Guest Post Written by JM
Rightsizing Expenditures – Where the Real Work Is
Rightsizing Expenditures – Where the Real Work Is
Needed
John
Maynard Keynes is perhaps one of history’s most influential economists. His theories regarding the requirement for
state intervention to moderate the natural “boom-bust” cycle of an economy has
been especially en vogue since the financial crisis of 2008. The basic premise of the theory is that
government should borrow in periods of slow economic growth (or during a period
of retraction), invest in infrastructure, and then manage the economy until it is stronger.
Maynard Keynes is perhaps one of history’s most influential economists. His theories regarding the requirement for
state intervention to moderate the natural “boom-bust” cycle of an economy has
been especially en vogue since the financial crisis of 2008. The basic premise of the theory is that
government should borrow in periods of slow economic growth (or during a period
of retraction), invest in infrastructure, and then manage the economy until it is stronger.
In
Newfoundland and Labrador since 2006 the government has perhaps done the opposite of what would be advocated by Keynes. Despite a strong economy fuelled by mining and offshore developments, the Provincial government commenced in 2006 a series
of programs to further stimulate the economy.
They were represented by a general increase in spending of some 35% in real
dollars, tax cuts, and a series of large infrastructure developments. The latter included the massive Muskrat Falls
public works project.
Newfoundland and Labrador since 2006 the government has perhaps done the opposite of what would be advocated by Keynes. Despite a strong economy fuelled by mining and offshore developments, the Provincial government commenced in 2006 a series
of programs to further stimulate the economy.
They were represented by a general increase in spending of some 35% in real
dollars, tax cuts, and a series of large infrastructure developments. The latter included the massive Muskrat Falls
public works project.
The
result was that in 2012 the political leadership proudly proclaimed our economy
to be “white hot”
result was that in 2012 the political leadership proudly proclaimed our economy
to be “white hot”
The
white hot economy was fuelled by government stimulus, which, in turn, inflated salaries,
drove up project costs, and allowed housing prices to increase at a pace far
outside of inflation. It was simply not
sustainable and I am deeply afraid it will have a long term negative impact on
the economy.
white hot economy was fuelled by government stimulus, which, in turn, inflated salaries,
drove up project costs, and allowed housing prices to increase at a pace far
outside of inflation. It was simply not
sustainable and I am deeply afraid it will have a long term negative impact on
the economy.
The
result is that with an economic downturn driven by low commodity prices the
province does not have the financial strength to be able to implement
additional stimulus. (I say “additional”
as we are presently running a $2 billion cash deficit).
result is that with an economic downturn driven by low commodity prices the
province does not have the financial strength to be able to implement
additional stimulus. (I say “additional”
as we are presently running a $2 billion cash deficit).
Newfoundland
and Labrador is an economic nomad. We
must get back to basics.
and Labrador is an economic nomad. We
must get back to basics.
As shown in Figure 1, a more realistic estimate of government revenue would suggest
that government spending has to be reduced by about 10% to be sustainable over
the next 5-10 year period. In the
opinion of the author the government should implement a 5 year plan to remove $700
million annually from the spending side of the budget, representing 10% in real
dollars.
that government spending has to be reduced by about 10% to be sustainable over
the next 5-10 year period. In the
opinion of the author the government should implement a 5 year plan to remove $700
million annually from the spending side of the budget, representing 10% in real
dollars.
Cutting
10%, in real dollars, is a daunting task. However, it is a required action for a
responsible government to make.
10%, in real dollars, is a daunting task. However, it is a required action for a
responsible government to make.
After
studying the estimates, I have attempted to identify where cuts might be make. The following is a list of the modest ideas
of the author. Comments and suggestions
are welcome in the comments section of the blog.
studying the estimates, I have attempted to identify where cuts might be make. The following is a list of the modest ideas
of the author. Comments and suggestions
are welcome in the comments section of the blog.
1.
Public Service
Public Service
In
2013 the province spent $3.8 billion on salaries. Based on a long term revenue of $6.8 billion,
the provincial government will be spending 55% of their revenue on
salaries. Next to commodity pricing, the
size of the public service is the biggest threat to economy of the
province. The salary commitments will
preclude the province from making key infrastructure investments, lowering
taxes or other key initiatives to help diversify the economy. As our population ages, and the requirements
for health care increases the ability to serve these needs will be limited by
the number of people the province has on staff.
