The True Cost of First Nation Government Prepared By: Fiscal Realities Economists 412 Sun Rivers Drive West, Kamloops, BC The True Cost of First Nation Government Page i Table of Contents EXECUTIVE SUMMARY ............................................................................................................. 1 INTRODUCTION ....................................................................................................................... 2 THE DEBATE ABOUT FIRST NATION GOVERNMENT .................................................................. 3 WHY FIRST NATION GOVERNMENT WILL CREATE NET FISCAL COSTS ........................................ 4 WHY FIRST NATION GOVERNMENT WILL CREATE NET FISCAL BENEFITS .................................................... 5 WHAT IS THE COST OF THE EXISTING SYSTEM .......................................................................... 7 WHAT DRIVES SPENDING ON FIRST NATIONS? ...................................................................................... 7 WHAT ACCOUNTS FOR THE DIFFERENCE? ............................................................................................. 8 Administration Costs ............................................................................................................... 8 Costs of Direct Programs ....................................................................................................... 10 FIRST NATION POVERTY AND PROGRAM COSTS ..................................................................... 13 HEALTH ........................................................................................................................................ 14 SOCIAL ASSISTANCE ........................................................................................................................ 14 POLICE AND PROTECTION ................................................................................................................ 14 HOUSING ...................................................................................................................................... 15 EDUCATION ................................................................................................................................... 15 SUMMARY OF FINDINGS ........................................................................................................ 16 PROJECTIONS ................................................................................................................................ 17 IMPACT ON PRODUCTIVITY .............................................................................................................. 18 CONCLUSIONS ....................................................................................................................... 19 The True Cost of First Nation Government
i
The True Cost of First Nation Government Page 1 Executive Summary This paper addresses the “fiscal” argument concerning First Nation government. The fiscal argument is that the “creation” of First Nation government will impose high costs on Canadian taxpayers by creating “more” government when the trend is just the opposite. The principle conclusions are as follows: 1. Additional administration costs are not the largest “fiscal” impact of implementing First Nation government. Most of the costs of government are program delivery costs and these are driven by poverty levels. Accordingly, most of the fiscal impact of implementing First Nation government depends on: (1) whether it can reduce First Nation poverty; and, (2) whether it can enhance Canada’s overall investment climate. If First Nation government can reduce First Nation poverty to national levels, the resultant reduction in program costs would be $3.7 billion. The total economic benefit includes the value of additional production resulting from increasing First Nation incomes and is a great deal larger. 2. The impact of First Nation government on the overall investment climate will depend upon the design of self‐government institutions. However, the goals of self‐
government are consistent with the broad policy objectives of raising Canadian productivity, making social programming more effective, reducing bureaucracy and making government more accountable. 3. The key to achieving points 1 and 2 are to pursue self‐government with a strategy that does not seek to minimize the administration costs of First Nation government, unduly limit the powers of First Nation government or impose needless restrictions on their freedom to act. These considerations should only act as constraints Fiscal Realities Economists The True Cost of First Nation Government Page 2 Introduction This paper explores some of the debate about the fiscal impact of developing First Nation government. More explicitly, it does the following: 1.
It summarizes the arguments concerning the fiscal impact of implementing First Nation government. 2.
It analyzes the costs of the existing system of First Nation governance to determine its principle cost drivers. 3.
It tries to determine what, if any, incremental administration costs would be created by First Nation government. 4.
It explores competing explanations for why some First Nation program costs are higher than other costs. 5.
It explores the hypothesis that extending First Nation government would increase the complexity of government. Increased complexity would likely raise the costs of doing business and compliance costs. 6.
It explores the hypothesis that First Nation government is the cause of under development of First Nation lands. 7.
