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Background
"An important part of having an open and accountable government is providing the people with information that is honest and true. New Brunswickers deserve an impartial, independent picture of the financial health of their province. They need to know that there is a long term plan to manage that financial health which is based upon honest accounting figures."
New Vision – New Brunswick
An imbalance between revenues and expenditures, declining federal contributions to New Brunswick's overall revenues and questionable accounting practices have resulted in growing debt and debt service costs, leaving the Province with a precarious fiscal situation.
In New Brunswick, from 1988-1989 to 1998-1999, total expenditures increased by an annual average compound growth rate of 2.6 per cent while total revenues have grown at an average annual compound growth rate of just 2.4 per cent. Health care expenditures alone, the single largest expenditure component, have grown on average by 3.7 per cent compared to the overall average of 2.6 per cent.
Health care's share of provincial expenditures has grown from 25.5 per cent in 1982-1983 to 29.9 per cent in 1999-2000. Education represents 21.2 per cent of total expenditures, and service of the public debt represents 13.1 per cent. Combined, these three expenditure programs, which continue to grow, account for more than 60 per cent of total government expenditures.
There is clearly a need to review and refocus spending priorities. As the following chart prepared by the TD Bank shows, New Brunswick is one of only three provinces in Canada that has had growing program expenditures from 1992-1993 to 1997-1998.
New Brunswick has seen transfers from the federal government drop from 45.3 per cent of total revenues in 1982-1983 to under 38 per cent for 2000-2001. Significant reductions to the federal cash transfer portion of the Canada Health and Social Transfer (CHST), in support of key social programs, including health care, have exacerbated the problem. For New Brunswick, transfers under the CHST will be approximately $85 million less in 2000-2001, than if the CHST cash transfer was restored to its 1994-1995 level.
In 1998-1999 the notionally allocated health portion of the Canada Health and Social Transfer covered only 12 per cent of provincial health care expenditures, half as much as the federal government contributed just a decade ago. This is a far cry from the equal partnership which existed between the federal government and the provinces when programs of vital importance to Canadians, such as Medicare, were founded.
The first step was to conduct an independent review of the financial affairs of the Province. Based on recommendations to correct certain accounting irregularities, New Brunswick's estimated surplus of $18.5 million budgeted for 1998-1999 actually turned out to be a deficit of $164.3 million. This resulted in a corresponding increase in net debt in that year.
The effect of expenditures growing faster than revenues is obvious. Left unchecked, the Province would face ongoing deficits growing to $425 million in 2003-2004.
The fiscal imbalance in the Canadian federation
In their December 1999 report "Improving The Competitiveness And Standard Of Living Of Canadians," provincial and territorial finance ministers concluded that rapid growth of some provincial expenditure programs will make it difficult for provinces to achieve lasting surpluses. The finance ministers recognized that a fiscal imbalance existed in Canada. The paper states:
"The emergence of large and growing federal surpluses reflects, to a considerable degree, a fiscal imbalance in the Canadian federation. The Constitution makes the provinces responsible for delivering programs subject to the greatest demand and cost pressure and for which taxpayers have the highest expectations: health, education, social assistance, infrastructures. These programs are also key tools for improving competitiveness. And yet, taken together, the provinces have less revenue than the federal government to fulfil these responsibilities. Moreover, the federal government has the greatest share of the revenue sources with the highest growth potential, particularly personal income tax of which the federal government collects over 60 per cent of total revenues."
Taking steps to address the problem
It is clear the solution to the fiscal structural problem has to be addressed on several fronts. Recognition of this problem motivated the provincial government's commitment to manage smarter and focus on public priorities. Beginning with the 2000-2001 Budget, the government is taking decisive action to correct the problem.
First and foremost, this is a balanced budget. It is also a budget that clearly supports the priorities of New Brunswickers. Enhanced support for health care and education, tax relief for individuals and small businesses, more efficient and compassionate government, all of these goals are reflected in the budget.
Achieving this balance has meant that the government has had to ask fundamental questions about priorities in order to make some clear choices to protect health care and education, lower taxes, and build new job opportunities. But as indicated by the independent financial review and an analysis of the fiscal structural problem, maintaining the "status quo" is not an option for New Brunswick. Initiatives such as the Program/Service Review and the Agencies, Boards and Commissions Review were established to help answer these questions, focus on the things that matter most to New Brunswickers, and ensure they can be delivered at a price New Brunswickers can afford.
Second, the Province will relentlessly pursue, with its provincial and territorial counterparts, the full restoration of federal transfers for health and other social programs. The pressures on health care are mounting across the country while the federal government benefits from record surpluses paid for by Canadian taxpayers. Under the Constitution, the provinces are responsible for providing large expenditure programs such as health care and education, yet it is the federal government that is benefiting from large surpluses. This imbalance must be addressed.
While the federal government has record surpluses and positive cash flows, the situation in New Brunswick is much different. Even in past years of modest accounting surpluses, New Brunswick continues to borrow to meet its cash requirements. This means the structural fiscal problem has never been fundamentally addressed and has resulted in overall increasing debt.
