Category Archives: New Brunswick

Moving From Debt to Growth

S&P

Published in the Telegraph-Journal 17th May 2013

The recent downgrade of New Brunswick to AA-minus from A-plus underscores the extent to which the global financial crisis continues to cast its shadow on local economies. Standard and Poor’s (S&P) outlook change took place in June 2011 when New Brunswick became the only province with a negative outlook rating.  According to the credit agency, even with the downgrading, New Brunswick maintained a very strong capacity to meet financial commitments.

At the time, S&P explained their downgrading this way: “Credit concerns include our view of the significant deterioration in the province’s budgetary performance since fiscal 2009 , which continued in fiscal 2011. In addition, New Brunswick’s relatively high net tax-supported debt burden, rose further in fiscal 2011 to about 33% of GDP from about 30.6% in the previous fiscal year. The province expects it to rise further to about 36% in fiscal 2012. The negative outlook reflects our expectation that New Brunswick’s budget plan will not be enough to return the province to a balanced budget position in the medium term.”

Although the downgrade has had no immediate impact on the province, the longer-term effects may be more profound, albeit manifested in subtle ways. Some of the effects of a ratings downgrade are straightforward and manageable. The underlying differences in fundamentals — the set of economic indicators, institutions and policy frameworks that shape the economic outlook — between an AA-minus and an A-plus bond arguably are only minor. Prudential regulations restrict some large institutional investors from holding any asset that is not rated A-plus but this is not an insuperable obstacle to investment.

A small change in fundamentals can result in a relatively large change in bond yields. If the change in yields is large enough and the stock of debt correspondingly high, there is the real possibility that the province could suffer a vicious circle of rising risk premiums and increased debt charges with the consequence of deteriorating economic performance.

There is an expectation that New Brunswick eventually will need greater access to capital to play a more active role in its economic renewal. To achieve this, the fundamentals will need to slant in the province’s favour. Government’s solution to the challenge to date has been to reduce government expenses to draw down its costs. It has been unable to engage in more aggressive austerity policies but additional reductions in health care costs will come with increased unemployment and slowed economic growth. The public policies that will support greater efficiencies — and which will provide real solutions to the growing constellation of health care challenges — will be more transformational than incremental. These policies will require budgets and long-term spending commitments, if they are to reduce costs over time.

To reduce the risk to the province, government would need to avoid introducing discontinuities in the set of policy choices in favour of smooth, orderly adjustments. This may require more time to achieve. Ratings agencies have confirmed their conditional confidence in the direction of the province’s finances. To some extent, the expected sequence of events that will eventually lead to the province’s financial health has already relieved some pressure on New Brunswick and delayed the implementation of greater austerity. The success of this strategy will depend in part on the ability of Finance Minister Blaine Higgs to gain traction on his deficit reduction plans. But success will additionally be predicated on economic growth.

This is where the province’s downgrade could have disproportionate and unexpected effects in the longer term. New Brunswick’s credit worthiness is a synthetic composite of risk and expectations about the future. The objective of government should be to move from current conditions characterized by concerns about the speculation of out-of-control deficits and growing debt, to a desirable equilibrium of improved public finances and a return to growth where government is a committed player.

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Filed under Austerity, Economic Growth, Fiscal Policy, New Brunswick

Troubling Signs on the Economic Horizon

washington

Published in the Telegraph-Journal 3rd May 2013

We didn’t need to review the data to know that the New Brunswick economy has not fared well in recent years. The combined effects of the decline of traditional industries such as the forestry, weakened U.S. markets in the wake of the 2007-2009 financial crisis and cutbacks in government-sponsored construction have resulted in low or no growth across the province.

The output numbers tell part of the story. The province saw GDP fall by 0.6 per cent in 2012 after increasing only 0.2 per cent in 2011. According to Statistics Canada, goods-producing industries fell 3.6 per cent with declines in construction, mining and the energy sector, while manufacturing declined 1.6 per cent. Services output barely rose at 0.4 per cent in 2012 with marginal gains in finance, insurance and real estate services.