It draws conclusions about what factors the debate really hinges on, and what the potential costs and benefits are in moving to an alternative system of government. Fiscal Realities Economists The True Cost of First Nation Government Page 3 The Debate about First Nation Government The debate about First Nation self‐government is often couched in “fiscal” terms. How much will it cost? Can we afford it? These are good questions but in order to answer them they must be placed in the proper context. First, the debate must be about the sum total of First Nation governance, that is to say the costs to all governments of delivering public services to First Nation persons. It must include the costs incurred by First Nation governments, and by other governments in providing services to First Nation persons. Second, the costs of developing First Nation government only make sense when they are compared to the costs of the existing system of First Nation governance. It is often simplistically assumed that developing First Nation government will create entirely new costs. In fact, it will reassign costs already being incurred among different orders of government. Third, the sum total of the costs and benefits related to different systems of governance need to be compared and not simply the costs of administration and/or program delivery. Total costs would include differences in the costs of program delivery, compliance costs and any differences in economic outcomes that can be attributed to the system of governance. There is considerable difference of opinion as to whether the development of First Nation government would create net fiscal costs or net fiscal benefits. Below, the two points of view are loosely summarized Fiscal Realities Economists The True Cost of First Nation Government Page 4 Why First Nation Government Will Create Net Fiscal Costs The chief economic arguments made against the development of First Nation government are that: (1) it will create additional administration costs and add substantially to the cost of government 1 ; (2) it will make government more complex and harm investment; 2 (3) it will reduce the quality of government programs and reduce economic opportunities for First Nation people. Several lines of reasoning support this argument. 1. Direct Costs of Government. Critics argue that First Nation government will create considerably more bureaucracy because there are over 600 First Nations in Canada. Each will have an expanded mandate under self‐
government and because of their relatively small populations; this implies a high administration‐
to‐population ratio. 2. Indirect Costs of Government – Overlap and Duplication. The scope for policy conflict and overlap and duplication among different orders of government will rise commensurately with the establishment of a new order of government. This will reduce the efficiency of government programming and make the investment climate more complex. 3. Indirect Costs of Government – National Paralysis. The introduction of another order of government will make it more difficult to reach agreements that enhance the Canadian economic and social union. 4. Indirect Costs of Government – Jurisdictional Disputes. The complexity of jurisdictional disputes among different orders of government will increase exponentially if First Nation government is further developed. This complexity will increase for the following reasons. •
First Nation governments will have distinct powers from both the provincial and local orders of government. This implies their establishment will generate new types of dispute that will have no precedent in the Canadian context. •
First Nation government will be taking powers from an existing system of federal‐
provincial‐local governments. As a result, they will be creating the potential for new disputes that go well beyond those created by issues created by interactions along the jurisdictional edges of each order of government. 1
This argument has been made in various forms by Mel Smith and Tom Flanagan, Reform MPs Mike Scott, Dick Harris, Jay Hill, and newspaper columnists Andrew Coyne and David Frum. 2
“Compliance” costs in this sense are somewhat different from their normal meaning. This refers to the costs associated with governments carrying out their functions and the effectiveness of these functions, as well as the costs of complying with government policy. Fiscal Realities Economists The True Cost of First Nation Government •
Page 5 First Nation government introduces a variant of a citizenship model of government into the Canadian system of government. Most government in Canada is based on geography, that is to say a person’s government is determined by their place of residence. First Nation government will depend in part upon whether a person is or isn’t a member of a specific First Nation. While the precise extent of this citizenship model has yet to be determined, it will raise complex new fiscal issues. •
Inter‐governmental issues will be greatly complicated by Treaty and Aboriginal Rights. This will make it more difficult to draft “equal treatment” agreements. It will make it more difficult to manage land and natural resources and may encumber Canada’s ability to conclude international agreements. 5. Poor Quality Services ‐ Reduced Growth. Critics charge that First Nation governments will deliver substandard services that cause First Nation citizens to grow up in poverty and create substantial social costs on the rest of the country. They also maintain that the economic underdevelopment of First Nation lands is caused by corruption within First Nation governments themselves and the nature of property rights on First Nation lands. Therefore, expanding First Nation government will worsen the problem. Why First Nation Government Will Create Net Fiscal Benefits 1. Lowers Administration Costs Administration costs are high under the current system of First Nation governance because there are so many cash transfers to administer. There are over 600 First Nations receiving multiple cash transfers from many different agencies. There is administration costs associated with two levels of government for each transfer. As a result, reporting, monitoring, and administration costs tend to be very high. The development of true First Nation government could result in simpler reporting requirements and the consolidation of many transfers thus reducing administration costs. 