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.