RIGHTSIZING EXPENDITURES – THE BUDGET COLLOQUY (PART V )

Guest Post Written by JM

Rightsizing Expenditures – Where the Real Work Is Needed

John Maynard Keynes is perhaps one of history’s most influential economists.  His theories regarding the requirement for state intervention to moderate the natural “boom-bust” cycle of an economy has been especially en vogue since the financial crisis of 2008.  The basic premise of the theory is that government should borrow in periods of slow economic growth (or during a period of retraction), invest in infrastructure, and then manage the economy until it is stronger.

In Newfoundland and Labrador since 2006 the government has perhaps done the opposite of what would be advocated by Keynes.  Despite a strong economy fuelled by mining and offshore developments, the Provincial government commenced in 2006 a series of programs to further stimulate the economy.  They were represented by a general increase in spending of some 35% in real dollars, tax cuts, and a series of large infrastructure developments.  The latter included the massive Muskrat Falls public works project. 

The result was that in 2012 the political leadership proudly proclaimed our economy to be “white hot”

The white hot economy was fuelled by government stimulus, which, in turn, inflated salaries, drove up project costs, and allowed housing prices to increase at a pace far outside of inflation.  It was simply not sustainable and I am deeply afraid it will have a long term negative impact on the economy.

The result is that with an economic downturn driven by low commodity prices the province does not have the financial strength to be able to implement additional stimulus.  (I say “additional” as we are presently running a $2 billion cash deficit). 

Newfoundland and Labrador is an economic nomad.  We must get back to basics. 

As shown in Figure 1, a more realistic estimate of government revenue would suggest that government spending has to be reduced by about 10% to be sustainable over the next 5-10 year period.  In the opinion of the author the government should implement a 5 year plan to remove $700 million annually from the spending side of the budget, representing 10% in real dollars.    

Cutting 10%, in real dollars, is a daunting task.  However, it is a required action for a responsible government to make. 

After studying the estimates, I have attempted to identify where cuts might be make.  The following is a list of the modest ideas of the author.  Comments and suggestions are welcome in the comments section of the blog. 

1.     Public Service

In 2013 the province spent $3.8 billion on salaries.  Based on a long term revenue of $6.8 billion, the provincial government will be spending 55% of their revenue on salaries.  Next to commodity pricing, the size of the public service is the biggest threat to economy of the province.  The salary commitments will preclude the province from making key infrastructure investments, lowering taxes or other key initiatives to help diversify the economy.  As our population ages, and the requirements for health care increases the ability to serve these needs will be limited by the number of people the province has on staff. 

The salary growth of the public service employees will also limited by the size of the public service.  The top employees in the provincial government should, therefore, be just as concerned about the size of the public service, as I am!

There should be no doubt that any reduction in public spending needs to start right here.  

The author recommends that the government implement the following actions:

·     10% head count reduction in all departments other than health.  This includes Nalcor,           MUN, CONA, and other government agencies.

·       5% head count reduction in health.

However, in the public interest, union agreements will have to be ignored.  The reductions should be across all levels of government, and all positions (management and front line workers).  But it should not be based on seniority.  It should be based on performance!

The province should get rid of the dead wood!

As most people in business will tell you, a 5%-10% cut in head count will actually lead to better output.  The reason is that if you reduce head count based on performance, as opposed to seniority, you maintain your best employees.  The “lowest common denominator” is increased, and the improved output is increased.  Managers will tell you that the bottom 10% of staff take 30% of their time to manage. 

I am sure people will laugh when they read this recommendation.  My mother, who is a long time NAPE organizer, certainly did!  She told me that the union would never agree. 

The union management would never agree, but what about the membership?

Most people are not oblivious to the government's predicament. They know that their future raises, and pensions are all threatened by this fiscal reality.  Most union members also know that the ability to remove under-performers, will actually make life better for the average worker.   People don’t like working alongside dead wood.  It makes their job harder, and their workplace less pleasant.  

The province needs to tackle the size of the public service, first by cutting poor performers, but remaining staff ought to have the opportunity for better compensation. I suggest they should be offered an annual bonus mechanism linked to oil prices.  If the price of oil increases, and there is an increase in revenue, then part of that upside can be shared with them.  This type of bonus mechanism would represent a better compensation model than long term increases to salaries.

Of course, the unions would have to agree.  On this account, I am not optimistic! 

However, I would mandate that NAPE (and other unions) put the proposal to their membership.  The membership should have an opportunity to give input into the direction of the required austerity.  Given the choice of a 5 year wage freeze, and a strong likelihood of a cut based on seniority, or a 10% cut based on performance, I am pretty certain that human nature would prevail. 

After explaining this to my shop steward mother, she lamented: “in a secret vote, I would probably vote yes to that proposition”.

A cut based on performance based on seniority is the only way to maintain quality of service while facing our current economic realities.   This should result in savings of ~250 million per year.  The cuts should be implemented over a 3 year period. 

But I am fearful that even this magnitude of a cut will not be sufficient. 

2.    Professional Services

As documented in Part II of this series, government spending on professional services has gone from $280 million per year (1997-2003) to almost $500 million a year in real dollars.

As recently documented in the AG’s Report, many issues remain unanswered regarding how this work is identified, and how the contracts are awarded. I am not sure if people in government truly recognize how out of step the province is with OECD best practices for awarding such work.  By comparison, the system in this province is in great disrepair.

In the face of the current reality, I would cut $75 million from professional services over the next 3 years.  This is a coarse analysis.  But departments should be tasked with doing the work in-house.  Any work that has to be subcontracted, should be done in a manner that utilizes the public tendering system.  No longer should consultants be selected by the Minister, with budgets based on a proposal, as opposed to a competitive tender.  In addition, distribution of work among consultants should be based on performance, rather than on political connections.