Unemployment has maintained a persistently high level and sits at more than 20 per cent in much of the province outside the three cities in the south. Despite the efforts by the Alward government to reduce its costs, the fiscal deficit continues to grow as does the net debt. The latter has climbed to more than $10 billion.

The U.S. is New Brunswick’s most important export trading partner. A particular concern continues to be the American economy which has effectively stalled since the financial crisis.

On the face of it, an American economic recovery seems to be well underway. The U.S. GDP expanded at 2.5 per cent on an annualized basis in the first quarter of 2013, following marginal growth for the previous three-month period. But even this apparently positive figure masks other more disturbing signs that an economy whose recovery has not matched the pace of past expansions could now be facing a deceleration in its own modest growth rate.

In fact, adjusted for those changes due to temporary fluctuations in inventories maintained by corporations, the U.S. economy’s annualized growth rate shows a steady deceleration over the past three quarters, falling from 2.4 per cent to 1.9 per cent to 1.5 per cent. Other economic measures, from retail sales to the index of leading economic indicators, exhibit symptoms of fragility or even outright declines. The alarm has been sounded by numerous investors who are now concerned that the U.S. has entered yet another spring slowdown.

It is possible that the U.S. economy is merely in transition. But this time may be different. First, after adjustment for inflation, wage compensation hasn’t increased since 2010 and in the absence of higher incomes, consumers have been reluctant to increase their purchasing to pre-recession levels, even with record-low interest rates.

The weakened EU economies have made it much more difficult for the U.S. to increase growth by boosting exports. Today export sales are barely growing, and sales to Europe’s hardest-hit economies have actually declined.

In the interim, Washington’s dysfunctional politics has resulted in numerous unproductive policy moves, instead of the reforms that are sorely needed. And while the U.S. federal deficit has been significantly reduced, the sudden contraction in growth will serve to slow the economy even further, reducing growth in America’s economic output this year by as much as 1.5 per cent. That loss in economic activity will equate to 1.5 million fewer jobs.

In spite of the weaknesses in global economies, the New Brunswick government has admitted its spending cuts and the lack of major infrastructure projects on the horizon will impede economic growth in the province.

“Reduced levels of public sector capital spending along with the absence of any new major projects in the private sector will limit the contribution of capital investment to economic growth. As well, fiscal consolidation at all levels of government will serve to weaken overall economic growth.” Mr. Higgs said.

In the circumstances, it is critical for the government to revisit its commitment to what has become a counterproductive push for austerity. The New Brunswick economy shows little capacity for sustainable growth in the short term. It is necessary now to ensure that the capacity of the economy to recover in the medium term is not jeopardized.

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Filed under Austerity, Fiscal Policy, Job creation, New Brunswick, U.S.Economy, Unemployment

The Economy Isn’t Working As Planned

higgs-alward

A substantial amount of public support for fiscal consolidation is predicated on the assumption that profligate government spending has been responsible for fiscal deficits and debt. But New Brunswick is a clear example of how revenue shortfalls, as the result of lowered taxes, have conspired with too-low spending to create a fiscal imbalance. Policies aimed at reducing government deficits and debt accumulation have increased unemployment at the same time that they have been fiscally counterproductive.

Published in the Telegraph-Journal 26th April 2013

Today’s economy wasn’t part of David Alward’s plan. Before taking office in 2010, his campaign pledge was that he would “lower small business taxes, freeze power rates, increase the budgets for tree-planting and woodworkers, and put more decision-making power into the hands of local economic development agencies” to restore the province’s economic health.

