COVER

TO TAX OR CUT

MARY NEMETH February 13 1995
COVER

TO TAX OR CUT

MARY NEMETH February 13 1995

TO TAX OR CUT

COVER

MARY NEMETH

On a crisp and sunny morning in January, the regulars are flocking to Lorna’s café in Lloydminster, a city of 17,800 straddling the Alberta-Saskatchewan border. They are gathering for that Prairie ritual, the so-called coffee row, to debate hockey and politics and the fate of the world.

Steve Babyn, a 65-year-old retired businessman, is chatting with old friends and colleagues.

And when the talk turns to the current national preoccupation with debts and deficits, he has plenty to say. Although he hails from the Alberta side of town,

Babyn prefers what he sees across the way. “Saskatchewan’s got a plan,” he says. “It was just chop, chop, chop in Alberta.” Another coffee row regular disagrees. “I support Alberta’s approach-cutting as quickly as possible,” says Ken Burke, a 46year-old accountant who finds fault instead with recent tax hikes in Saskatchewan. “Canadians are taxed to death,” he adds.

“Besides, we have too many programs we could never afford.”

Because the border runs right down Fiftieth Avenue in the centre of Lloydminster, its people enjoy an ideal vantage point from which to compare two dramatically different approaches to what has become the holy grail for governments across Canada: eliminating their deficits. Other provinces are closing in on that goal: New Brunswick, British Columbia and Manitoba among them. But nowhere are the contrasting roads to a deficit-free future so clear as they are in Lloydminster. To the east of the city lies steadfast Saskatchewan, operating quietly and gradually, mixing spending cuts with tax increases, pledging to balance its books with compassion. To the west is maverick Alberta, charging ahead with a dramatic 20-percent cut in government spending, refusing to raise taxes, determined to wean its population from government dependency—and challenging the rest of Canada to follow suit.

In those two approaches lie important lessons, not only for other deficit-laden provinces, but also for the federal government as Finance Minister Paul Martin prepares to bring down a crucial budget in late February. “Alberta is anti-government more or less,” observes John McCallum, chief economist for the Royal Bank of Canada. “Saskatchewan, well, as former NDP premier Allan Blakeney used to

say, they just want to balance the budget so they wouldn’t be dependent on the banks. But what this emphasizes is that governments with very different ideologies can both have the same priority—deficit reduction.” The same priority, and other similarities as well. Both are resourcebased provinces that have been lucky in the past year, riding an oil and gas boom in Alberta and a surging farm sector in Saskatchewan. Both Alberta, led by Conservative Ralph Klein and Saskatchewan, led by New Democrat Roy Romanow, have pledged to eliminate their deficits by 1996-1997, and both are well ahead of schedule. They are so far ahead, in fact, that when Saskatchewan introduces its 1995-1996 budget on Feb. 16 and Alberta brings down its plan on Feb. 21, both governments are expected to announce that they have either already balanced their books or are very close to it. And when they say balanced, that will include operating costs, interest payments, capital investments—everything. Both provinces also have confounded the popular wisdom that cutting spending and raising taxes are fatal political manoeuvres. The governing parties are ahead of the opposition in

Saskatchewan raised taxes, Alberta cut programs. Both are about to balance budgets.

both provinces according to polling by the Angus Reid group—Alberta’s Tories with a stunning 60-per-cent support, Saskatchewan’s New Democrats with a solid 48 per cent. But in Alberta, and indeed across Canada, many have been shocked by Klein’s methods. Alberta is now a land of private liquor stores and private health clinics. And it is a place where tough new social program regulations have cut Alberta’s welfare rolls nearly in half, from 94,087 recipients in March, 1993, to just 51,799 now. About 12,000 of those who have lost welfare benefits are enrolled in retraining programs; others have found jobs, on their own or through a government program that pays them $5 an hour to do work like tree-planting. Still others have been offered bus tickets out of the province—although government officials claim other

provinces do that, too. At the same time, a 17.6per-cent cut to health-care spending has also raised alarm, fuelled in part by a few high-profile incidents. Last month, a two-year-old boy was shipped by taxi, rather than ambulance,! from an Edmonton hospi-1 tal to a hospital in hiss home town of St. Paul, 150 km He died