Third, the provincial government will build on a number of guiding principles established in its 2000-2001 Budget. The economy in New Brunswick is strong and projections are positive for the future. As outlined in the budget, the government will work toward creating an environment in which participation in our growing economy is rewarded and barriers to success are removed. In this way, New Brunswickers can share in the province's economic recovery for years to come, and the government can focus on delivering programs and services when and where they are most needed.
"Governing is about choosing – direction and priorities. … But as our province enters a new century, New Brunswickers want a new approach to government – an open, responsive government – to chart a new direction and set new priorities to meet their most important needs."
New Vision – New Brunswick
Why Program/Service Review was undertaken
Understandably, the Program/Service Review is viewed as a key element of the plan to address the structural fiscal situation and allow the government to focus on clear public priorities.
In New Vision - New Brunswick, a commitment was made to taxpayers to manage smarter through the reduction of waste, and the elimination of duplication and overlap in the delivery of programs and services in government. Ultimately, it was envisioned that the result would be a more efficient, better-managed government that provides needed public services at affordable taxation levels. Basic fundamental principles would govern the structure and function of the provision of public services to New Brunswickers, including:
Several facts were evident. The government could not meet its objective of "living within its means" with the fiscal and program structure it had inherited. Choices would have to be made. Government cannot do everything nor should it. The previous approach of financially squeezing every program rather than make choices was resulting in pressure on all programs and services to keep delivering more with less. Only by reviewing programs and services in a "horizontal" manner across all sectors could priorities be set, waste identified, resources allocated and choices made. The focus would have to be placed on essential services, and in the end, services considered essential must be funded from those no longer considered relevant.
At the same time, New Brunswick has changed economically and socially. Needs have changed. Priorities have shifted. At a time of strong private-sector-driven economic growth, the focus on creating jobs through corporate welfare has diminished. A growing, more resourceful private sector means alternative service delivery models can be considered where appropriate.
New Vision - New Brunswick also committed to the establishment of a special Waste Reduction Cabinet Task Force. With a mandate to identify and reduce areas of waste, duplication and overlap in government, its first task was to conduct a Program/Service Review, and make recommendations to Cabinet as a basis for future policy and funding priorities.
Five ministers were appointed to the Waste Reduction Cabinet Task Force: Hon. Dale Graham (Chair), Hon. Norman Betts, Hon. Kimberly Jardine, Hon. Norman McFarlane, and the Hon. Jeannot Volpé.
How Program/Service Review was done:
On August 10, 1999, the government approved a proposed process for a Program/Service Review. It was to be a systematic assessment of all government programs – employing over 32,000 public servants. During the evaluation process, the review was to be guided by five questions:
The job of coordinating the review was given to a steering committee comprised of four senior deputy ministers, including the Clerk of the Executive Council and Secretary to Cabinet, the Deputy Minister of Finance, the Deputy Minister, Premier's Office, and the Deputy Minister for Policy and Planning.
Four distinct phases to the review were structured:
Phase One: Identification and Description
The first phase was to be a detailed look at the way government conducts its business.
A format to facilitate the review was provided, with staff from the Department of Finance and the Executive Council Office working with senior officials from each department to develop comprehensive descriptions of all programs and services. Participation of the central agencies as part of the departmental teams ensured consistency in approach between departments.
Each department produced an inventory of all of its programs and services. The objective was to gather as much pertinent information as possible, using the 1999-2000 Main Estimates as a framework.
Program/service descriptions included details on:
Senior management in each department reviewed the reports, and they were signed-off by their respective minister and deputy minister.
Phase Two: Functional Grouping
The second phase of the review consisted of setting priorities, and programs and services were to be given priorities in the context of their relevancy to the future vision for New Brunswick.
As a result of the first phase, approximately 600 programs and services from across government were identified. At this point, programs and services were sorted, not according to department, but according to horizontal service groupings. These groupings included:
Phase Three: Priority Setting
Once all programs and services were assigned to service groupings, the priority setting exercise began. Each program (in each grouping) was rated either essential or non-essential.
To be considered essential, programs had to be seen as necessary:
In addition, other considerations in the evaluation of the programs and services included ensuring that all New Brunswickers would pay their fair share of government costs, that programs and services were an investment for future revenue generation as opposed to a continuing subsidy, and that they would help make government operate efficiently and effectively.
Those considered non-essential were evaluated in the context of whether it made sense to continue providing the program, whether there was a rationale for eliminating the program or if effective alternative service delivery options existed.
Phase Four: Impact Assessment and Implementation
Looking at programs and services in terms of the 12 service groupings provided the task force with a new perspective on the "business" of government. Rather than looking at a program or service in the context of the department that delivered it, this new sorting allowed the task force to look at the similarities in the programs and services delivered to similar types of clients. This "horizontal" perspective also allowed them to look for common objectives, modes of delivery, and client-base, and to assess the outcomes in terms of effectiveness and efficiency.
This process identified duplication, waste and overlap in evaluated programs and services.
The Program/Service Review has, to this point, accomplished a great deal. The first results are contained in the recent restructuring of government departments and priorities as well as the 2000-2001 Budget. However, there is still a considerable amount of work to be done that will continue, including implementation of announced changes and ongoing review of government programs and services.