2. Reduces uncertainty with respect to property rights First Nation government could create fiscal benefits if it provides a basis to more easily resolve claims, Treaties and Aboriginal title. This resolution would strengthen the specification and certainty of property rights in Canada and provide greater certainty with respect to the regulation of land and resources. The present situation is very unclear and this is creating risk that slows investment and is preventing the rational use of public infrastructure. 3. Increases Service Efficiency Proponents of First Nation government believe that many services currently delivered by other orders of government could be delivered better by First Nation governments to First Nation Fiscal Realities Economists The True Cost of First Nation Government Page 6 citizens. They argue that under the current arrangements, the natural advantages of small local governments are not afforded to First Nation governments. Local discretion is lost because of conditions attached to transfer funds, onerous reporting requirements and a lack of autonomy created by high transfer dependency. In fact, First Nation governments would benefit from greater local discretion. There is potential benefit from local discretion in every situation where the local population has interests distinct from adjacent areas. First Nations have distinct cultural, demographic, and socio‐economic characteristics that have all contributed to distinct interests and greater potential for local government to improve services. 4. Increases Economic Growth Opponents of First Nation government often argue that First Nations are underdeveloped because of the existing system of First Nation governance. In particular, they point to the different nature of property rights and cite “corruption” of First Nation governments as the major impediments. Their implied solution is to make First Nation lands fee simple, and reduce the scope of authority for First Nation governments. Proponents of First Nation government suggest that First Nations are under developed because First Nation governments lack the jurisdictional tools to support economic development. While the First Nation system of property rights is distinct from the rest of the country, it by itself need not prevent market forces from operating. For example, much property in England is also leasehold and market forces have worked very effectively there. 5. Reduces Social Programming Costs related to Poverty Poverty creates fiscal costs. It raises costs associated with the social safety net, health care and police and protection. It stands to reason that reducing poverty reduces social costs. Proponents of First Nation government argue that if First Nation government can make a difference in reducing First Nation poverty than they can make a significant difference in the programming costs associated with First Nation persons. Fiscal Realities Economists The True Cost of First Nation Government Page 7 What is the Cost of the Existing System Citizens create costs on government. They create health care costs, education costs, costs associated with police and protection, old age security, economic security and many other demands on government programming. First Nation citizens are no different. They receive the same services as other Canadians although often through different agencies and fiscal arrangements. Because these arrangements tend to be different, it is often assumed that the costs of services to First Nation persons is entirely discretionary – for example, in the popular press it is often presented as “we spent $7 billion on First Nations. . .” Presented below is a rough comparison of average costs for different types of government programs on First Nation persons versus the average for other Canadians. What Drives Spending on First Nations? It is actually no simple matter to determine “how much is spent on First Nations people”. First, there is spending by federal, provincial, and local governments as well as First Nation governments to consider. Second, many of these governments do not track spending on “First Nation persons” or “First Nations”. Funding flows through multiple agencies and each may account for these funds in different ways. In some instances, they may measure spending on “Aboriginals” without regard to Status or place of residence. In other incidences, they may prefer much more restrictive definitions such as “Status on‐reserve”. Clearly, it would be no simple task to identify spending on First Nations by all governments. All governments in Canada spent over $11 billion on programs and services for Aboriginal people3 in 1992. This provided for a population that was estimated by Statistics Canada to be 799,000 people in 1996. 4 If the 1992 figure on expenditures is then adjusted for population growth and inflation (assuming that real 1992 per capita expenditures are still maintained 5 ) an estimated per capita expenditure of $16,508 per Aboriginal person 6 is derived. This estimate includes public debt servicing costs1. If those costs are excluded, then average per capita government program expenditures per Aboriginal person are $14,159. By comparison, all governments spent about $7,777 on per capita program costs for non‐
Aboriginals in 99/00. At first blush then, it appears that Aboriginals “cost” the government more programming dollars than non‐Aboriginals. 3
Jones and Smith. The authors defined Aboriginal people as all registered Indians, non‐status Indians and Inuit. 4
Stats Can counts all people who self identify themselves as Aboriginals. DIAND counts registered Indians. The number of registered Indians in 1996 was estimated as 620,170. The Statistics Canada count is more appropriate for this estimate. 5
In fact, real per capita expenditures have likely declined. 6
