lABOUR’S ECONOMICS EXPERT

Direct Examination – by gARTH SMORANG

We’ve seen the last of Smorang-the-Smasher and I miss him already. Although I may seem to be a little fan-girl about him, that’s not really why. As he chainsaw’d his way through the various massacres, there was a part of me that wanted to be up there in battle, deep in the carnage and getting all bloody. (That’s appalling. Scratch that … it’s the fan-girl thing …)

Dr. Eugene Beaulieu impressed me even before he began speaking. He sat in on the economic evidence of Dr. Di Matteo to help Garth plan the attack. Even then, every thing about him said earnest excitement. He was a little nervous, and we learn that this is his first time being an expert witness. But, his intent focus on doing his job, and only his job, was even more pronounced.

How an expert witness understands their role begins and ends with how it is explained to them, which in turn depends on how well the lawyers prepare them. But, even with the best preparation, experts are by their nature, generally opinionated, and so there is always a risk of them creeping their own opinions of what they should be saying or doing in. Dr. Eugene “the Earnest” Beaulieu was a lawyer’s dream, firmly focused on the only the task before him – explaining the economic issues to help the court understand them.

Dr. Beaulieu is a professor of economics at the University of Calgary. He has all the usual exceptional academic qualifications. But I like him even more when he says that his job is empirical economics. Oh yes. This I can believe. Give me some concrete calculations of what actually is, as opposed to what, all things being equal (which they never are), they some day might be.

correcting the course?

According to Dr. Beaulieu, the economic evidence suggests that Manitoba has a strong, growing, stable economy. There is no financial crisis; there is no dire need. While there is a budget deficit that should be managed, Dr. Beaulieu did not see anything that indicated that extreme measures were necessary.

And he would characterize the Public Services Sustainability Act as an extreme measure. Why? Because it is harsh (hard on public sector employees), and because there are other more moderate and prudent ways of reducing the deficit. Steering a government’s economy is like steering a ship. You don’t want to try to stop on a dime. You take slow, well-thought out, small corrective actions in sequence so that you gradually get there.

You can cut expenditures and you can increase revenue or both, but whatever you choose, those choices should be balanced and implemented in a moderate and timely fashion.

Dr. Beaulieu acknowledges that there are always political issues that may intrude on the process, but says that even so, political choices should be made by looking at the economic options, and selecting the best (most economically sound) course of action.

It is true, of course, that deficits aren’t good and fiscal responsibility requires that you take steps to manage them. But you don’t have to engage in harsh cuts in order to do so. For example, Quebec went from a deficit of $695 million in 2017, and by 2019, they were in a significant surplus. Dr. Beaulieu says that they did this through textbook ways of managing the deficit – cautious and measured actions.

While  Dr. Beaulieu agrees with Dr. Di Matteo that you do not want to keep running deficits and therefore adding to your debt (this makes people like the IMF nervous), he points out that you don’t have to do it through legislated wage freezes. You can raise taxes, and reduce other expenditures, which is exactly what the Government of Canada did when they reduced the Debt to GDP ratio from 62% in 1997 to 37% in 2004. (Hey, I remember that. Thank you Paul Martin.)

goldilocks again

Although Smorang already talked about all this stuff with Dr. Di Matteo, we get a short recap. Yes, yes, Manitoba is always in the middle of the muddle, and its financial position is not at all unusual as compared to the rest of Canada. Our current fiscal situation is neither really spectacular, nor really dangerous. Just middling. We’re in the middle here and we’re in the middle there. We’re not in as good of shape financially as Alberta (but then again nobody is), and it isn’t nearly as bad here as it is in Ontario.

As it happens, our Debt to GDP ratio of 35% is another place where Manitoba is squarely in the middle. And Dr. Beaulieu then gives some very helpful information about when the Debt to GDP ratio is too high and why.   

Japan’s Debt to GDP ratio is 240%. That’s really high, and that’s really bad. The economic danger zone starts when the ratio starts to approach 90%. At that level, it starts to harm your economic growth (which in turn, I gather, makes it even harder to reduce your debt, and so it all starts to spiral out of control).