2013 the province spent $3.8 billion on salaries. Based on a long term revenue of $6.8 billion,
the provincial government will be spending 55% of their revenue on
salaries. Next to commodity pricing, the
size of the public service is the biggest threat to economy of the
province. The salary commitments will
preclude the province from making key infrastructure investments, lowering
taxes or other key initiatives to help diversify the economy. As our population ages, and the requirements
for health care increases the ability to serve these needs will be limited by
the number of people the province has on staff.
The
salary growth of the public service employees will also limited by the size of
the public service. The top employees in
the provincial government should, therefore, be just as concerned about the size
of the public service, as I am!
salary growth of the public service employees will also limited by the size of
the public service. The top employees in
the provincial government should, therefore, be just as concerned about the size
of the public service, as I am!
There should
be no doubt that any reduction in public spending needs to start right here.
be no doubt that any reduction in public spending needs to start right here.
The
author recommends that the government implement the following actions:
author recommends that the government implement the following actions:
· 10% head count reduction in
all departments other than health. This
includes Nalcor, MUN, CONA, and other government agencies.
all departments other than health. This
includes Nalcor, MUN, CONA, and other government agencies.
· 5% head count reduction in
health.
health.
However, in the public interest, union agreements will have to be
ignored. The reductions should be across
all levels of government, and all positions (management and front line workers). But it should not be based on seniority. It should be based on performance!
ignored. The reductions should be across
all levels of government, and all positions (management and front line workers). But it should not be based on seniority. It should be based on performance!
The
province should get rid of the dead wood!
province should get rid of the dead wood!
As
most people in business will tell you, a 5%-10% cut in head count will actually
lead to better output. The reason is
that if you reduce head count based on performance, as opposed to seniority,
you maintain your best employees. The
“lowest common denominator” is increased, and the improved output is increased. Managers will tell you that the bottom 10% of
staff take 30% of their time to manage.
most people in business will tell you, a 5%-10% cut in head count will actually
lead to better output. The reason is
that if you reduce head count based on performance, as opposed to seniority,
you maintain your best employees. The
“lowest common denominator” is increased, and the improved output is increased. Managers will tell you that the bottom 10% of
staff take 30% of their time to manage.
I am
sure people will laugh when they read this recommendation. My mother, who is a long time NAPE organizer,
certainly did! She told me that the
union would never agree.
sure people will laugh when they read this recommendation. My mother, who is a long time NAPE organizer,
certainly did! She told me that the
union would never agree.
The union management would never agree, but what about the membership?
Most
people are not oblivious to the government’s predicament. They know
that their future raises, and pensions are all threatened by this fiscal
reality. Most union members also know
that the ability to remove under-performers, will actually make life better for
the average worker. People don’t like
working alongside dead wood. It makes
their job harder, and their workplace less pleasant.
people are not oblivious to the government’s predicament. They know
that their future raises, and pensions are all threatened by this fiscal
reality. Most union members also know
that the ability to remove under-performers, will actually make life better for
the average worker. People don’t like
working alongside dead wood. It makes
their job harder, and their workplace less pleasant.
The province
needs to tackle the size of the public service, first by cutting poor performers, but remaining staff ought to have the opportunity for better compensation. I suggest they should be offered an annual bonus mechanism linked to oil prices. If the price of
oil increases, and there is an increase in revenue, then part of that upside can be shared with them.
This type of bonus mechanism would represent a better compensation model than
long term increases to salaries.
needs to tackle the size of the public service, first by cutting poor performers, but remaining staff ought to have the opportunity for better compensation. I suggest they should be offered an annual bonus mechanism linked to oil prices. If the price of
oil increases, and there is an increase in revenue, then part of that upside can be shared with them.
This type of bonus mechanism would represent a better compensation model than
long term increases to salaries.
Of
course, the unions would have to agree. On
this account, I am not optimistic!
course, the unions would have to agree. On
this account, I am not optimistic!
However,
I would mandate that NAPE (and other unions) put the proposal to their
membership. The membership should have
an opportunity to give input into the direction of the required austerity. Given the choice of a 5 year wage freeze, and
a strong likelihood of a cut based on seniority, or a 10% cut based on
performance, I am pretty certain that human nature would prevail.
