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Painful deficits
Mar 26, 2010

Manitobans woke up last Wednesday morning to the news that provincial budgets will be awash in a sea of red ink for at least the next five years. It’s a novelty in Manitoba as successive governments — Conservative and NDP — have managed for over a decade to balance the books at budget time. Ironically, during his years as finance minister in the Gary Doer government, Greg Selinger oversaw balanced budgets. But as premier, Selinger will now rule a province with successive deficits that are projected to total $1.4 billion over the next four years. 

The government was even forced to raid the rainy-day fund to the tune of $600 million to help cover this year’s budget shortfall, although the deficit is still expected to reach $545 million. 

“There will be $200 million left in the rainy-day fund,” Finance Minister Rosann Wowchuk told reporters after announcing her first budget. “I’m telling you we have a plan and we don’t want to cut services, we don’t want to raise taxes, we don’t want to sell Crown corporations.” While the government won’t be raising taxes, it also won’t be providing Manitobans with earlier promised tax relief. For example, the $50 that was to be added to the $650 provincial education tax credit has been deferred until better times. 

Wowchuk said the province is not expected to balance another budget until 2014. Four more years of deficits also means adding another $1.75 billion to the province’s existing $12.25-billion debt, which is $11,339 per Manitoban.

So many years of deficits is illegal under the existing balanced-budget legislation enacted by the former Gary Filmon Conservative government, which is why Wowchuk also announced the NDP government intends to amend the legislation. “You wouldn’t let yourself be tied by some legislation that said you couldn’t borrow to keep your family going,” she told reporters. “It would mean we would have to stop our stimulus, raise taxes and lay off a lot of people. It would mean doing a lot of things I don’t want to do.”

The NDP government already amended the legislation last year to lower the required amount to be paid towards the Manitoba debt. 

When the Filmon government under Finance Minister Eric Stephenson first managed to balance the province’s finances in the 1990s, it was an extremely painful process, involving slashes to government services, which amassed a slew of critics.  By 1995, the Filmon government had finally balanced the provincial government after 22 years of deficits. To ensure future governments would be fiscally responsible, the Tories in November 1995 passed the Balanced Budget, Debt Repayment and Taxpayer Protection Act — the act which Wowchuk is now planning to amend for the second time. Pain was felt while balancing the budget, but was quickly relieved as the economy improved and government coffers filled with tax dollars. In 1996-97, the province had a $120-million surplus which was added to the Fiscal Stabilization Fund, which is now commonly referred to as the rainy-day fund.  

There is no question that Manitoba has been a victim of the world-wide recession, which has prompted more government spending from all quarters, including the federal government. But Manitoba’s economy fared better than most during the recession. In fact, the province emerged from the recession relatively unscathed when compared to other provinces. 

A sign of the province’s fiscal health is the housing market which didn’t suffer the massive downturns of other provinces such as British Columbia, Alberta and Ontario. The Manitoba housing market experienced a slight hiccup, but while other markets went into the doldrums, it proceeded at a slow but steady rate. Today, the average price of a residential-detached home in Winnipeg is $230,000, which is expected to rise by five per cent by the end of the year — a relatively gradual increase.

Wowchuk is relying upon steady growth to slay the deficit within five years. This year, the projection is for 2.5 per cent in economic growth after the economy declined one per cent in 2009. But the problem with long-term economic forecasts is that they are rarely accurate. The field of economics is more akin to voodoo science than any semblance of reality. There are simply too many variables in the equation that could throw the best-intended forecasts into a sudden tailspin. 

Has everyone forgotten that only a couple of economists warned that the United States was headed toward a  mortgage debacle, and that they were ignored as the vast majority of economists believed rosier days were still ahead? 

The fact that federal transfer payments — a third of Manitoba’s budget comes from this source — were frozen this year at $4.1 billion is another cause for concern. The federal government has its own staggering deficit, which will likely lead to future belt tightening, including potential cuts to transfer payments. When the Chretien government began to tame the federal deficit in the 1990s, cuts were made to the amount of money the provinces received from Ottawa. 

Wowchuk is right in asserting that Manitobans expect to keep their basic services such as health care and education intact, which is why the government has devoted most spending in the recent budget to core services. Wowchuk’s $10.7-billion budget actually calls  for 90 per cent of new spending to be on health  care, education, training, family services and justice.

Extraordinary times necessitate extraordinary measures. There is no question Wowchuk was hampered in attaining anything resembling a balanced budget by the recent recession. 

To keep Manitobans working, the provincial government is continuing its stimulus spending on infrastructure, including highways, bridges, new schools, provincial campgrounds and 1,500 new social housing units. The city of Winnipeg is also the beneficiary of $218 million from the province — money it will use for infrastructure spending.

The challenge now facing the government is turning a sea of red ink into at least a pond of black ink. Wowchuk might find it’s a task that cannot be achieved without highly-unpopular tax increases and massive service cuts as was the case in the 1990s.