Q&A segment

Okay, today I will play a little ‘Dear Abby’ segment. I received this email from someon this morning:

Dear It’s the Economy, Stupid (or just plain Stupid for short):

I saw an Alberta-based pundit say something on Newsworld last night that caught my attention, and I thought I’d throw it at you for your reaction. It was about the new premier of Alberta, and she was arguing that all of Canada has a stake in Alberta’s boom continuing, because all of Canada benefits from it. People in Hamilton and Montreal, she said, manufacture much of the equipment used in Alberta, for example. And, she said, Atlantic Canada benefits because outmigration means a lower unemployment rate here — and some of the workers who go west even send money home!

Now here’s my question. You have written at length — eloquently and accurately in my view — about the cost of outmigration: Labour shortage, smaller tax base, etc.

Is there any possible theoretical argument that the benefits of Alberta’s boom to us — lower welfare costs, for example, because of fewer unemployed people as a result of outmigration, or increased federal income tax revenue from all the workers out there, which help fund national programs — outweigh the cost?

I’m not suggesting they do, but I’d be curious to read your thoughts on whether there is any credible argument that we do, indeed, derive a net benefit from Alberta’s boom and the resulting demographic shift? I’m genuinely interested in your answer.

Dear Emailer:

This is an excellent question (or series of questions) for the self described Stupid one.

Does Atlantic Canada benefit from Alberta’s boom?
Certainly. The royalties and taxes flowing into the Federal coffers are used in part to fund the Equalization program (and several other programs for which NB gets a disporportionate share of benefit). Without this, New Brunswick’s government would have a serious challenge making payroll every other week.

But we need to differentiate between the indirect financial benefit from Equalization and the secondary argument that Albertans are using about attracting Maritimers to move west. This is a whole other kettle of fish.

Communities need people. Emptying out our communities and sending them to Alberta has, in my opinion, no benefit and in fact is a serious problem. Welfare rates have been going down in recent years, that’s true. The Alberta effect may be the cause of this. However, the data is clear that more and more of our skilled workers are moving West. In addition, we have data that shows on average out-migrants are more educated that the average guy/gal that stays here (like me).

And our young people are moving at an increasingly alarming rate. Consider this. There are two stages in life when people are the most burdensome on the public purse – when they are young and when they are old. In between, when they are working, they are in most cases net contributors to the pie. So, what we are doing in New Brunswick is acting as the labour market incubator for Alberta (and BC and Ontario). While a person is basically a cost to the system (aged 1-22), they live in New Brunswick. They go to school on the public dime. They use the public system in various ways. The go to subsidized universities here (we still have above average rates of university students – but underaverage rates of university graduates in the workforce). Then when they are about to start paying real taxes – they leave for Alberta or Ontario or BC. Then, when they are done working, many of them move back here (in-migrants are increasingly older than out-migrants). This is okay. I think it’s neat that expats move back here to retire but their investments/RRSPs are funding companies in Ontario, Alberta, Georgia and Bangalore so their direct taxes paid in New Brunswick – in most cases – is less than what they are taking out in health care and other social costs.

So, that is a very long winded way of saying that emptying out New Brunswick of people is not the way to go. We need a certain critical mass of tax payers to allow us to pay for the social infrastructure that we all want. And we do not have that critical mass and every year we are increasingly dependent on Equalization because we are not even holding at a steady state.

Therefore, I would make the case that the overall Alberta boom is a serious problem for New Brunswick and unless things change, it will end up in badly. As I have stated before, if the population continues to decline and if Equalization continues to rise eventually the national government will force a systemic change on us. At the current growth rate of Equalization and the current decline rate of population – within 20 years or so it will cost the government twice as much per capita to offer public services in NB as in Ontario (for example).

Think about this simple example. There are something like 450,000 taxpayers in New Brunswick. However, many of these are at the very low end of the taxpaying system. There are really only about 300,000 taxpayers of any consequence and we have a provincial budget of close to $6 billion – or $20,000 per taxpayer. We also know that corporations (small and large) pay almost no taxes at all directly in New Brunswick (it’s about 3% of the total provincial take) so the potential for more there is limited.

So project this out 20 years. Let’s say that # of taxpayers drops to 250,000 or lower. Based on historical projections, we know that conservatively the provincial budget will double or more in 20 years. As a result, we will need $50,000 per taxpayer to meet our basic provincial obligations. Now this is a crude example because it doesn’t account for inflation or other external factors.

But it doesn’t take a rocket scientist to understand a basic economic development fact. A province needs to be able to increase own-source tax revenues at a rate more or less consistent with the increase in government spending.

So, let’s turn to an issue that is near and dear to Stupid’s heart – attracting our share of global business investment.

Microsoft established its European headquarters in Ireland a few years ago. In a five year period, the company paid almost $1 billion in corporate taxes alone. This doesn’t include the hundreds of millions paid by its staff in Ireland or property taxes or the VAT or any other taxes. One billion ($200 million per year). In other words, Microsoft pays more in one year than all companies in New Brunswick combined. In the 2006/2007 budget, it states that New Brunswick companies pay $178,400,000 in corporate income tax (total).

So for me that’s where are mindset needs to be. Not shipping out our best and brightest to Alberta to feed their labour needs but building our own new industries and collectively solving our labour challenges through an effective immigration system (and by repatriating ex NBers – over 500,000 have left since 1976).

Alberta has a fast growing energy sector. Fine. Good for them. That sector is expected to generate some $80 billion new global investment and the 10s of thousands of jobs flowing from that. Fine.

New Brunswick needs to grow its own industries. What will they be? Well, energy in Saint John could be one. What else?

Shawn Graham wants to eliminate the Equalization requirement within 20 years. Neat goal.

Without factoring the cost of all the services that would come with those folks, we would need at least 100,000 more high paying jobs in New Brunswick right now to eliminate this premium ($1.5 billion/$15,000 in provincial t
axes paid = 100,000). There are less than 200,000 jobs in New Brunswick right now that I would consider ‘high paying’ (meaning they would generate $15,000 in provincial taxes -income/pst, etc.).

So, again realizing the crudeness of that example, you can see that Premier Graham has his work cut out for him.

So, in conclusion, I believe that when an Alberta-based pundit says that out-migration is good for the Maritimes this is to ease the guilt felt by the average Albertan – many of whom are first or second generation Maritimers themselves and who most likely feel some pangs of regret when they see the majority of their home communities in decline.

Out-migration, if not checked and checked soon will lead to serious and possibly terminal consequences for New Brunswick.

Dear reader, when you are old and grey, you may be living in a new territory called “The Maritimes” with a capital in Halifax and about one million people scattered around the region either in small retirement communities, small service oriented cities or primary industry extraction (we will still need trees in 30 years or so). I am not sure we will be fishing, however; as Dalhousie researchers just concluded that within 50 years there will be no fish left.