Three years later, the health of the economy has scarcely improved. The most stark evidence of this failure is on the fiscal side. Standard & Poor’s Rating Services downgraded New Brunswick’s credit from its A-plus grade to AA-minus over fears of its high tax-supported debt and the long-term demographic trends facing the province. In 2009-2010, New Brunswick had the second largest deficit in Canada as a proportion of GDP and it has been growing steadily. The interest on the net debt reached $643 million in 2010-2011, even with record-low interest rates. The rating agency says the Alward government is on the right track to turn the situation around. But it is clear that fiscal consolidation has become mired in the reality of near-zero GDP growth.

New Brunswickers are acutely aware that things aren’t working as planned. Since 2010, unemployment has risen to over 10 per cent, real wages have fallen and despite record-low interest rates, businesses are not investing. The federal government has made changes to Employment Insurance prompting Premier Alward to call for a moratorium on the new provisions until more study is done on their impact. The response of a record number of New Brunswickers to the moribund economy has been to join those who already have sought more favourable employment conditions in Alberta, Saskatchewan and Ontario.

New Brunswick joins those jurisdictions in which the practices of fiscal consolidation have only worsened an already bad set of economic conditions. Even austerity hawks have begun to reconsider whether the cure is more onerous than the disease. The International Monetary Fund said this month that “it may be time to consider adjustments to the original fiscal plans.” The IMF may have been referring to Great Britain, but the observation is equally relevant to New Brunswick.

The question is what kind of adjustments would work in New Brunswick at this stage. Mr. Alward and Minister of Finance Blaine Higgs blame the fiscal situation on years of profligate government spending. Mr. Higgs has on numerous occasions said that the government plans to stick to the economic course it has set which focuses on reducing government expenditures to kick-start growth.

A growing chorus of economists and policy makers argue that there are some things the government could do to spur growth without risking a large increase in the budget deficit. The simplest would be an injection of investment in infrastructure such as roads, bridges and schools. The logic is that such projects create jobs and generate business investment. They could get off the ground almost immediately, yet would not add significantly to the deficit because they are financed by long-term borrowing. There are a significant number of infrastructure projects across the province that would meet an urgent need, from the building of water treatment facilities to hospital improvement to school repair. Each of these projects eventually will need to be undertaken anyway but with record-low interest rates, these projects today represent a real bargain.

The challenge even to this relatively modest undertaking is that infrastructure development requires government funding. Government however, has borrowed beyond its ability to pay, at least according to the bond ratings agencies that are watching this province closely. This offers the politically partisan opportunity to criticize Mr. Alward and his party but New Brunswick has supported heavy government spending for far longer than Mr. Alward has been premier. New Brunswickers today enjoy the legacy of substantial government spending in health care, education, roads and pensions. But this has occurred at the same time that taxes were reduced to levels that ultimately have proven to be unable to sustain this spending.

Mr. Higgs is right that unbridled spending has been the primary cause for the province’s financial mess. But increasingly, being right may not be enough.

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Filed under Austerity, Fiscal Policy, New Brunswick, Unemployment

Start-ups Are the Key to Our Future

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Published in the Telegraph-Journal 19th April 2013

In a province where traditional industries have been in decline, substantial reliance has been placed on new business formation to support New Brunswick‘s economic growth. But entrepreneurship has always been a risky proposition. Whether launching a tech start-up, a small business, or an initiative within a large corporation, the odds are overwhelmingly against the entrepreneur. Harvard Business School researchers have recently estimated that more than 75 per cent of all start-ups fail.

For decades, business founders had been taught that success involves writing a business plan, pitching it to investors, assembling a team, introducing a product and selling it as aggressively as possible. This is the conventional approach and prevailing wisdom of business schools, government economic development agencies, financial institutions and investors.

But recently an new methodology has called into question the logic of business planning and discarded much of what we thought we knew about the process of starting a company. Called the “lean start-up“, this new methodology favours “experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development“.

One of the forces behind this new methodology is Steve Blank, a consulting associate professor at Stanford University, National Science Foundation principal investigator at the University of California at Berkeley and Columbia University and extremely successful founder of numerous high-tech start-ups.