km away. He died en route in his mother’s arms. The story— and questions about the impact of health-care cuts—made frontpage headlines in the province. But hospital spokesman Anne Marie Downey insists that there was no connection at all, that the boy was judged to be in good and stable condition and that cars or taxis have been used for years to transfer patients when that is considered safe. Klein says the success of his approach proves that governments can take tough measures without worrying about special-interest groups. But his critics are shocked by the speed and depth of reform. In Saskatchewan, the shock is that it is an NDP government that is doing the deficit-slashing. And in a province that prides itself as the birthplace of medicare, the government’s decision to close 52 acute-care rural hospitals and turn them into health clinics has been a symbolic as well as tangible blow to some of the party’s traditional supporters. “It probably hurts a lot more,” says Saskatchewan Federation of Labour president Barbara Byers, “when you realize that a social democratic government is taking the same approach that Liberals and Conservatives have taken.” Romanow’s government has also taken heat from business leaders who say that a series of tax hikes on everything from corporate profits to cigarettes will undermine the province’s economy. But while the government has alienated people on both sides of the political spectrum, it has won neither the praise that Klein has drawn from international observers, nor the intense opposition at home. The contrasts between the two provinces are far from complete. Although Alberta has stuck to its promise not to increase taxes, it has increased such fees as healthcare premiums. And Klein’s decision to reduce funding to programs like kindergarten classes means that many parents now pay out of pocket for schooling that used to be paid for by the government. Across the border, meanwhile,

part of the revenue increases flowing to the Saskatchewan government stem not from increased tax rates but from reorganizing its tax structures and incentives that have boosted economic growth. But budget targets released by the two governments in 1993 clearly show that Saskatchewan is banking heavily on boosting the revenue side of its ledger, while Alberta is counting on massive reductions in spending. The premiers themselves clearly voice their contrasting approaches. “We have a spending problem, not a revenue problem,” claims Klein. Counters Romanow; “Bal-

ance in budget-making is essential. To eliminate the deficit by eliminating only expenditures is unattainable and undesirable.” There is no general agreement on which of the two approaches could best be exported outside the Prairies—or whether Ottawa, in tackling its own budget dilemma, for exampie, has more to fear from angry taxpayers or from Canadians who do not want to see cuts to social programs. And to some extent, the two plans are tai-

lored to their respective audiences. “Saskatchewan people tend to be more social democratic,” observes McCallum. “So tax increases may be more palatable there, while they may be anathema to Albertans.” Bruce Cameron, a Calgarybased senior vice-president of the Angus Reid polling firm, observes that the number 1 concern expressed by Albertans over the past three or four years has been the deficit, while people in Saskatchewan have been more worried about jobs. Certainly, political differences are obvious in Lloydminster: the Alberta side of the city is represented by a Conservative MLA, Saskatchewan’s by a New Democrat.

Of course, the Conservatives in Alberta have not always been as right-wing as they are now. They had the luxury of massive oil and gas revenues in the 1970s and early 1980s to fund some of the most generous social programs in the country. Alberta also had one of the country’s largest civil services, in proportion to its population, and, into the late 1980s, invested huge sums to prop up money-losing firms under the guise of economic diversification. But the revenue that funded that largesse collapsed along with oil prices in 1986: government income from natural resources that had averaged $5 billion a year between 1981 and 1986 fell to less than half that in the next five years. By 1993, Alberta was running a $3.7-billion deficit. Saskatchewan, meanwhile, has traditionally been governed by fiscal conservatives, New Democratic or otherwise. Between 1944 and 1982, successive governments balanced 30 of 36 budgets—all the while pioneering new social programs. The crunch in Saskatchewan came in the early 1980s, when a series of droughts ravaged the wheat fields that were the mainstay of the province’s economy. At the same time, an agricultural trade war broke out between Europe

and the United States, driving down grain prices. The Conservative government of Grant Devine carried through on its election promise to cut taxes, further reducing revenues; in 1987 alone, Devine’s government went $1.2 billion into the red. “It is only in the last years of the Conservative government,” says Brian Neysmith, president of the Montreal-based Canadian Bond Rating Service, “that Saskatchewan seemed to

