure that the best and lowest cost providers are serving the needs of Nova Scotians. That means that the government must be completely neutral between public and private providers, and concentrate on quality and price.
Of course it takes time to build up the expertise to design and administer such a performance-based approach to health care, so we cannot expect to achieve a 3 percent saving on the ratio of health care spending to total program spending overnight. A reasonable target would be a one-percentage point saving each year, reaching the full 3 percent economies in Year Three. That is, in Year One, we would strive to get health care spending down from 34%, to 33%, of the program budget. This gradual reduction would, in three years, bring health care spending to 31% of total spending, still significantly more than other provinces in the region are spending.
Taking the current health budget of $1.77-billion as the base, achieving a 1 percent reduction in spending ratios would amount to a savings of $60-million. In Year Two, with health expenditures representing 32% of total program spending, the saving would be $50-million, and in Year Three, another $50-million would be saved. The cumulative saving over the 3 years would be $160-million.
USELESS OVERLAP IS still rife in the Nova Scotia government in spite of efforts to share numerous administrative and information technology services between departments. There are people across government getting paid to perform nearly identical tasks, or administer strikingly similar programs and services.
For instance, there is no reason to have separate departments for Fisheries and Aquaculture, Agriculture and Marketing, Economic Development, and Natural Resources. They all play similar functions for particular industries, and should simply be merged in single Department of Industry. They have similar loan board functions, policy goals, and programs that would be more effective if coordinated through one entity. Moreover, between the four of them, their annual total expenditures as of March 31, 1999 reached $186-million.
Two other departments that could share an umbrella are Human Resources and Labour. Employee training, workforce preparedness, labour standards, and a host of other policies and goals should be jointly designed through one department. Between HR and Labour, their combined expenditures in 1999, while not huge, still amounted to just over $14-million.
Based on experience elsewhere, the saving from merging like departments and agencies such as these could easily be on the order of 25 percent, but let’s assume a more conservative saving of 15 percent. For our Department of Industry, shaving 15% off a $152.4-million budget (taking the combined $186-million budget for the four existing departments and subtracting the $33.3-million in economic development grants under Point Four, above) would save government roughly $23-million in fiscal Year 2 and Year 3. With a combined HR and Labour department, a spending reduction of 15 percent would result in savings of $ 2-million annually, over the same time period. Thus, total savings in each of Year 2 and Year 3 from the two newly merged departments would amount to $ 25-million.
A THIRD AND final point where “less is more” is foreign debt-exposure. The past three years have witnessed unbudgeted expenses due to foreign exchange fluctuation averaging $77-million per year. A fully hedged foreign debt portfolio beginning in Year One, compared to the past three years, would save $77-million per year. This translates into a cumulative three year reduction in the deficit (before hedging costs) of $231-million.
6. Conclusion
Year One, $368m; Year Two $521m; Year Three, $605m.
Cumulative Grand Total: $1494m
BY USING THESE straightforward examples, government would find itself with savings in Year 3 of $605-million and a cumulative grand total of $1.494-billion saved over the three years of this deficit elimination program.
This is well above what is needed to eliminate a deficit that lies just below the $500-million mark. And does not even take into account savings that could arise from other departments’ budget exercises or other possibilities such as compulsory competitive tendering throughout all government or a requirement that departments earn a return on their capital assets or be required to sell them.
Nor does this grand total of $1.494-billion in savings take into account the fact that government would have had to borrow this amount in order to finance the current level of spending. Thus, by not incurring $1.494-billion in new accumulated debt, and assuming an interest rate of 7.5%, by Year Three the government would be avoiding approximately approximately $110-million in average annual new debt servicing costs. Our plan achieves a significant surplus without even counting these additional benefits.
The deficit puzzle is not a difficult one to solve. With these five easy pieces, government and the people of Nova Scotia would find themselves in Year Three with a balanced budget and around $105-million in surpluses with which to embark on debt reduction and tax cuts. Since the evidence is strong that it is jurisdictions with falling tax burdens and falling public debt that enjoy the strongest economic growth, that should be exactly where Nova Scotians want to go.
The deficit puzzle solved:
YEAR ONE
($MILLIONS)
YEAR TWO
($MILLIONS)
YEAR THREE
($MILLIONS)
1. ATTRITION
84
168
252
2. WHITE ELEPHANTS
107
107
107
3. NSLC
0
54
54
4. SUBSIDIES
40
40
40
5. HEALTH, OVERLAP & CURRENCY
137
152
152
SUB TOTAL
$368
$521
$605
GRAND TOTAL
$1494
