The 2013 Federal Budget probably disappointed people who might have been hoping for a change in the slow growth in federal transfers to First Nations or major new initiatives.  There was slow growth or cuts in most expenditures and a lot of tweaking around the edges.  However, this is going to be typical of federal budgets for the next twenty years.  We know this because an aging society means the costs of programs directed to the elderly are gradually but irreversibly crowding out spending in other areas.  The slow erosion of per capita funding to First Nations is similar to what is happening to a lot of so called "discretionary” expenditures.  
 
The math is irreversible.  Older Canadians are retiring.  They are putting pressure on old age security and provincial health care.  This must all be paid for from a workforce that is shrinking in relative terms.  When the number of people receiving government services (retired Canadians) rises faster than the people paying for those services through taxes(working Canadians) then something has to give. In fact, it would be accurate to say
that politics over the next twenty years is going to be very different from politics of twenty years ago.  In those days, it was still, “who gets what?”  Today and in the future, it’s “who is
going to pay for services to retired Canadians?” Or more accurately who is going to pay
for the costs of an aging society.

Answering the question “who is going to pay?” will imply a steady litany of funding cuts or tax increases. There will be serious differences between the political parties about who should bear the burden but regardless of the political party, tough choices will have to be made. The news however, is not all bleak for First Nations.

For the first time, federal and provincial governments are“discovering” First Nation potential.  In a 1999 pre-budget submission we wrote for the AFN we predicted this very outcome.  An aging society is making it more important that each person of working age be employed, and if possible, employed in a good paying job.  And First Nations are the fastest growing component of this labor force.  While there might be some pressure to reduce transfers, there’s more interest now than ever before in initiatives that create business on reserve and put First Nations people to work.  Also significant is the fact that there is a real shift underway in our major trading partners.  There’s strong demand emerging for Canadian resources in the so-called emerging economies. Some may balk at the idea of Canada being only “hewers of wood” but in fact, resource development is a high-tech industry in many respects and it brings high paying jobs and resource royalties and offers a real chance to affect some of the irreversible math that aging will otherwise have on Canada.  A significant number of these jobs are going to be in places where a large portion, or often a majority, of the workers are First Nations.  Any government is going to prefer training First Nations people for these jobs over bringing in foreign workers.  And finally, the government has recognized that in order to take advantage of demand for resources, it needs the support of First Nation governments.  
 
That support is going to be difficult to secure so long as resource development creates far more revenues for the federal and provincial governments in a First Nation’s traditional territory than it does for the First Nation government itself.  In a nutshell that is what is going to change over the next five years.  It can be through revenue sharing, tax collection, or enhanced transfers but the federal and provincial governments are ready to make deals.  

That is not to say that these deals are going to be easy to make.  However, Fiscal Realities Economists can help.  We can start by making you aware of what kind of revenues a resource project will generate beyond royalties that only exist during the operating phase of a development.  We can help you identify how much of these revenues are flowing to First Nation services. We can help you to negotiate an agreement that provides sustainable revenues to raise the standards of First Nation services and improve community infrastructure. Generating independent revenues and building an economy from the resource development opportunities is the real name of the game for First Nation leaders in the coming
generation. 

This is the 3rd and final post of Facing the Fiscal Reality. This post will address what the current fiscal environment means to First Nations in Canada.

We can break this down into three points. 

First, federal support for First Nations is already not keeping up with inflation and population growth. The fiscal reality is that competition for federal revenues is going to grow substantially over the next twenty years because of cost pressures on age driven programs such as health care and old age security. The demographic reality is that the requirements of First Nations are going grow at the same time because of a higher birth rate. The political   reality is that increased First Nations need is going to be competing  politically with demands from people who are seeing themselves grow poorer. We believe that a strategy based on increasing federal contributions is going to be extremely difficult in that political context. 

A strategy based on developed on economic and fiscal powers now, will on the other hand find a growingly receptive climate. The appetite for initiatives which can be demonstrated to improve productivity is going to grow. The federal government is also going to be forced out of the current system of bureaucratic oversight and control because its per capita costs and personnel requirements dwarf the oversight afforded to local governments. The emerging fiscal and economic crisis is going to eventually lead to an acceptance of new a real reassignment of fiscal powers and responsibilities. Government is going to conclude that the present system of Departmental oversight and responsibility is simply unaffordable.  

Second, First Nations are a younger population than Canada as a whole. They are going to pay a relatively higher price as a population for past policies which transferred wealth from young to old.  
 