Once you reach this threshold, you are risking the need to implement really harsh austerity measures. No government wants to have to do this, because it causes a great deal of suffering and unrest. But if you end up in this situation, like Greece did a few years ago, you are left with little choice. In Dr. Beaulieu’s opinion, however, wage freezes like the Public Services Sustainability Act should be reserved for these truly extreme situations.

To put Manitoba’s Debt to GDP ratio of 35% in context, it’s right in the middle of the Canadian provinces (4^th of 10 or 6^th of 10 depending on how you list them). The Government of Canada’s Debt to GDP ratio is 62%, which is a little high, while the USA’s is at 104%. They are clearly in the danger zone and economically in need of some correction.

manitoba’s fiscal management

Dr. Beaulieu has some concerns about how Manitoba has been managing its finances.

The words in the 2017 Budget were good – fixing the Province’s finances in a responsible, prudent manner. But what they were actually doing? Not so much. Reducing taxes is reducing revenue and that’s the wrong direction, in these circumstances. Furthermore, it doesn’t seen fair for the Province to be increasing spending in some areas, while at the same time they are decreasing spending on the wages of public employees through the Public Services Sustainability Act.

As for the Rainy Day Fund, it’s a good idea to have one. It helps smooth out unexpected bumps in the financial road. But you add into it when you have a surplus. When you are in deficit, you let it drop or leave it alone. And putting $407 million into the Rainy Day Fund when you have a deficit? No, says Dr. Beaulieu, that doesn’t make sense. You would expect the government to either use that money to reduce the deficit or pay down the debt.

“It doesn’t seem to be all hands on deck to me when you look at the public employees,” he says.

As he finishes his sentence, I finish his thought:

Again, the numbers surprise me. According to Dr. Beaulieu’s calculations cutting the PST by 1% alone is more that they would save from the Public Services Sustainability Act. I see. So you didn’t have to do it. You just wanted to be tax heroes – the equivalent of Garth buying his kids bicycles.

And, it’s an actual expense. Because the PSSA freezes wages at 0% for the first 2 years, if you assume an average increase in the cost of living of 2%, what it means that in real terms, the people affected by the PSSA are making 5.68% less.

Finally, again as already mentioned, Dr. Beaulieu is of the opinion that the government’s history of getting their deficit forecasting so consistently wrong, is an indication that their budgeting competence is not strong.

summary

Oh good. I do like a summary to wrap it all up.

In Dr. Beaulieu’s opinion:

When the Government of Manitoba announced the Public Services Sustainability Act in 2017, the facts of its fiscal situation did not support a conclusion that such action was needed, particularly harsh action like placing a disproportionate burden of reducing the deficit on public employees.

Dr. Beaulieu’s concerns aboutthe PSSA, were amplified by the fact that:

1. Other actions were being taken that were going in the opposite direction, i.e. decreasing taxes and increasing other expenditures;
2. The Province has been constantly overestimating the deficit by significant amounts (presumably poor forecasting is also an indicator of poor planning);
3. The Auditor-General has issued qualified opinions for the past two years, and these are very serious matters.

All of these things suggest to Dr. Beaulieu that in fact there was and is no need for the Public Services Sustainability Act.

And he ends by asking – why would you put all the onus on public servants by making them shoulder a disproportionate share of the burden?

That’s a good question, I think.

CROSS-EXAMINATION – BY michael conner

Let’s see if Michael Conner can get better answers for the government to some of these questions.

This was actually where I thought Dr. Beaulieu shone the most. It is really tempting to not want to agree with anything the opposing lawyer says, simply because they are the opponent, and you think that any agreeing will hurt your side. But, that’s a mistake. If the other lawyer asks you to say something that is true, then don’t wiffle, don’t waffle, don’t collect $200 or go straight to jail. Just say yes.

So, when Conner asks Dr. Beaulieu –

   Conner:    You say there was no financial crisis, but there were real fiscal challenges, weren’t there?

   Dr. Beaulieu: Yes.

