Manitoba - Some Future Budget Considerations

There was little mention of the global financial crisis in the March 25, 2009 Manitoba provincial budget, the theme of which was steady, balanced. In Part 2 of the budget coverage, some future considerations which will affect Manitobans are outlined in the editorial by Evelyn Jacks, below:

With Manitoba's diverse economy performing relatively well under the circumstances, the trick for Manitoba Finance Minister Selinger will be to pilot this year's "steady, balanced" budget into turbulent waters ahead. Three threats emerge for his consideration:

1. Our aging population. The decline in the share of the population of working age is common to most industrialized countries, but projections by the United Nations show that over the next 25 years, Canada will experience the second largest decline among G7 countries and the fourth largest among all OECD countries. An aging population will add to the shortages of labour that are already developing in our economy, putting downward pressure on living standards. At the same time, the aging of our society will create additional demand for health and social services.

How does this relate to our specific standards of living? Tax patterns tell the story:

In Manitoba we collect just under $12 billion in revenues with 21% of this coming from personal income taxes, 26% from retail sales, education property taxes and other taxes, 12% from other fees and 6.5% from Government business enterprises.

To zero in on the taxation side, here is how this shakes out for individuals: From 2007 data we know that 855,000 Manitobans filed income tax returns, and of these, 556,000 (65%) actually paid MB tax.

But who contributes the most to individual tax coffers? Based on a department of finance calculation last done in 2006, using 2003 tax year data, the breakdown looked like this:

• taxable income up to $30,000: 42% of taxpayers, paying 12% of tax;
• taxable income $30,000 to $60,000: 42% of taxpayers, paying 39% of tax;
• taxable income over $60,000: 16% of taxpayers, paying 50% of tax.

These folksóyoung professionals and top-of-career baby boomers represent a potentially diminishing tax base, without whose powerful tax dollars our standard of living will be affected. It is important to shore up this tax base to continue the revenue patterns this province has come to rely on.

2. Changes To Transfer Payments. By far the largest revenue line item for government however is federal transfer payments at 32% of total. This reliance on federal transfer payments can represent a large problem we are heading into with full knowledge in the near future, but one that we are seemingly unprepared for. Equalization measures a province's ability to raise revenues and in Manitoba we have previously received the 4^th highest amount after PEI, New Brunswick, Newfoundland and Nova Scotia.

Specifically, changes announced by the federal government on November 3, 2008 would permanently change the Equalization Payment formula by imposing a ceiling on the program. This could be particularly significant here, because Manitoba has enjoyed relatively stronger economic performance in the past several years than most provinces. As a result, Equalization Payments would begin to decline in future yearsóat the same time when tax revenues are expected to decline due to our global economic slowdown. While the impact will be tempered with a protection payment this fiscal year, there appears to be no vision for the longer term impact of such changes.

With federal transfers representing almost 32% of provincial revenues, (as compared to personal tax revenues which represent only 21%) Manitoba's standard of living may be at risk in the future in the wake of a disappearing boomer tax base. At the same time, the net per capita debt has risen from $8846 in 2008 to $9142 in 2009óan increase of over 3%.

3. Declining tax revenues ahead. Finally, tax revenues are projected to decline as a result of world economic events. Businesses deal with these scenarios by drastically cutting costs. Government has not done so yet, raising a potential debate between stimulating economies today at the expense of deficits tomorrow.

Baby boomers planning for retirement are certainly forward looking, and concerned about their wealth, and that of the country poised to cover their needs in old age. For them, the question to consider is whether temporary tax reductions and deficit spending serve them and their heirs well in the long run? This issue was not addressed in the budget.

Next Week: Part 3 - What can we do about this: Building Successful New Economies