Finally, the Budget has framed the productivity challenge quite well. What it doesn’t say, but is nonetheless well understood, is that the First Nations share of this labour force is growing. If First Nations people remain underemployed the prospects of Canada growing collectively poorer will also grow. The government appears to recognize this and this likely provides a partial explanation for why it has chosen to actually increase funding for First Nations education at a time when many program areas are facing modest restraint.

We believe however that no First Nations development strategy is going to be truly effective without a strategy for allowing the market to work on First Nation lands. The former USSR was successful in educating population but not in raising living standards simply because it did not let the market work. A market strategy requires a new regime of property rights for First Nations, greater clarification of First Nation responsibilities and greater authority at the local level. At the present time, First Nations and Canada are simultaneously paying substantial bureaucratic oversight and the resources to navigate that bureaucratic system. It is generating some successes in developing First Nations. However, it is doing this one project at a time. This needs to change and the First Nations Property Ownership Act will change it, and it will change it in a way that requires less government. 

We are only at the beginning of what is going to be a long and potentially divisive process of addressing the implications of an aging society. Simply put, if we can’t improve productivity substantially, we are going to get poorer collectively. There are already substantial constituencies betting on this outcome and working towards ensuring that they don’t become poorer individually. We believe that the country would be better off having the question out in the open. People need to understand that full indexing of government salaries and double and triple dipping doesn’t enhance everyone’s economic security. In fact, it will make some people a lot worse off.  

If the pain is equally shared, there will be greater support initiatives which make us collectively better off and less towards strategies which divert the pain from one group to another. If the pain is shared equally then there will be broad support for strategies that rethink government in a way that improves productivity and efficiency. If the problem is fully understood, there will be a growing appetite for initiatives which lead to better educational outcomes for First Nations or increased participation by First Nations in resource development. 

However, we should all recognize that “who pays?” is going to be a big question for Canadian politics over the 20 years and people who pretend it’s not happening are likely thinking, “you, not me”. This fundamental question may never be explicitly stated, but this doesn’t mean it won’t be answered. The people who don’t understand the question, for what it really is, are going to like the eventual answers the least, and pay the most.

In Part I of Facing the Fiscal Reality we discussed how Canada has finally begun to address the implications of being an aging society. Part II focuses on the question "who pays?"

If we, as Canadians, become poorer these events will take place and they will be collectively borne by the Canadian public. However, how much of the burden we each shoulder individually will depend very much on decisions made by government and this is why it is important to be under no delusions about what this government or any government is deciding. They are deciding how much the public sector pays versus the private sector and they are deciding how much younger Canadians pay versus older Canadians. 

To understand this, we need to understand the current situation. Over the last forty years public sector employees have enjoyed a steadily growing wage premium over the private sector, in part due to a heavy subsidization of their retirement plans. A typical federal public servant contributes only 37 per cent of the costs of their pension benefits versus 100 per cent for a private sector employee. Stated more bluntly, private sector employees not only contribute to their own pensions but also to much richer, on average, public sector pensions. Public sector workers do not contribute to private sector pensions. Furthermore, this public sector pension is fully indexed against inflation and ultimately guaranteed by the taxpayer. In other words, if our current record of poor productivity growth continues, and we do get poorer, the current plan is for much poorer private sector workers to further subsidize this public sector plan. 

It’s not surprising in light of this that public employees retire younger and with higher incomes than private employees. It is a wide and growing inequity. This Budget is a watershed for one important reason. It takes the first baby step towards reversing this trend. The government has announced its intention to review pensions for Members of Parliament and federal employees. However, let’s not fool ourselves. A “review” is not a change. It’s simply testing the political winds. And make no mistake, the people who designed these inequitable policies also benefited from them, so do not expect any talk of rolling their pensions back, although this has happened in other countries. The plan appears to be one of imposing the change on future employee and future Members of Parliament. 
 
The apparent intention of the Government to ensure that only its younger employees bear the consequences of the adjustment provides a useful segue to the issue of how governments determine “who pays?” question across different age groups. It’s been remarked in some quarters that this Budget risks,“generational war”. This is a mistake. In one sense, generational war has been underway for forty years. It was really ushered in the 1970s, when governments began to run large program deficits. A program deficit is a situation where spending minus interest costs exceeds government revenues. The federal government ran program deficits for roughly ten years in the 1970s and most of our national debt was a result of our inability to control the resulting interest costs. In fact, what happened is that in the 1980s, governments were forced to run program surpluses despite large budget deficits. 

The practical meaning of these “program surpluses and Budget deficits” is that people entering the workforce in the 1980s began to get considerably less per tax dollar than the people who came before them and these inequities widened in subsequent years. The federal Budget deficit was, in fact, a large transfer of wealth and income from these generations to those that had come earlier. In light of this it is not surprising at all that this period  saw a concentration of wealth in older Canadians and income declines in younger Canadians. There was a steady decrease in retirement ages from the 1970s through to the 1990s. 