Blank holds that business plans are one of the fundamental reasons why failure rates among start-ups are so high. The traditional business plan typically includes a five-year forecast for income, profits and cash flow. The assumption behind writing a business plan is that it is possible to figure out most of the unknowns of a business in advance, before funding is raised and the idea is actually executed.

According to Blank, “no one besides venture capitalists and the late Soviet Union requires five-year plans to forecast complete unknowns. These plans are generally fiction, and dreaming them up is almost always a waste of time.”

Conventional business plans contribute to the likelihood that entrepreneurs who can convince investors to fund them then begin to build the product in isolation from their markets, with little if any customer input. Too often, after months or even years of development, entrepreneurs learn the hard way that customers neither need nor want most of the product’s features. And in today’s fast-moving markets, even good ideas can be made obsolete very quickly.

Blank concedes that business success is predicated on too many factors for one methodology to virtually guarantee that any single start-up will be a winner. But on the basis of hundreds of start-ups, in university programs that teach lean principles, the more important claim can be made that using lean methods across a portfolio of start-ups will result in significantly fewer failures than using traditional methods. In the last five years alone, more than three dozen universities have begun to incorporate the lean start-up methodology in their program portfolios, with immediate and documented success.

A lower start-up failure rate would have profound economic consequences in New Brunswick. The province’s economy increasingly is being buffeted by the forces of globalization and disruption. Its traditional industries are rapidly losing jobs, many of which will never return. To ensure economic viability in the long term, the province must rely on successful entrepreneurship. The growth of jobs across the province will need to come from new ventures, and all New Brunswickers have a vested interest in fostering an environment that helps them succeed, grow and hire more workers. The rapid expansion of start-ups is critical to supporting the transformation to an innovation economy. Universities, government, financial institutions and investors each have a key role to play.

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Filed under Business strategy, Education, Innovation strategy, Job creation, New Brunswick, Universities

Maritime Union Not the Answer

maritime union

Published in the Telegraph-Journal 30th November 2012

Every few years, the concept of a Maritime union recirculates as a solution to the economic challenges of the region’s three provinces. On the heels of a recent economic summit in Halifax, the Universite de Moncton’s Donald Savoie raised the idea again.

Professor Savoie stated that he would like to see a formal union between the three Maritime provinces.

He is not alone. Three Conservative senators from Atlantic Canada are pushing for a Maritime union, proposing the merger of the Maritime provinces into a single political entity to turn around the region’s faltering economy. Stephen Greene of Nova Scotia, John Wallace of New Brunswick and Mike Duffy of Prince Edward Island have written a detailed proposal for a union of their three provinces that is slated to be released late this week.

The proposal will include how power and political representation would work as well as an idea for the name of the new province.

A key advantage often touted by supporters is that the creation of one jurisdiction would lead to the elimination of duplication of services and the establishment of economies of scale. Senator Duffy has characterized the potential advantages as similar to retail economics where “big-box stores can offer lower prices because they buy in large volume.” This shared-services logic follows not only from private sector strategies of consolidation and standardization, but key initiatives undertaken by government.

But the real challenge is political will.

Canada has been recognized worldwide for the development of leading-edge government reorganization models. Released in 1995, Treasury Board’s “Blueprint for Renewing Government Services Using Information Technology” was a pioneering approach to government shared services. Seventeen years later, many of the Blueprint’s recommendations have gone unheeded and implementation has been slow.

An additional feature of a Maritime union presumably would be the political rationalization and consolidation that would increase the region’s influence and power in Ottawa. The idea that a Maritime union would give a single voice to the region is a powerful one as reflected by Ron MacDonald, then-MP for Dartmouth, who wrote in 1995, “If or when the constitutional debate begins anew, it will be vital that the Maritime provinces speak as one.

“Our interests are similar, if not identical, yet are seldom presented as such.”