have thrown 30 to 40 years of fiscal conservatism out the window.” The two provinces faced severe fiscal difficulties when Romanow came to power in late 1991 and Klein took office in late 1992. But there were key differences. Alberta’s economy was, and, remains, richer and more diversified. Saskatchewan had amassed a bigger debt—$11,776 per capita in 1992, compared with $6,824 per capita in Alberta. Because the interest costs on its higher debt kept gobbling up ever greater portions of the province’s budget, “it has made it much more difficult to bring the deficit down,” says Casey Vander Ploeg, research assistant at the Calgary-based Canada West Foundation. “Saskatchewan has had to work harder and has probably had to absorb more pain.” Alberta’s historically high-spending ways, on the other hand, have made it easier than many other provinces to make spending cuts. And

in Lloydminster, at Loma’s café, when 72year-old Albertan August Hartel complained that Klein’s government is cutting too many seniors benefits, Dorothy Penny chided him. A 71-year-old homemaker living on the Saskatchewan side, Penny claimed that Alberta’s seniors had more

benefits to begin with. “They’re just cutting Albertans down to what we’ve been getting all along,” she said. Across town, the Lloydminster Public School Division’s director of education, Don Duncan, prefers the Saskatchewan approach because cuts are being implemented more gradually and with more public consultation. In Alberta, he says, “I’m afraid that efficiency has taken priority over effectiveness.”

But he says that Alberta has traditionally funded education more generously than has Saskatchewan. And Duncan points out that even though Alberta is cutting education budgets more deeply than is Saskatchewan (Alberta is reducing grants to his school board by about 14 per cent, Saskatchewan by about eight per cent), his board still gets more money per student from Alberta than it does from Saskatchewan. Next to education, the most controversial deficit-cutting measures are in health care. Both provinces appear to be moving in the same direction, away from expensive acute care and towards more community and home-care programs. But Romanow tackled the issue first. Over about 18 months beginning in early 1993, Saskatchewan merged 400 health boards into 30 regional health districts. Then, it converted the 52 acute-care rural hospitals into so-called wellness cen-

tres, health clinics intended as local clearing houses for all kinds of community health services. Overall, Saskatchewan’s health budget has fallen just three per cent, to $1.534 billion in 1994-1995 from $1.581 billion in 1991-1992. But

most of the savings from the consolidation of g " 7 ^ health boards and the closing of acute-care beds went back into the system and was redirected to community and home care. “Our goal is to make it sustainable,” says Saskatchewan Finance Minister Janice MacKinnon. “Health care accounts for about 36 per cent of our budget and we want to keep it there, not allow it to do what it was doing before—expanding and expanding until it’s out of control.”

Alberta also condensed health-care administration—paring more than 300 health boards down to 17 regional health authorities responsible for implementing spending restraints. But the pace of reform has been quicker. ‘The health authorities were given direction in June, and the deadline for submitting plans was Sept. 15,” says John Fallows, a partner with Ernst & Young management consultants in Calgary who was a consultant to one of the boards. “There went my summer holidays, and a lot of other people’s, too.”

So far, three-quarters of the regional boards in Alberta have publicly announced their budget-cutting plans. Among other measures, those boards have identified eight hospitals—including five in Calgary and Edmonton—that will either be closed or converted to health-care centres or long-term care facilities. In the meantime, the provincial government has implemented other spending cuts directly—announcing that it will no longer pay for eye examinations for those aged 19 to 64, for example. Overall, government spending on health care is projected to fall 17.6 per cent over three years—to $3.4 billion in 1996-1997 from $4.05 billion in 1993-1994.

Fallows says the time pressure was a good thing—that it forced action and creative thinking. “You could study things for 20 years,” he said, “and not make any decision.” And in fact, the speed of spending cuts is a key plank of Alberta’s deficit-reduction platform. Treasurer Jim Dinning has repeatedly said that “you can’t jump a chasm in two leaps.” And Treasury spokesman Gord Rosko argues that, with debt payments soaring, “we didn’t have the luxury of time—doing it early and quickly worked for Alberta.”

