Understanding the Romanow - Calvert Economics

-- a Book Review by John Warnock --


For Briarpatch Magazine.

The New Saskatchewan NDP

by John W. Warnock

Janice MacKinnon has recently published her political memoirs: Minding the Public Purse; the Fiscal Crisis, Political Trade-offs, and Canada's Future. In case you don't remember her, she was elected Member of the Legislative Assembly from Saskatoon Westmount in the NDP sweep in 1991, immediately became part of Roy Romanow's "war cabinet," and served for five years as the Minister of Finance.

Her story is a partisan defence of the Romanow government and the changes it made to the New Democratic Party. This is the first insider report of those years and should be required reading for those interested in Saskatchewan politics and the politics of the political left in Canada. She documents the shift in ideology of the Saskatchewan NDP from the social democratic Keynesian welfare state orientation of the T. C. Douglas and Woodrow Lloyd governments (1944-64) and the Alan Blakeney government (1971-82) to the neoliberal pro-business approach of the Roy Romanow and Lorne Calvert governments (1991-2003)

The heart of her book is a defence of the fiscal policies of the Romanow government.
The battle she describes is never with the political right and its allies in the business community.
The struggle of the Romanow government was always with the "left" and "leftists," who include the trade union leadership, particularly those in the public service unions, social justice organizations, writers like Linda McQuaig and Murray Dobbin, Briarpatch Magazine, the Canadian Centre for Policy Alternatives, the Saskatchewan Alternative Budget, and social democratic professors. In government, the new group of NDP leaders is constantly in conflict with the "old NDP," those who had ties to the Blakeney government and wanted to continue to pursue an active, progressive government. They also have to do battle with the membership of the NDP, who are still foolishly tied to Keynesian social democracy.

MacKinnon praises the Blakeney government for balancing the budget on a regular basis,
but she is critical of it for "raising the expectations" of the people of Saskatchewan, leading
them to believe that they could afford extensive social programs like subsidized drugs for the elderly and dental care for children. She insists that the province does not have the resources to support such programs.

Setting the new direction of the party

She does agree with Briarpatch Magazine and other leftists on one key issue. We argued (June 1992 issue) that the direction of the Romanow government was basically set at the April 1992 three-day meeting in Saskatoon between the inner circle of cabinet ministers and 35 important business leaders. At this meeting the NDP government assured business leaders, as Mackinnon puts it, "that we would not return to the 1970s, with its high royalties and big government, but would create the right climate for investment." The new
economic development policy was formally set forth in Partnership for Progress, released in November 1992. It pledged that the NDP government would create a "competitive tax regime" [with Alberta], reduce government red tape, train the workforce, and build required infrastructure and research facilities. Emphasis was to be put on creating "a regulatory and taxation environment in which it is easier for business to operate."

The new NDP policy ruled out regaining control over the privatized Crown corporations in the natural resource sector or creating new ones to aid economic development. At best the NDP would create "innovative public-private partnerships." Soon after this meeting the Romanow government established an industry-government committee to revise oil and other royalty rates. They were not raised back to previous levels, as promised
in the 1991 election, but lowered below those set by the Tory government of Grant Devine. Other tax breaks for business followed.

Prior to the 1991 campaign the NDP caucus had released a document, Tax Fairness for
the 1990s. It pledged that an NDP government would introduce a social democratic tax policy,
progressive taxation based on ability to pay. It called for corporations to pay their fair share of taxes and denounced the Tory government for cutting resource taxes and royalties. The 1991 election platform, The Saskatchewan Way, promised to repeal the Provincial Sales Tax, introduce the "wellness system" to health care, improve farm insurance programs, bring in an Environmental Bill of Rights, introduce a comprehensive energy conservation strategy, eliminate poverty in the first term of government, and balance the budget. A public opinion poll contracted by the NDP and released in November 1991 revealed that Saskatchewan citizens wanted a real change in policy direction, with first priorities on job creation and the elimination of poverty. There was no concern expressed in the size of the government deficit.

The people of Saskatchewan did not give the NDP a strong election mandate just to continue the unpopular policies of Grant Devine's Tory government. As MacKinnon stresses, the first task for the new government was to change public opinion.

Confronting the Tory deficits and debt

During the election campaign the leadership of the NDP stressed the fiscal mismanagement of the Tory government and the government's involvement in the financing of private corporate megaprojects. In November 1991 the new Romanow government appointed the Financial Management Review Commission, chaired by Donald Gass, a Saskatoon chartered accountant. Everyone knew that its job was to present the worst possible picture of the fiscal mess created by Grant Devine's Tory government. They did their job well. It is not possible to examine this process in detail here.

Briefly, the Gass Commission reported that the budget deficit for 1991-2 was $975 million, nearly three times as high as the Tory estimate. The total public debt was set at $12.7 billion, of which $8.8 billion was accumulated budget deficits and $3.9 billion borrowing by the Crown corporations. It reported that provincial employee pension plans had an unfunded liability of $3.1 billion, and $1.7 billion in investments and loan guarantees were at risk. The commission concluded that the NDP government had "no alternative" but to reduce expenditures, to downsize the government, and to reduce "the expectations of what the Provincial Government is able to do." The accountants added that "our economy can no longer support the public sector infrastructure that we have built to serve the quality of life and the standard of living that we have come to expect."