I would mandate that NAPE (and other unions) put the proposal to their
membership. The membership should have
an opportunity to give input into the direction of the required austerity. Given the choice of a 5 year wage freeze, and
a strong likelihood of a cut based on seniority, or a 10% cut based on
performance, I am pretty certain that human nature would prevail.
After
explaining this to my shop steward mother, she lamented: “in a secret vote, I
would probably vote yes to that proposition”.
explaining this to my shop steward mother, she lamented: “in a secret vote, I
would probably vote yes to that proposition”.
A cut
based on performance based on seniority is the only way to maintain quality of
service while facing our current economic realities. This should result in savings of ~250 million
per year. The cuts should be implemented
over a 3 year period.
based on performance based on seniority is the only way to maintain quality of
service while facing our current economic realities. This should result in savings of ~250 million
per year. The cuts should be implemented
over a 3 year period.
But I
am fearful that even this magnitude of a cut will not be sufficient.
am fearful that even this magnitude of a cut will not be sufficient.
2.
Professional
Services
Professional
Services
As
documented in Part II of this series, government spending on professional
services has gone from $280 million per year (1997-2003) to almost $500 million
a year in real dollars.
documented in Part II of this series, government spending on professional
services has gone from $280 million per year (1997-2003) to almost $500 million
a year in real dollars.
As
recently documented in the AG’s Report, many issues remain unanswered regarding
how this work is identified, and how the contracts are awarded. I am not sure if people in government truly
recognize how out of step the province is with OECD best practices for awarding such work. By comparison, the system in this
province is in great disrepair.
recently documented in the AG’s Report, many issues remain unanswered regarding
how this work is identified, and how the contracts are awarded. I am not sure if people in government truly
recognize how out of step the province is with OECD best practices for awarding such work. By comparison, the system in this
province is in great disrepair.
In the
face of the current reality, I would cut $75 million from professional services
over the next 3 years. This is a coarse
analysis. But departments should be
tasked with doing the work in-house. Any
work that has to be subcontracted, should be done in a manner that utilizes the
public tendering system. No longer
should consultants be selected by the Minister, with budgets based on a
proposal, as opposed to a competitive tender.
In addition, distribution of work among consultants should be based on
performance, rather than on political connections.
face of the current reality, I would cut $75 million from professional services
over the next 3 years. This is a coarse
analysis. But departments should be
tasked with doing the work in-house. Any
work that has to be subcontracted, should be done in a manner that utilizes the
public tendering system. No longer
should consultants be selected by the Minister, with budgets based on a
proposal, as opposed to a competitive tender.
In addition, distribution of work among consultants should be based on
performance, rather than on political connections.
I
believe a good part of this targeted savings proposed could be achieved with
true public tendering, using professional services only for “real”
requirements; those that truly cannot be provided in-house. One example of an unnecessary consultancy is
the engagement of a consultant in to review how consultants are engaged. This
is work that can easily be conducted in-house; the skill-set available at Confederation
Building is simply not that deficient.
believe a good part of this targeted savings proposed could be achieved with
true public tendering, using professional services only for “real”
requirements; those that truly cannot be provided in-house. One example of an unnecessary consultancy is
the engagement of a consultant in to review how consultants are engaged. This
is work that can easily be conducted in-house; the skill-set available at Confederation
Building is simply not that deficient.
But the
first step in cutting cost is to understand what comprises the $500 million
spent each year in professional services. It is a staggering number; one that is completely disproportionate to
virtually any metric for a province of its size and budget.
first step in cutting cost is to understand what comprises the $500 million
spent each year in professional services. It is a staggering number; one that is completely disproportionate to
virtually any metric for a province of its size and budget.
3.
Executive
Council
Executive
Council
The
amount spent on executive council has grown from $19 million in 1995 (in 2015
dollars) to $60 million in 2015. There
are several actions which should be immediately implemented:
amount spent on executive council has grown from $19 million in 1995 (in 2015
dollars) to $60 million in 2015. There
are several actions which should be immediately implemented:
· Women’s Policy Office: The province spends $4.3 million per year on
this Office. I would take this outside
government, and give 50% of the budget to the Status of Women Council to
undertake the mandate.
this Office. I would take this outside
government, and give 50% of the budget to the Status of Women Council to
undertake the mandate.