But the pace and depth of spending cuts are key sources of complaint for Klein’s critics. They include seniors who have lost healthcare and housing benefits, and teachers who claim that a dramatic reduction to kindergarten funding and other changes are creating a two-tiered education system in which rich and poor no longer have equal access to services. In fact, according to Angus Reid’s Cameron, most Albertans oppose cuts to kindergarten funding and certain elements of health reform. “But none of that has translated into overall opposition to the government,” says Cameron. “People say, ‘I may not

agree with cutting there and there, but I don’t disagree with the need to cut.’ ” Lloydminster Mayor liston Plant, for one, says he admires Klein’s “intestinal fortitude” for sticking with tough spending cuts. “I hear more and more people saying that ‘we’ve got to do it,’ ” adds Plant. “They kibitz and complain, but deep down, when they think about it, they say it’s the right thing to do.”

In Saskatchewan, as in Alberta, there has been little public debate about the need to cut the deficit—only about the means to that end. And Finance Minister MacKinnon insists that balanced budgeting is as much a left-wing idea as it is a right-wing one. She has even quoted the 1933 Regina Manifesto, the founding document of the Co-operative Commonwealth Federation, precursor of the NDP, which called for balanced budgets on the grounds that borrowing only perpetuates “the parasitic interest-receiving class.”

Under Romanow, that philosophy translated into some tough spending cuts early in the government’s mandate, with some easing off later in the plan. Overall operating expenditures—what the government spends on its programs—is scheduled to fall 4.6 per cent, to $4.2 billion in 1996-1997 from $4.4 billion in 1991-1992, although rising interest payments mean that total spending will increase. But the government is also rearranging its spending priorities. It has already cut funding to agriculture, for example, by 12 per cent since 1991-1992. Meanwhile, although spending in health and education has been reallocated, the overall cuts have been relatively small (three and one per cent, respectively). MacKinnon has argued that the Saskatchewan

plan has compassion. “We haven’t relied on cuts alone to reach our objectives,” she has said. “That would be too painful.”

Some of the government’s critics, however, say that the pain is too great already. Labor leaders complain that the government failed to take into account the effect of job losses when it closed acute-care facilities, for example, and has been too slow to introduce home care and other programs in their wake. On the other hand, the tax increases have also fuelled opposition, especially given that tax rates were already considerably higher in Saskatchewan than in Alberta. The effects of taxation were evident at a Rotary Club luncheon in Lloydminster last month. When the local president asked members who live in Saskatchewan to stand, only nine of the 58 people present rose. Then, he asked members who used to live in Saskatchewan, but have since moved to Alberta, to rise—more than 20 stood up. The underlying reason for the emigration, residents say, is the lower tax rates on the Alberta side of the border. That was the reason one of the Rotarians, Saskatchewan-born Glenn Weir, cited for his decision to establish his veterinary practice on the Alberta side of Lloydminster back in 1952. “But there was a philosophy that went with it,” maintains Weir, now 68. “Alberta was gungho, the Texas of Canada. Saskatchewan was more pessimistic.”

In the unique border city of Lloydminster, where moving to Alberta is as simple as crossing the street, that exodus to Alberta is an obviously exaggerated example of what nevertheless used to be a perennial problem in Saskatchewan—population decline. And while Saskatchewan’s population has begun to grow in recent years (it is now just over one million), business leaders maintain that the government should not have increased taxes in a province that needs business expansion and faster population growth. Those tax hikes included a 10-per-cent deficit-reduction surcharge on personal income, a jump in the sales tax (to nine per cent from seven per cent) and in fuel taxes (to 15 cents a litre from 10 cents), as well as hikes in corporate taxes. Communities near the border with Alberta (the only province with no sales tax) have been particularly vocal about the disparities, claiming that they are losing business to cross-border shopping. “Our preference would be no tax increases, and, personally, I think government spending at all levels should be reduced,” said Saskatoon lawyer Casey Davis, chairman of the Saskatchewan Chamber of Commerce’s finance committee.

It is too early to know which province’s deficit plan is most sustainable in the long term, or which will have the most profound effect on general economic performance. Klein’s

‘ITS BEEN MESSY’

Alberta’s premier champions deep spending cuts

Alberta Premier Ralph Klein has been travelling the country, talking up the benefits of his government’s efforts to eliminate the provincial deficit without raising taxes. He defended his policies in an interview with Maclean’s Associate Editor Brian Bergman during a recent visit to Toronto. Excerpts:

Maclean’s: A federal budget is expected shortly. What lessons can Ottawa learn from what’s gone on in Alberta over the past two years?