This may be a bit of an under estimation since at least federally expenditures on DIAND have risen faster than other departments. It should be noted that this estimate includes expenditures on debt servicing. Fiscal Realities Economists The True Cost of First Nation Government Page 8 Of course, there is a difference between spending on “Aboriginals” and spending on First Nation persons. According to the best available guess, the federal government spent about $6.4 billion 7 on Status Indians in 1999. This works out to about $9,520 per registered Indian. Per capita expenditures on Status Indians “on‐First Nation land” are likely higher since most federal dollars are so ear marked. A good guess of the cost per capita of federally funded government services to Indians living on First Nation lands last year is $14,144 8 . This does not include expenditures made by provinces. There is insufficient data to even render a guess for the per capita expenditures on First Nation citizens living off First Nation lands. These per capita expenditures are summarized in the table below: Total Per Capita Expenditures on Aboriginals and Non‐Aboriginals Program Costs Per Capita
Aboriginals including debt servicing Aboriginals excluding debt servicing Non‐Aboriginal Canadians including debt servicing
Non‐Aboriginal Canadians excluding debt servicing
Status Indians living on First Nation Land excluding debt servicing. (Federal Expenditures Only) $16,508 $14,159 $10,126 $7,777 $14,144 The bottom line is that program costs are on average $6,382 higher for Aboriginal persons, a sixty percent cost differential. What Accounts for the Difference? It seems clear that program costs associated with First Nation persons are higher on average than for the rest of the population. There are three possible explanations – (1) high costs of administration and/or inefficiency in program delivery, (2) richer programming than that enjoyed by other Canadians; and, (3) greater “need”. These explanations are not necessarily mutually exclusive. The paper will now analyze each in turn. Administration Costs Even a cursory glance shows that only a tiny amount of the difference in program costs is accounted for by the costs of First Nation government administration. Administration costs are 7
This subtracts about $200 million for Inuit from the federal government expenditures on Aboriginal people. 8
For per capita costs of government services to status individuals on‐First Nation land, it was assumed that (1) the Inuit portion of the Northern Affairs budget was about $200M, (2) status Indians living off First Nation lands receive a proportionate share of health and education and (3) that the all other expenditures were principally for on‐First Nation land Indians. Fiscal Realities Economists The True Cost of First Nation Government Page 9 a relatively small part of the overall costs of government. According to Statistics Canada, they are on average about 3.5 per cent of total costs and hence even very large differences in average administration costs would not explain much of the overall difference. Our analysis is based on Statistics Canada data and employs the most liberal assumptions, suggests that only $182 of the $6,382 differential in average costs is accounted for by administration costs. This $182 differential is likely accounted for by the relatively small populations served by most First Nation governments. To the extent that economies of scale in administration exist, then relatively small sized governments will have higher per capita administration costs. Of course, part of the explanation may also be the design and fiscal underpinnings of First Nation government. First Nation governments are, on average, much more dependent on conditional cash transfers flowing from multiple agencies. These arrangements create compliance and reporting costs on both sides of the transfer relationship. A third possibility is a lack of First Nation administrative capacity. A fourth possible explanation is the remoteness of First Nation communities and difficulties dealing with communities that are generally less “wired” than the Canadian norm. Finally, it has been suggested, First Nation administration costs are increased by nepotism. Of course, some would argue that while the contribution of administration costs to a high cost of First Nation governance are relatively small, they are still a concern. After all, there are over 600 First Nation governments in Canada for a population of roughly 800,000. Yet again, this begs the question, what are the costs of an alternative system of governance. This situation is no different from that which maintains for small, remote communities all across Canada. For example, there are 291 municipal entities in Newfoundland, 75 in Prince Edward Island and 1406 in Saskatchewan. Clearly, the issue of small governments serving small remote communities is a Canadian rather than a strictly First Nation phenomenon. Fiscal Realities Economists The True Cost of First Nation Government Page 10 The question can then be applied to every small community in the country ‐ is there a cheaper or more efficient alternative to small governments? Simply eliminating them would not eliminate the need for what they do. The alternative to delivery through Consolidated Government Spending
small governments is delivery through Government
Administration
3.21%
the bureaucracy of a large government. It does not seem clear at all that this would result in lower administration costs. In fact, most experts in the field of local government, support smaller Government Services
96.79%
governments for remote communities. They argue that the evidence generally shows these reduce the costs of government9 and create stronger Source: Statistics Canada & own Calculations
incentives for accountability and self‐
sufficiency. Costs of Direct Programs The analysis of administration The Distribution of the Per Capita Fiscal Cost on Aboriginals
costs suggests that most of the cost differential must be Other
11%
accounted for by the major service programs – either “municipal” Administration
3%
services such as fire protection and garbage collection, Protection of Persons and
Property
8%
Housing
11%
Health
19%
“provincial” services such as health care and education and/or federal services. Education
19%
Social Services
29%
9