I believe a good part of this targeted savings proposed could be achieved with true public tendering, using professional services only for “real” requirements; those that truly cannot be provided in-house.  One example of an unnecessary consultancy is the engagement of a consultant in to review how consultants are engaged. This is work that can easily be conducted in-house; the skill-set available at Confederation Building is simply not that deficient.

But the first step in cutting cost is to understand what comprises the $500 million spent each year in professional services. It is a staggering number; one that is completely disproportionate to virtually any metric for a province of its size and budget.

3.    Executive Council

The amount spent on executive council has grown from $19 million in 1995 (in 2015 dollars) to $60 million in 2015.  There are several actions which should be immediately implemented:

·     Women’s Policy Office:  The province spends $4.3 million per year on this Office.  I would take this outside government, and give 50% of the budget to the Status of Women Council to undertake the mandate.

·     Office of Climate Change and Energy Efficiency:  This is an office with a budget of $1.13 million.  I would eliminate it, and transfer the responsibilities to the existing staff within the Works Services and Transportation.

·         Office of Public Engagement:  The Office has an annual budget of $5 million.  I would remove it.  It should be completed by the existing communications people in each government department. Alternatively, the government should remove the communications staff from each department.  There are simply too many communications staff in government. 

·    Human Resources Secretariat:  Consolidation of the several of its departments including “opening doors”, “strategic staffing”, “strategic management” -  too many managers. 

·         Office of Chief Information Officer – hold all enhancements to IT programs. 

·       Labrador and Aboriginal Affairs Office – annual budget $4.2 million.  With 4 MHA’s I am sure the budget of this department could be cut 50%.

·         Muskrat Falls Oversight Committee:  This committee is duplicating work that Nalcor completes internally; it provides little, if any, real oversight of the project.  Mandating Nalcor to post all internal monthly reports on the internet would negate the need for this entire oversight exercise. With the information in the public domain, the media would complete the role of the oversight committee, in its current form.

·     Communications:  Again, we are a province of only 500,000 people.  I suggest a review of the entire government communications with the goal of benchmarking the staffing complement to private industries of similar size. 

4.    Legislature

The Legislature division of government has a $30 million budget in 2015.  In 1995 it’s budget was $10 million, in 2015 inflation adjusted dollars.  There has been considerable growth in the cost of the services this allocation is intended to fund.  They include: the office of the Auditor General, Chief Electoral Offices, Citizens Representative, Child and Youth Advocate, and Information and Privacy commissioner. 

I would reconcile the Child and Youth Advocate, Information and Privacy Commissioner, and the Citizen Representative into a single Ombudsmen office.   

Some may argue that this would weaken the service to the weakest members of society.  However, history has shown the greatest weakness of these separate offices is the public actually knowing they exist.  A single agency for which those in need could contact, would be a much stronger in this regard. 

Could a single agency perform any worse than the current incantation? 

5.    Advanced Education and Skills

This is a broad ranging department with an annual budget of $870 million representing a considerable expenditure on grants as well as programs.  I would recommend a full review of this department, particularly in the area of rural presence.  As part of this discussion we need to challenge the requirement that this department should have representation in so many nooks and crannies of the province.  However, some immediate actions might include:

·         Atlantic Veterinary College: Eliminate the $1.2 million grant for “seats”.  Let students apply competitively.

·         MUN:  An additional cut of $20-30 million.  Memorial University is getting fatter to server fewer local students.  A reality check is needed.  The first of those “reality checks” is that a province of 500,000 people can’t have a world class university, across all faculties.  It is irresponsible to even suggest it.  The university should review whether we should even continue with some of the more expensive faculties.  Perhaps the med school, for example, should be reviewed.  Although the budget comes via the Department of Health, the MUN medical school has an annual budget of $60 million per year.  It accepts about 80 students per year; only about 60 are local.  Is it not more cost efficient to pay other universities to train our medical students in more of the disciplines?

Medical schools are controversial topics.  So too is tuition.  Newfoundlander’s tuition is too low, and has to be increased.  Tuition fees should be increased by 25%. 

·       College of the North Atlantic:  The College has 17 campuses located in Newfoundland and Labrador.  This model was acceptable 25 years ago, when students from Fogo had perhaps never been further than Gander.  Things have changed.  Students from rural areas of the province are decreasing in numbers, but they are becoming worldlier.  CONA has to reconcile their campuses.  I would target a reduction of 5.    

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Editor's Note: 

Due to the length of JM's Budget Colloquy (Part V), he has chosen to state his ideas in two Posts. Look for the second segment to be posted soon..

 "JM" is a researcher and writer.   He is a frequent contributor to Uncle Gnarley Blog offering analysis of the Muskrat Falls project and on other issues, including the fiscal position of the Province. 

JM's essays include: IN NALCOR WE TRUST, Delusion and Deception (Part III), and The Snow Job (Part I).  The very latest Posts, on the 2015-16 provincial Budget, include IT'S THE SPENDING STUPID and The Budget Colloquy (Part 1): Put Him In The Round Boat Til He's Sober,  The Budget Colloquy (Part 2) Revenue Projections: Close Your Eyes, Make a Wish, Hope for the Best and The Budget Colloquy (Part 3) Whistling Past the Graveyard No More and  The budget Colloquy (Part-5) Getting Back to Basics. 

Having chosen to retain his anonymity, JM is prepared let his articles be judged on the research and argument each contains.