Klein: I think there’s a political lesson to learn. And that is: you can carry out a tough program and maintain political credibility and popularity. So the lesson is there: make your decision, set your targets and

achieve your goal. We identified an overspending problem of something like $3.4 billion annually. We said that would mean a 20-per-cent reduction in our overall spending. And our goal was a balanced budget by fiscal year 1996-1997.

Maclean’s: And you are ahead of schedule. Klein: I’ve warned Albertans not to get too excited about that. We’ve been lucky on the revenue side. We still haven’t completed the job of expenditure reductions and we’re determined to do that.

Maclean’s: How would you compare Alberta’s approach to that in Saskatchewan, where they have reduced the deficit through a mix of spending cuts and tax increases. Klein: The easy way is to raise taxes. The difficult way is to find new and better ways of doing things, and to reduce spending. To

me, it’s no different than running a household or a business. You simply can’t spend more than you earn. Only governments can artificially create revenue. Only governments have a legal right to pick your pockets. Maclean’s: But isn’t it also true that Saskatchewan sees higher taxes as the price it must pay to avoid Alberta-like cuts to health care and education?

Klein: But again, taxation is so easy. It doesn’t take brainpower to find ways to raise new taxes or to broaden the tax base. I don’t know of any society in the history of this world that has taxed its way back to prosperity.

Maclean’s: How do you respond to critics who say that the cuts in Alberta have disproportionately hurt the weak and the poor? Klein: I say that’s absolutely wrong. We have strictly and clearly articulated that we will look after—and look after very well—those who can’t fend for themselves. But to those who can work and who say, ‘No, it’s my God-given right to live off the state,’ we’re saying, ‘No, sorry, you might be able to do that in other jurisdictions, but not in Alberta. We will give you an opportunity to work, we will help you to be retrained, and if you have young kids we’ll look after them. And if you’re severely disabled, and you legitimately can’t work, we’ll look after you. Otherwise, you’re outta here.’ And by reducing the number of our welfare cases from something like 95,000 to 40,000, we’ve been able to put more money into areas where people truly need our help.

I Maclean’s: Now that it looks like AlberH ta will balance its budget, is there any I room for putting money back into areas I that you’ve cut?

° Klein: Yes. I call it a reinvestment. Once = you have your spending under control, you can take a good look at the house after the home renovation. You can say, ‘OK, where do the cracks have to be filled up? Where were the small construction mistakes?’ In other words, how do we make sure, once we have restructured, that we maintain good education and good health? But no longer will we go into an overspending mode. I think we are the only jurisdiction in the country that has legislation stating that after we balance the books, we can never again spend more than we earn. That’s the law.

Maclean’s: Do you have any federal political aspirations?

Klein: None whatsoever. I’ve likened this to a home renovation. It’s been messy, it’s been frustrating, it’s been disruptive. When it’s all finished, I want to be able to sit back for a while and put up my feet and enjoy the house. I’m not ready to get into another mess.

• efforts have won him a fistful of awards from conservative groups and plaudits from international observers: just last week The Wall Street Journal advised Martin to follow the Alberta premier’s approach to deficit-cutting. But even Klein concedes that his earlier-than-expected success has been a result of windfall oil and gas revenues. And treasury department officials warn that Alberta is still planning on a deficit for 19951996 before achieving a sustainable balanced budget in the following year in 1996-1997.

As for low taxes, what Klein calls the “Alberta advantage,” government officials point to a decline in unemployment rates, low inflation and economic growth as evidence of the strategy’s success. Certainly, most economists preach the investment appeal of low taxes. But a few are skeptical. “I think it’s vastly overplayed,” argues University of Regina economist Michael Rushton. “There are just so many other things businesses are going to be concerned about—like distance from markets.”

Saskatchewan has also been lucky. It benefited from increased revenues from oil and gas and mining, as well as strong farm income. As in Alberta, the government points to economic growth and declining unemployment rates as evidence of its success. Meanwhile, if high taxes did anything to discourage outside investment in Saskatchewan, that effect was masked by the general economic recovery. But there may yet be storm clouds on the horizon. Both agriculture and energy are volatile sectors. And Saskatchewan is a “have-not” province—any serious reduction in federal transfer payments could upset its long-term budget plans.