· Office of Climate Change and
Energy Efficiency: This is an office
with a budget of $1.13 million. I would
eliminate it, and transfer the responsibilities to the existing staff within
the Works Services and Transportation.
Energy Efficiency: This is an office
with a budget of $1.13 million. I would
eliminate it, and transfer the responsibilities to the existing staff within
the Works Services and Transportation.
·
Office of Public
Engagement: The Office has an annual
budget of $5 million. I would remove
it. It should be completed by the
existing communications people in each government department. Alternatively,
the government should remove the communications staff from each department. There are simply too many communications
staff in government.
Office of Public
Engagement: The Office has an annual
budget of $5 million. I would remove
it. It should be completed by the
existing communications people in each government department. Alternatively,
the government should remove the communications staff from each department. There are simply too many communications
staff in government.
· Human Resources Secretariat: Consolidation of the several of its
departments including “opening doors”, “strategic staffing”, “strategic
management” – too many managers.
departments including “opening doors”, “strategic staffing”, “strategic
management” – too many managers.
·
Office of Chief Information
Officer – hold all enhancements to IT programs.
Office of Chief Information
Officer – hold all enhancements to IT programs.
· Labrador and Aboriginal
Affairs Office – annual budget $4.2 million.
With 4 MHA’s I am sure the budget of this department could be cut 50%.
Affairs Office – annual budget $4.2 million.
With 4 MHA’s I am sure the budget of this department could be cut 50%.
·
Muskrat Falls Oversight
Committee: This committee is duplicating
work that Nalcor completes internally; it provides little, if any, real
oversight of the project. Mandating
Nalcor to post all internal monthly reports on the internet would negate the
need for this entire oversight exercise. With the information in the public
domain, the media would complete the role of the oversight committee, in its
current form.
Muskrat Falls Oversight
Committee: This committee is duplicating
work that Nalcor completes internally; it provides little, if any, real
oversight of the project. Mandating
Nalcor to post all internal monthly reports on the internet would negate the
need for this entire oversight exercise. With the information in the public
domain, the media would complete the role of the oversight committee, in its
current form.
· Communications: Again, we are a province of only 500,000 people. I suggest a review of the entire
government communications with the goal of benchmarking the staffing complement to private industries of similar
size.
government communications with the goal of benchmarking the staffing complement to private industries of similar
size.
4.
Legislature
Legislature
The Legislature
division of government has a $30 million budget in 2015. In 1995 it’s budget was $10 million, in 2015
inflation adjusted dollars. There has
been considerable growth in the cost of the services this allocation is intended to fund. They include: the
office of the Auditor General, Chief Electoral Offices, Citizens
Representative, Child and Youth Advocate, and Information and Privacy
commissioner.
division of government has a $30 million budget in 2015. In 1995 it’s budget was $10 million, in 2015
inflation adjusted dollars. There has
been considerable growth in the cost of the services this allocation is intended to fund. They include: the
office of the Auditor General, Chief Electoral Offices, Citizens
Representative, Child and Youth Advocate, and Information and Privacy
commissioner.
I would
reconcile the Child and Youth Advocate, Information and Privacy Commissioner,
and the Citizen Representative into a single Ombudsmen office.
reconcile the Child and Youth Advocate, Information and Privacy Commissioner,
and the Citizen Representative into a single Ombudsmen office.
Some may argue
that this would weaken the service to the weakest members of society. However, history has shown the greatest
weakness of these separate offices is the public actually knowing they
exist. A single agency for which those
in need could contact, would be a much stronger in this regard.
that this would weaken the service to the weakest members of society. However, history has shown the greatest
weakness of these separate offices is the public actually knowing they
exist. A single agency for which those
in need could contact, would be a much stronger in this regard.
Could a single
agency perform any worse than the current incantation?
agency perform any worse than the current incantation?
5.
Advanced
Education and Skills
Advanced
Education and Skills
This
is a broad ranging department with an annual budget of $870 million
representing a considerable expenditure on grants as well as programs. I would recommend a full review of this
department, particularly in the area of rural presence. As part of this discussion we need to
challenge the requirement that this department should have representation in so
many nooks and crannies of the province.