The "left" feared the worst. The Saskatchewan Government Employees Union hired Professor Jim Sentance, chair of the Department of Economics, University of PEI, to do his own assessment. A Keynesian economist, he attacked the accounting system used by the Commission, noting that it was not used by any other province, and argued that it presented a distorted view of the province's financial situation. True, revenues
were down, but they would recover with the economy. He pointed out that the borrowing and debt of the province "was in the same league" with the rest of Canada and was nothing exceptional.

Debt financing as a percentage of expenditures, at 10.5 percent, was not untypical. Much of the seemingly high budget deficit was due to one-time write offs of poor investments and the impact of the recession. But no one in the business community, the media or the political elite wished to hear this case. It was time for the new policies of neoliberalism, being implemented by Labour governments in New Zealand and Australia.

The first NDP budget, under Finance Minister Ed Tchorzewski, is described by MacKinnon as "a landmark in Saskatchewan history." The trade unions, the Saskatchewan Coalition for Social Justice, and the NDP pressured the government to continue the CCF-NDP traditions. They failed. The NDP government argued that the budget deficit had to be reduced by major cuts to social programs, including health and education, and off loading on the municipalities and school boards. Revenues were to be increased through a higher sales tax and tax on fuel, plus a 10 percent surtax on top of personal income taxes. Some business taxes were raised and others lowered. The inflated deficit was "cut" to $500 million.

The key issue of resource revenues

You didn't need a doctorate in economics to find the cause of the provincial debt and persistent budget deficits. A quick glance at the provincial budgets over the 1980s clearly shows that the deficits were due to a decline in revenues caused by the reductions in taxes and royalties on the resource extraction industry. As Allan Blakeney and others often stressed, in a hinterland economy like Saskatchewan, unless a fair share of the economic rents from resource extraction goes to the public in the form of taxes and royalties, the government cannot afford to finance the social programs demanded by its citizens.

In the last two years of the Blakeney government, royalties and taxes accounted for 33 percent and 43 percent of resource industry revenues (or sales). In the first term of the Devine government, they fell to below 25 percent and below 14 percent in the second term. While the volume of resources extracted steadily increased, and industry sales increased dramatically, the share of resource industry sales going to the public treasury fell to a low of only 11 percent in 1991.

As Doug Elliott reported in Sask Trends Monitor (April 1990), if the Tory government had maintained the royalty rates at the levels set by the Blakeney government, the revenues collected over the 1980s would have covered the Tory deficits and debts.

Colin Thatcher reports in his memoirs that when he proposed a cut in the royalties for oil extraction during the Devine government, there was strong opposition in the cabinet. Over $400 million a year would be shifted from government revenues to the oil companies. But he carried the day.

It is really astonishing that Janice MacKinnon has no discussion of taxation and tax decisions taken by her government. All MacKinnon does is flatly dismiss the critics of the left. The right wing Fraser Institute ranked the Romanow government the second best government in North America. Why would they do that?

Convincing the Wall Street bankers MacKinnon became finance minister in 1993, set forth a four year plan to eliminate the budget deficit, and made further cuts to programs. The cuts were necessary, the NDP insisted, because of the inability to sell bonds in the New York City capital markets. An attempt to raise $500 million in March "failed to sell easily and quickly. It was a warning," MacKinnon argues.

MacKinnon insists that the NDP government "could not borrow money in Canada" in 1993. But in 1992 they began to tap the $8 billion in savings held by Saskatchewan residents. However, they only sought $150 million in the new Saskatchewan Savings Bonds. In 1994 they raised $800 million.

There were other options. They might have gone to the trade unions and negotiated some loans from their pension plans.There was no minimum tax placed on the 30 percent of profitable Saskatchewan corporations who pay no income taxes. In 1992 the NDP government promised to create a new Saskatchewan Economic Development Bank to mobilize local capital for investment, but they never carried through on this.

The Romanow government never addressed the cause of the debt and deficit: the radical drop in revenues from the resource sector. Under the NDP government from 1991 to 2001, the share of resource extraction sales that went to the treasury varied from 11 percent to 17 percent. This was a much smaller share than under the Blakeney or Devine governments.

Throughout the memoirs, MacKinnon insists that the federal government can no longer afford to finance our traditional social programs. She argues that the federal debt and deficit grew because of the expansion of our universal social programs. This is not true. As Statistics Canada demonstrated in a famous report in June 1991 (Mimoto and Cross), the accumulated budget deficit was not caused by increases in program spending but to the introduction of a number of personal and corporate tax breaks which greatly reduced

How have the people of Saskatchewan reacted to the new version of the CCF-NDP? In the election in 1991 the party received 275,780 votes. This fell to 192,320 in 1995 and then 156,243 in 1999. When the NDP was routed in the 1982 election they received 201,190 votes. The percentage of eligible voters going to the polls fell from the usual 80 percent in 1991 to 64 percent in 1995 and 56 percent in 1999. There has been no apparent rush to the Saskatchewan Party or the Liberal Party. All three share the same basic neoliberal

Margaret Thatcher once said that her greatest success as prime minister was transforming the Labour Party into another conservative party. She insisted that there was no alternative to the neoliberal agenda of the free market and free trade. Janice MacKinnon and the new NDP leadership agree.


John W. Warnock is a Regina political economist and author. His next
book, Saskatchewan: The Roots of Discontent and Protest will be published in the spring of 2004. In 1971 he worked hard to elect his NDP MLA and served on the executive of his constituency association.

April 22, 2003