Bond raters—whose credit ratings determine how much investors are willing to lend to a province and at what rate—tend to look more favorably on Alberta, a reflection of that province’s larger economy and lighter debt-load.

And Alberta has won even more praise with bond raters for going the spending-cuts route to eliminating its deficit. The Canadian Bond Rating Service continues to give Alberta a higher rating, AA, compared with A for Saskatchewan. But its analysts did not penalize Saskatchewan for raising taxes. “There was no smoke and mirrors, they actually made real cuts and real tax increases,” says Canadian Bond Rating president Brian Neysmith. “We thought their plan was achievable and we had confidence in their determination to carry it out.” Ultimately, however, the provincial governments are answerable not to bond raters but to their voters. And if there is a lesson for other governments in the experience of Alberta and Saskatchewan, it is that most of those voters seem willing to accept tough measures. □

‘BALANCE IS ESSENTIAL’

Saskatchewan has raised taxes and cut spending

Saskatchewan Premier Roy Romanow has been reducing his province’s deficit through a blend of tax increases and spending cuts. It is widely anticipated that his government’s next budget, to be introduced on Feb. 16, will balance the province’s books for the first time since 1981-1982. He spoke with Maclean’s Calgary Bureau Chief Mary Nemeth last week. Excerpts:

Maclean’s: How close are you to balancing your 1994-1995 budget?

Romanow: Because of the combined forces of our fiscal plan and an economic turnaround, the promise of a balanced budget by the spring of 1996 is, for sure, going to be achieved. And it now looks very likely we’re going to do it ahead of time.

Maclean’s: Does the federal government have anything to learn from Saskatchewan? Romanow: The lesson is twofold. First of all, balance in budget-making is essential. To eliminate the deficit by simply eliminating expenditures is unattainable and undesirable. On the other hand, you cannot eliminate the deficit by tax increases only. Secondly, people will not like the decisions a government takes with respect to either expenditure reductions or revenue enhancements. But they will accept it if it is seen to be fair.

Maclean’s: How would you compare your approach to that of Alberta?

Romanow: There are some practical differences. First, it is generally believed in government circles that Alberta had an extremely rich civil service. If that’s right, there

was room to trim. But there is a philosophical difference as well. We believe that people are prepared to pay taxes for the provision of sensible, reasonable, purposeful government services. I believe that the philosophy in the Alberta government is contrary to that view. It seems to me that they size up the taxpayers’ mood to be one of reduction, some might even say elimination, of the role of government. I think that that direction is one which will, if successful, fundamentally alter the character of Canada. This character, that we believe in communitarian action through our government agencies, action such as medicare, should be much-heralded and supported. Maclean’s: How do you respond to people who say that your spending cuts have gone too far, that you could have chosen alternatives like investing in job creation? Romanow: Impossible. There is no way to grow out of this deficit-debt in Saskatchewan. That is not to say that you should not have incentives for economic development. But we examined this inside and out, because who wants to cut, and who wants to increase taxes?

Maclean’s: How difficult was it politically to close, or convert to clinics, 52 rural hospitals in a province that was the birthplace of medicare?

Romanow: Very difficult. People see in their communities not only a health centre, but an economic centre being affected. But our fundamental philosophy behind this change is that health is more than bricks and mortar, pills and high medical technology. We’ve tried to redirect money to wellness clinics—palliative care, respite care, education, nutrition, prevention against disease. The next stage will be home care for § seniors and looking after special needs.

I Maclean’s: Ralph Klein has attracted a lot § of publicity for his deficit-cutting efforts in Alberta. Is the imbalance in attention irritating? Romanow: I don’t feel jealousy about that. If I did feel any frustration, and this does not speak to Ralph Klein, it is with the lionization of the corporate world in Canadian culture lately, in the media. The message, which has a large measure of truth to it but which I think is over-stated, is that somehow we are incapable of managing our society’s values because of these huge international forces that are beyond our control. ‘If you don’t lower your taxes, your businesses are going to get up and leave for Chile or somewhere. You have to have the lowest Workers’ Compensation Board rates. Forget about occupational safety.’ The lionization of that ethic has irritated me because I believe that it is fundamentally un-Canadian and it’s a fundamentally flawed view of what makes good society. I have no beefs against Ralph Klein on a personal basis, or otherwise. Ralph may only be a current symbol of that lionization.