Under-Taxed Nova Scotia

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Every year for more than two decades, the Nova Scotia government has spent more money than it has taken in.

This has led to a debt of more than $11-billion, requiring interest payments that, even at today's modest rates, gobble up 20 per cent of the provincial budget.

There is a broad consensus that this is unacceptable. John Hamm's promise to eliminate the deficit over three years played a big part in his surprise 1999 election victory.

So far, Hamm's government is admirably on track toward meeting that commitment. It appears within reach of a balanced budget in fiscal 2002-2003.

Progress has been aided by financial reporting that gave an accurate picture of the province's books for the first time ever, by conservative forecasting and by a booming Ontario economy that swelled equalization payments beyond expectations.

A government that delivers what it promised seems a good bet for re-election, especially if it can pull the last rabbit out of the hat, a 10 per cent income tax cut in the last year of its mandate.

Suddenly, the fiasco created by Bill 68 has put Hamm's peaceful re-election cruise in jeopardy.

Health economists are doubtful whether the government can achieve its fiscal targets, let alone a $130-million tax cut, after an arbitrator chooses between contract proposals from the province and unions representing more than 9,000 health care professionals.

The province claims that its offer of 3 per cent increases in each year of a three-year contract would cost $100-million. Nurses - whose real wages have fallen by 7 per cent since 1990 - have demanded increases totalling 20-25 per cent over three years.

If the arbiter's final selection comes anywhere near that amount, it will blow a big hole in plans for a $130-million tax cut. Thousands of other government workers whose contracts expired months ago are waiting with demands of their own.

The picture may not be quite as bleak as it seems, however.

The winner-take-all method that let the government bail out of its disastrous strategy creates an interesting dynamic. Each side must proffer its best contract offer, and the arbiter can pick only one, with middle ground.

This encourages both sides to moderate their positions. If either party stays too far out on a limb, it's likely to lose. Nurses and other hospital workers will be taking an awful gamble if they stick with demands for 20 per cent raises. The government will likewise be foolhardy to hold its previously immutable position.

The $100-million costing of the government's offer is also misleading. Since the increases are spread over three years, the annual impact, even in the final year of the contract, is more like $50-million.

The furor over Bill 68 raises basic questions about government priorities. The strong public support that nurses enjoyed throughout the crisis confirms the high value Nova Scotians place on stable, government-funded health care. Most people dislike paying taxes, but it appears Nova Scotians like uncertainty in health care even less.

This begs a question hardly ever asked before Bill 68: Do Nova Scotia voters want a tax cut, even at the expense of having nurses and other health-care workers angry and resentful at the working conditions imposed on them?

Hamm's answer, when I put this question to him in a legislative scrum ten days ago, is that we have no choice. "We have to cut taxes to remain competitive," he said. "And being competitive is what will eventually get us out of this mess."

His view reflects two rarely challenged assumptions: That our notorious debt results from overspending, and that we are overtaxed relative to other provinces.

There is an alternative explanation, however. It's possible that our debt results, not from overspending, but from under-taxing.

This surely runs counter to our intuition, to our irritation at paying taxes that seem plenty high enough, and to the familiar mantra of all governments that spending is out of control and we have no choice but to cut programs. Health care in particular, we are constantly told, is soaring out of control.

Except that it isn't. In Nova Scotia, as in Canada as a whole, the percentage of our gross domestic product spent on health care has remained almost constant for the last decade. That measure, cost as a percentage of GDP, is the most accurate way of deciding what we can afford as a society.

But aren't we overtaxed? Not by comparison with other provinces, we aren't.

As part of its method for computing equalization payments, Ottawa calculates each province's capacity to generate revenue from thirty seven different provincial sources. On average, over a five-year period from 1995 to 2000, Nova Scotia's tax effort relative to its capacity stood at 92.4 per cent of the national average. Only Alberta collected taxes at a lower proportion of its (much higher) capacity.

For a heavily indebted province whose basic public programs - health, education, welfare, and transportation - are in disarray, it is irresponsible to contemplate tax cuts. That's the real message of the public reaction to Bill 68.

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