The cardinal assumption of many who support a Maritime union is that the current arrangement of provincial governance is one that features extravagant “jurisdictional anomalies” unlikely to survive exposure to the new global economy, as noted by University of PEI professors Barry Bartmann and David Milne. “In this metropolitan view, smallness means weakness, lack of power and influence, whereas consolidation and rationalization are the essential logic of our time. Integration alone holds promise in savings from culling jurisdictions and reallocating resources, and in providing a sound and rational foundation for good government.”

But it is not clear that a new Maritime Union would provide a solution to the challenge of having to support the disparate interests that would continue to exist within its borders. In 1998, Aubrey Cormier, an advocate of Acadian interests from P.E.I., said, “If the Acadians are included as full-fledged partners in the integration process, the realization of a Maritime political project will without doubt be much more feasible.

“On the other hand, if they are excluded as they were when the Maritime provinces were first created, this could prove to be a major stumbling block for the proponents of Maritime Union.”

In a regional project of economic renewal, greater collaboration would increase the prosperity of the region. But in the absence of a political union, the Maritime provinces have already worked on reducing bureaucratic barriers to trade and labour.

More can be accomplished but this proven model of collaboration could be extended to ensure that provincial governments are less rivals in pursuit of limited economic prospects rather than partners in a more expansive vision of the region. This much less ambitious approach of working within established bureaucratic parameters can be undertaken today.

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Filed under Maritime Economic Community, New Brunswick

In Health Care Cost Cutting Will Not Be Enough

Published in the Telegraph-Journal 30th October 2012

Healthcare spending in Canada, which annually consumes in excess of $200 billion, has emerged as this country’s biggest source of anxiety over public spending.

Canadians generally are committed to continuing our current system of government-funded healthcare that is free to all Canadians. The cost of healthcare has risen but the simple solution of adding more money without first making fundamental changes has not been successful. The $41-billion increase in federal transfer payments to the provinces initiated in 2004 by then-Prime Minister Paul Martin was intended to end healthcare funding problems for a generation. Instead, it has become one in a series of healthcare public policy miscalculations.

In December 2011, Finance Minister Jim Flaherty outlined Ottawa’s newest healthcare funding plan. Federal transfers for healthcare would continue at six per cent until 2016-17. After that, the federal government plan will have transfers move to a system that ties increases to the growth in real GDP plus inflation. Mr. Flaherty called the plan, which was not open to negotiation, an effort to move toward responsible spending.

“Our public health care system is a source of pride to all Canadians,” Mr. Flaherty said. “We all want to see a strong, sustainable system that is there when we need it for today and for our children and our grandchildren tomorrow.”

In New Brunswick, where the cost of healthcare is $2.8 billion a year or approximately 40 per cent of the total provincial budget, Health Minister Ted Flemming is promising to put a full-court press on healthcare spending.

“We are going to create a target to bring our healthcare spending in line with at least the national average, if not better than,” said Mr. Flemming.

Premier David Alward recently referred to measures government is undertaking to achieve reductions in healthcare costs. The New Brunswick government plans to eliminate the duplication of services in addition to reviewing administrative, supervisory and management functions for savings. He added that alternative service delivery – potentially leading to the integration of FacilicorpNB operations with the Department of Government Services – could also achieve cost reductions.

“Are there areas for shared services where the system can work more efficiently and ultimately more effectively?” Mr. Alward asked. “We have seen some of the success that has taken place with the renewal within general government”.

The initial priorities identified through the government healthcare reform process are focused on achieving management efficiencies within the healthcare system. The New Brunswick government also plans to implement health innovations and best practices, although it has not yet selected an innovation strategy.

New Brunswick “has started to put a curb on (healthcare) spending, but we cannot get there alone,” Mr. Alward said. For this reason, government has indicated that system-wide changes will be fueled through collaboration with established boards, agencies, organizations and health-service providers.

But will cost cutting measures be enough?