Stated another way, young Canadians are at the wrong end of an intergenerational wealth transfer. Their parents and grandparents paid less for their services than they were worth. They passed the rest of the bill to the young who have to pay more for services than they are worth. This is how one generation transfers wealth to the other. In previous generations the transfers used to go from old to young. 

This Budget actually exacerbates the intergenerational transfer of wealth from young to old. The decision to gradually raise the age of eligibility for old age security will not affect anyone over the age of 54. Now, there is little doubt that we need to rein in the costs of this program.
However, the decision to delay the implementation of these policies simply means larger adjustments will be forced on later retirees. It also means that the people responsible for creating the federal debt will pay the least for this adjustment. 

However, this raises another point. The generational war is still really a war of ideas. There are no shortage of older Canadians who have recognized the need to make social programs and living standards sustainable long after they have passed on. These are people who have argued for balanced budgets and a scaling back of unsustainable remuneration and double and triple dipping pensions. There is also no shortage of younger Canadians who have taken to the ramparts to defend policies which would exhaust social programs and leave them burdened with debts like Greece.

Subsequently, what does this all mean to First Nations in Canada?

This is the first Part of three installments of Facing the Fiscal Reality:

Budgets are generally analyzed for their major initiatives and announcements. Typically they announce a new program or a major tax change. Yet, all too often their most meaningful aspects are not announced or analyzed at all. The 2012 Budget is like this. There was one major announcement; the decision to gradually raise the eligibility for old age security from 65 to 67. It might be concluded that there is little of great interest in this Budget. This would be a mistake.

This is a very fateful Budget and it can be boiled down to one issue. Canada has finally begun to address the implications of being an aging society. Being an aging society means, as the government points out, two workers will have to produce as much value by 2030 as seven did in the 1970s. If they aren’t able to do this, then we will become collectively poorer. If we become collectively poorer, the question become who will become individually poorer and
by how much.   

What does “getting poorer” actually mean? In its most obvious sense, it means less take-home pay or discovering that our money doesn’t go as far as it used to. However, it could also mean some combination of poorer health care, poorer pensions, larger class sizes or higher tax rates. In this sense, we would become “materially poor”. And it could also mean people having to work longer hours or retire much later in life. In this sense, we would become“time poor”.   

None of these consequences is very attractive. So the government, quite correctly, devotes considerable time in this budget to addressing how we can avoid becoming poorer.  

We can avoid becoming poorer by producing more value from each worker. If we’re lucky, the resource boom will continue. When resource prices rise, it automatically makes workers more productive. If we couple this with improvements in our resource management, trade arrangements and transportation infrastructure we would likely see productivity improvements. The Budget quite rightfully devotes some discussion to this and to the consequences of lengthy, sometimes confused, approval processes. 

The government also addresses two other items aimed at improving productivity: getting better value out of government and improving our innovation performance.

A detailed analysis of either of these things would require considerably more information than was available in the 2012 Budget. At present, we can just note that the challenge is correctly stated. If we can make government more efficient and improve our innovation performance, then we will improve productivity. 

To understand the issues concerning government productivity, we need to understand one thing. Costs in many program areas of the federal and provincial governments are already growing faster than our ability to pay. Cost pressures in many of the same areas will increase still further as society ages. Either we are looking at large tax increases, which will likely further dampen productivity growth, or we’re going to have to find other ways to provide
many of these services.  

Innovation refers to the application of ideas, such as scientific research, to products or production systems so as to increase the value of the products or reduce the costs of producing them. Either way, this increases productivity. Innovation lies at the heart of the productivity challenge. Successfully innovative economies eventually become the richest economies. The Budget again states the challenge well. Canada makes enormous investments in training and education. Despite this, our performance with respect to innovation lags well behind most First World countries. If this doesn’t improve then obviously our productivity challenge will become more difficult. 

While the Budget is very explicit in articulating the issues surrounding our productivity, it is just the opposite in framing the issue of “who pays?” if we fail to meet this challenge. In fact, it’s not stated explicitly at all. However, we should not be under delusions. If we don’t become more productive, we will become poorer. If we become poorer, it means some combination of the following events:
(a) taxes will rise;
(b) government services will be cut back;
(c) wages and salaries will decline;
(d) pensions will be reduced;
(e) price levels will rise;
(f) people will have to work longer hours; and,
(g) people will have to delay retirement.

The events marked (a) to (e) imply that we will become materially poorer. The events (f) and (g) imply we will become time poorer.