However, some immediate actions might include:
is a broad ranging department with an annual budget of $870 million
representing a considerable expenditure on grants as well as programs. I would recommend a full review of this
department, particularly in the area of rural presence. As part of this discussion we need to
challenge the requirement that this department should have representation in so
many nooks and crannies of the province.
However, some immediate actions might include:
·
Atlantic Veterinary College:
Eliminate the $1.2 million grant for “seats”.
Let students apply competitively.
Atlantic Veterinary College:
Eliminate the $1.2 million grant for “seats”.
Let students apply competitively.
·
MUN: An additional cut of $20-30 million. Memorial University is getting fatter to
server fewer local students. A reality
check is needed. The first of those
“reality checks” is that a province of 500,000 people can’t have a world class
university, across all faculties. It is
irresponsible to even suggest it. The
university should review whether we should even continue with some of the more
expensive faculties. Perhaps the med
school, for example, should be reviewed. Although the budget comes via the Department
of Health, the MUN medical school has an annual budget of $60 million per
year. It accepts about 80 students per
year; only about 60 are local. Is it not
more cost efficient to pay other universities to train our medical students in
more of the disciplines?
MUN: An additional cut of $20-30 million. Memorial University is getting fatter to
server fewer local students. A reality
check is needed. The first of those
“reality checks” is that a province of 500,000 people can’t have a world class
university, across all faculties. It is
irresponsible to even suggest it. The
university should review whether we should even continue with some of the more
expensive faculties. Perhaps the med
school, for example, should be reviewed. Although the budget comes via the Department
of Health, the MUN medical school has an annual budget of $60 million per
year. It accepts about 80 students per
year; only about 60 are local. Is it not
more cost efficient to pay other universities to train our medical students in
more of the disciplines?
Medical
schools are controversial topics. So too
is tuition. Newfoundlander’s tuition is
too low, and has to be increased.
Tuition fees should be increased by 25%.
schools are controversial topics. So too
is tuition. Newfoundlander’s tuition is
too low, and has to be increased.
Tuition fees should be increased by 25%.
· College of the North
Atlantic: The College has 17 campuses
located in Newfoundland and Labrador.
This model was acceptable 25 years ago, when students from Fogo had
perhaps never been further than Gander.
Things have changed. Students
from rural areas of the province are decreasing in numbers, but they are
becoming worldlier. CONA has to
reconcile their campuses. I would target
a reduction of 5.
Atlantic: The College has 17 campuses
located in Newfoundland and Labrador.
This model was acceptable 25 years ago, when students from Fogo had
perhaps never been further than Gander.
Things have changed. Students
from rural areas of the province are decreasing in numbers, but they are
becoming worldlier. CONA has to
reconcile their campuses. I would target
a reduction of 5.
___________________________________________________________
Editor’s Note:
Due to the length of JM’s Budget Colloquy (Part V), he has chosen to state his ideas in two Posts. Look for the second segment to be posted soon..
Due to the length of JM’s Budget Colloquy (Part V), he has chosen to state his ideas in two Posts. Look for the second segment to be posted soon..
“JM” is a researcher and writer. He is a frequent contributor to Uncle Gnarley Blog offering analysis of the Muskrat Falls project and on other issues, including the fiscal position of the Province.
JM’s essays include: IN NALCOR WE TRUST, Delusion and Deception (Part III), and The Snow Job (Part I). The very latest Posts, on the 2015-16 provincial Budget, include IT’S THE SPENDING STUPID and The Budget Colloquy (Part 1): Put Him In The Round Boat Til He’s Sober, The Budget Colloquy (Part 2) Revenue Projections: Close Your Eyes, Make a Wish, Hope for the Best and The Budget Colloquy (Part 3) Whistling Past the Graveyard No More and The budget Colloquy (Part-5) Getting Back to Basics.
Having chosen to retain his anonymity, JM is prepared let his articles be judged on the research and argument each contains.
Top heavy Public Services are most often caused by two many managers relative to the people they manage. If people are given more direct control over their work even the dead wood can come to life.
As for performance appraisals, in one government department a manager was given a performance bonus because is unit be came alive and performed. The reason it became alive because the manager who got the performance bonus was off on stress leaf and the workers could do their work without being smothered.
I can only a peak for education, but it is getting slim to cut front line workers unless parents don't mind class sizes of 30 or more students k-12. Bureaucrats need to be the next line of cuts
Russell Stockley