Background
When Canada came into nationhood, both the federal and provincial governments were given powers to tax. However, the British North America Act stipulates that provinces are restricted to the application of direct taxes such as income and property taxes. Prior to World War II, both jurisdictions levied income taxes at different rates and on different bases, resulting in a complex and fragmented tax system.
In 1941, burdened with the costs of the war effort, the federal government asked the provinces to temporarily give up the right to levy income taxes in return for compensation. Over the next two decades various plans were proposed to deal with the allocation of taxation powers between the provinces and the federal government.
In 1962, New Brunswick and all other provinces but Quebec signed Tax Collection Agreements with the federal government. Since then, the federal government has administered and collected personal income taxes on behalf of the nine provinces. In this way, Canadians have been assured of a uniform system in which taxpayers file a single income tax return to one level of government. This system has served the provinces well, but it has been rigid in terms of what provinces can and cannot do with regard to their respective personal income tax systems.
Under the Tax Collection Agreements, the provincial personal income tax has had to be calculated as a percentage of the Basic Federal Tax in what has been called a "tax on tax" system. This has limited the ability of provinces to easily modify their respective personal income tax systems to adapt to various economic and social changes.
In the late 1990s, the provinces and the federal government developed a new system whereby provinces could apply provincial personal income tax directly to federally determined taxable income. By using taxable income as the base, Canada's personal income tax system remains uniform but provinces can exercise more control over how that base is taxed. Provinces moving to this system will have the opportunity to design their provincial personal income tax systems and better address the economic and social needs of their citizens. Within the next few years, most provinces will have adopted the "tax on taxable income" system.
"Tax on Tax" vs. "Tax on Taxable Income"
"Tax on taxable income" is a new approach to calculating the provincial personal income tax. As mentioned above, provincial personal income taxes have been calculated as a percentage of the Basic Federal Tax. In New Brunswick, provincial personal income tax has been calculated at 60% of Basic Federal Tax since January 1, 1999. The following table illustrates the differences between the "tax on tax" and "tax on taxable income" systems.
What "tax on taxable income" means for New Brunswick
The benefits of "tax on taxable income" to the Province include more flexibility in setting tax policy, greater ability to direct tax reductions to specific income brackets and more transparency in the provincial income tax system. In the long term, it also means the Province's personal income tax revenues will not be affected by changes the federal government may make to its tax rates and brackets or to its non-refundable credits. Having more control over provincial personal income tax revenues will be helpful in the Province's long-term fiscal planning.
More specifically, the Province will have increased flexibility in establishing its tax structure, with control over:
With respect to the Province's distinct block of non-refundable tax credits, the Province:
To ensure simplicity and consistency, the provincial credits would use the same definitions as federal credits, where federal definitions exist.
What "tax on taxable income" means for New Brunswick taxpayers
Moving to a "tax on taxable income" system means taxpayers will now have a better understanding of how much income tax they pay and to which level of government they pay it. They will also see the level to which the Province contributes to a number of tax credits. The federal government will continue to collect personal income taxes on behalf of the provinces through the Canada Customs and Revenue Agency. While taxpayers will continue to file a single tax return, they will notice a few changes to the tax form.
Converting from "tax on tax" to "tax on taxable income"
The federal government has agreed to allow provinces to make the transition to a "tax on taxable income" system for the year 2000 as long as the provincial system mirrors the federal system. Simply converting 60% Basic Federal Tax to a "tax on taxable income" system would result in the following rates on three federal brackets:
A new system and a $33 million personal income tax reduction for New Brunswickers
As announced in the 2000-2001 Budget, the government of New Brunswick is implementing a $33 million personal income tax reduction effective July 1, 2000. This represents a reduction in personal income taxes of roughly 5%.
The following table illustrates the tax savings for single New Brunswickers for a full year beginning July 1, 2000.
Making New Brunswick's personal income tax system simpler, fairer, more transparent and efficient
Simply converting from a "tax on tax" system to a "tax on taxable income" system does not take advantage of the increased flexibility the Province would gain by adopting the new system. However, adopting "tax on taxable income" is the first step in making New Brunswick's personal income tax system simpler, fairer, more transparent and efficient. The Province now has the opportunity to design its personal income tax system to better address the fiscal, economic and social needs of New Brunswickers. The government will explore ways in which to use this flexibility in order to bring about positive change to New Brunswick's personal income tax system. To this end, we will consider a number of important questions, such as:
How many tax brackets and at what income thresholds?
Should surtaxes be applied?
Should the distribution of the tax burden be altered?
How should tax credits be used?
How should government balance taxes and services, and what are the priorities for the future?
Conclusion
Beginning July 1, 2000, New Brunswickers will notice an increase in their take-home pay as a result of provincial and federal income tax reductions. As well, with the implementation of a "tax on taxable income" system, New Brunswickers will notice a change to their 2000 income tax form. While these changes represent significant developments for taxpayers in the province, the most important reforms to New Brunswick's personal income system will unfold over the next few years.