   Conner:      If interest rates suddenly get higher for whatever reason beyond our control, that could be a problem if you have lots of debt, right?

   Dr. Beaulieu:   Yes.

  Conner:       You want to reduce the rate of growth of your expenditures to match the rate of growth of your economy, right?

  Dr. Beaulieu:    Yes.

Beautifully done, Dr. Beaulieu, because look at what happens next:

   Conner:       A government has many priorities, a myriad of concerns, for example they have to worry about spending money on mental health and schools, right?

   Dr. Beaulieu:    Well, yes, but if you are trying to reduce the deficit, reducing taxes is going in the wrong direction, especially the PST.

   Conner:      But not all economists would agree with you about that, would they?

Dr. Beaulieu:       Yes, they would. Economists generally agree that a consumption tax is very efficient, and if you are going to cut taxes, the PST is the wrong tax to cut.

  Conner:      But doesn’t that kind of cut increase spending because of all the extra money that it would put into the economy?

  Dr. Beaulieu:    Nope. All the research says that increasing discretionary revenue of the taxpayers has a negligible effect on spending, and since it doesn’t lead to increased spending, it doesn’t grow the economy.

It comes across as exceedingly credible when Dr. Beaulieu is as forthright and straightforward in saying yes, as he is when he feels the need to say no.

It gets a little mushy here as Conner tries to suggest that there may be compelling public policy reasons for increasing spending, cutting taxes, and putting money into the Rainy Day Fund. But it doesn’t seem very persuasive because it is hard to imagine what public policy needs would be so great and immediate that they would completely overwhelm all other financial concerns, and Conner doesn’t give any examples to illustrate.

The rest of this section was little quibbles and quarrels. I gather that there was some suggestion that Manitoba was playing more accounting games by not reporting their cannabis revenue, but in fact Conner informed Dr. Beaulieu that there was a reason. Ok, point to you. Perhaps the government wasn’t gaming their finances. There.

a question of fairness

Uh-oh. Here we go. Another round of the government trying to say that an expert who says that something isn’t fair, isn’t giving an expert opinion, but rather a personal one. Time for a rant.

I went to the same law school as every lawyer in this room. I can’t be the only one who had the late Butch Nepon for Administrative Law. Now there was a man who cared – he cared about his students, he cared about the law, but wanna know what he cared about most of all? Fairness.

I can still hear him as we waded through weeks of classes on “Fundamental Fairness.” What is fair? Well it depends. On what? Well that depends too. The principle of fairness is, in law, an objective standard whose application and conclusion, does, as Professor Nepon always said, depend on the context. It is not, however, some subjective application of your personal value system.

Professor Nepon, we still miss you and let me one more time salute you for all that you did for and shared with Manitoba law students.

As it happens, Dr. Beaulieu holds his ground. It puts an unequal burden on employees in the public sector. So, you can call it fair or unfair or whatever you want. It’s still an unequal burden (which, objectively, is unfair.)

but they still get their step increases

This is when this argument finally became clear. It goes like this:

Many collective agreements include step increases year over year, within the same position.

Most step increases would be around 7% over two years.

So, except for the people already at the top of the step grid, public sector employees’ actual wages will still increase, even though their net salary will be reduced by 5.68% (due to cost of living increases).

Yeah, their wages will increase, by 1.32% instead of 7%, which means that those employees will still have lost 5.68% that they would otherwise have been entitled to if the Public Services Sustainability Act had never been existed.

How is that not still a loss, even if their salary goes up? I don’t find this convincing.

A small parting shot

Conner clearly hasn’t been channeling the Smasher’s cross-examination plan – end with a bang (like Does that surprise you?).

Instead, Conner again suggests that Manitoba’s current Debt to GDP Ratio isn’t that good, and something should be done about it.

Dr. Beaulieu agrees, but says that the way the Public Services Sustainability Act has been implemented, it puts all of the burden of reducing the deficit on the shoulders of public sector employees.

With that final word, Dr. Beaulieu is done.

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

And so are we. With the testimony anyway. The case resumes February 18-20, 2020, when the lawyers will put all of this together in final arguments.