There is no doubt that healthcare costs need to be comprehensively understood and more effectively managed. For example, a sustainable public health system information infrastructure is urgently needed. Despite the recent eHealth Ontario debacle, the deployment of an effective e-health, mobile health and tele-health infrastructure may become essential to provide services while managing cost in remote areas.

But simply reducing costs will not fix healthcare. The real issues lay below the surface, which include the challenges associated with end-of-life decisions, the increasing demands for seniors care, the pressures of emerging technologies and dramatic demographic changes. These issues will provide the foundation of sources of contention among Canadians. And in the background, the principles of our healthcare model will come under close scrutiny as Canadians review the limits of their entitlement and even entertain a two-tier service provision model. In New Brunswick, two official languages add complexity.

Healthcare reform will not stem from reviewing and implementing those initiatives that have proven successful in other jurisdictions. Healthcare reform in Canada will not be a simple matter of cost management. Instead, the philosophy, concept and practice of healthcare goes to the heart of what it is to be Canadian.

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Filed under Fiscal Policy, Healthcare, New Brunswick, Social contract

Health Care Has Become a Signal Issue of Our Time

Published in the Telegraph-Journal 19th October 2012

Canada’s publicly-funded health care system is poised to undergo its greatest reform since the signing of the Canada Health Act in 1984. The reasons for this pending transformation have much to do with health care’s financial unsustainability. A number of factors will drive changes in the total health care spending-to-GDP ratio over time. In New Brunswick, these factors include changes in the age demographics of the population because per capita health care spending increases rapidly beyond a mid-40s age threshold.

An additional challenge involves GDP growth that has effectively stalled while health care costs continue to rise by significantly greater than inflation. While New Brunswick’s fiscal deficit has been brought largely under control, government’s debt remains high. Historically low interest rates have helped to keep the government’s debt service costs low as well, but this is a temporary phenomenon. To compound the problem, global population aging is set to place upward pressure on long-term interest rates and therefore intensify debt service costs over the next fifty years.

Health care technology is one of the cornerstones of the cost challenge. Technology has increased efficiencies and dramatically improved the quality of medical services. Changes in medical technology and practices have had a material impact on health care spending. The introduction of more sophisticated tools has been shown to increase demand for health care services and raise costs. Pharmaceutical technologies have increased costs even more dramatically. In Canada, technology changes accounted for as much as 25 per cent of the growth in real per capita health care spending from 1996 to 2009.

Even with substantial health care reforms, a combination of initiatives will be necessary to cover rising health care costs. Individuals and employers may be faced with increased spending for government services in the form of fees or surcharges. However, the public may still see a reduction in government services. Increased taxes to finance the public share of health care spending may become necessary. Budgetary restrictions may lead to some form of co-payment spending by individuals on health care services that currently are provincially insured.

This could lead to the development of a privately funded health care system to provide better-quality care for those willing and able to pay for it. The UK and many European countries have this “two-tier” system, and New Brunswick already has elements of this system in place in the form of private clinics. The partial privatization of health care would have little impact on the rate of growth of total spending although it does alter the public-private split and has distributional implications. There is a greater risk that a weakening of the health care system will lead to a major degradation of publicly-insured health care standards such as longer queues, lower quality service provision and delisted products and services.

At the same time, technology will be one of the cornerstones of the transformation needed to realign health care with our fiscal reality. Over the course of more than 15 years, numerous attempts have been made to wield technology to introduce greater productivity into the health care system, but so far there has been little progress. Significant potential clinical and financial benefits would be achieved with the implementation and networking of health information technology (HIT), primarily through the widespread adoption of electronic medical records (EMR). By improving health care efficiency and safety, HIT-enabled prevention and management of chronic disease could significantly increase benefits.

However, in New Brunswick, these benefits are unlikely to be realized without related changes to the health care system. These changes amount to a full-scale transformation of health care, our fundamental assumptions about how it is provided and how we plan to pay for it.

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Filed under Economics, Finance, Fiscal Policy, Government transformation, Health Care, Innovation, New Brunswick