For example, a small community infrastructure support program in British Columbia was created to increase the viability of local government solutions because it was viewed as the lowest cost alternative for service provision. Fiscal Realities Economists The True Cost of First Nation Government Page 11 The majority of government spending is accounted for by major social programs ‐ health care, education, social housing, protection of people and property and social assistance. It stands to reason that it is here that most of the difference must arise. Expenditures on Aboriginals in these program areas are consistently higher (as the table illustrates). 10 Consolidated Federal, Provincial, Territorial and Local Government Expenditure per Person 1999/00
Financial Management System Basis
Expenditure per Expenditure per Expenditure
Canadian Non-Aboriginal per Aboriginal
Protection of Persons and Property
$
Health
$
Hospital Care
$
Medical Care
$
Preventive Care
$
Other Health Services
$
Social Services
$
Social Assistance
$
Workers' Compensation Benefits
Pension Plan Benefits
Veterans' Benefits
Other Social Services
$
Education
$
Elementary and Secondary Education $
Post Secondary Education
$
Special Retraining Services
$
Other Education
$
Housing
1,030.42
1,877.04
771.66
781.58
106.24
217.57
961.31
559.49
$
$
$
$
$
$
$
$
1,001.14
1,823.69
749.72
759.37
103.22
211.38
933.99
543.59
$
$
$
$
$
$
$
$
1,496.12
3,002.68
1,234.41
1,250.29
169.95
348.04
2,708.56
1,576.41
352.66
1,279.31
839.24
358.13
51.91
16.67
$
$
$
$
$
$
342.63
1,242.95
815.38
347.95
50.44
16.20
$
$
$
$
$
$
993.64
2,439.21
1,719.76
631.78
100.87
32.39
$
143.66
$
139.58
$
$
435.66
$
$
5,130.76
10,422.51
$
$
4,549.27
10,126.27
Administration
Other
Total
Expenditure
Difference
$
$
494.98
1,179.00
$
1,774.58
$
1,196.26
785.92
$
646.34
$
616.88
$
181.21
$
$
5,459.12
16,508.49
$
$
909.85
6,382.23
Table 1 Per Capita Expenditure Comparisons The data shows that there are many program areas where per capita expenditures on Aboriginals 11 are higher than for non‐Aboriginals. In four relatively large expenditure areas, health care costs are 65% higher, social service costs are 194% higher 12 , basic education costs are 111% higher and costs associated with the protection of people and property are 49% higher. 10
It is based on data developed by the Royal Commission on Aboriginal Peoples and has been updated to account for inflation and population growth. 11
Again, the data now goes back to Aboriginals only instead of First Nations. However, it is clear that there is a fairly consistent relationship between expenditures on Aboriginals and expenditures on First Nation persons. 12
Social Services do not include Workers Compensation, Pension Plan Benefits, and Veterans Benefits. Fiscal Realities Economists The True Cost of First Nation Government Page 12 The data is clear. The costs of maintaining First Nation government administrations do not account for high costs associated with the governance of Aboriginals in general and First Nation persons specifically. The high costs are accounted for by those some programs that are received by every other Canadian. In other words, we cannot make these differences go away by ceasing to provide financial support to First Nation government administration. Per capita Aboriginal Spending vs. Per capita Canadian Spending
(percentage difference between)
500%
463%
450%
400%
350%
300%
250%
194%
200%
150%
111%
100%
82%
65%
49%
50%
42%
4%
0%
Elementary
and
Secondary
Education
Post
Secondary
Education
Income
Transfers
Housing
Health Care
Social
Services
Protection of
Other
Persons and Government
Property
Expenditures
Source: RCAP
There are three possible, not necessarily mutually exclusive, explanations for high program costs. (1) First Nation programs are richer than those of other Canadians. (2) First Nation program costs are higher because programs such as health care and social assistance rise with levels of poverty. (3) First Nation program delivery costs are higher because of the remoteness of many First Nation communities. Fiscal Realities Economists The True Cost of First Nation Government Page 13 First Nation Poverty and Program Costs Social indicators show that First Nation persons are the poorest, most disadvantaged group in the country. The statistical evidence is probably familiar to anyone with experience working in First Nation policy issues. The average income for a First Nation person living on First Nation land is only about 50% per cent of the Canadian average. First Nation persons suffer from much higher rates of unemployment and social assistance dependency. First Nation children are more than twice as likely to experience child poverty. There is also little doubt that poverty drives the costs of many social programs. Simply put, people living in poverty tend to place greater demand on government services. The extent of this influence varies from service to service. It is most pronounced with income tested services such as social assistance because the effect here is direct – low incomes create program eligibility and thus create costs. It is less pronounced with services such as health care because the relationship between poverty and higher expenditures is indirect. If program costs are being driven by First Nation poverty then, the cost differential should, be greatest in social assistance and less pronounced in health care. If the cost differential is driven by community remoteness or the richness of the programs, then it should be greatest in services that must be delivered by people, such as health care and education. The data is consistent with the theory that poverty provides the largest explanation for high costs of delivering First Nation programs. With the exception of housing, the largest cost differential is social services. The salient point is that First The Distribution of the Per Capita Fiscal Cost on Aboriginals
Nation poverty has raised the cost of First Nation programs. However, it is difficult to quantify Other
11%
Protection of Persons and
Property
8%
Administration
3%
Housing
11%
the precise relationship. The next sections of this paper will discuss the causal factors of this Health
19%
relationship. For simplicity, it will focus on the major cost areas – health care, education, social services, protection of people and property, and housing. These account for 86% of the First Nation program costs Education
19%
and thus explain most of the cost Social Services
29%
differential. Fiscal Realities Economists The True Cost of First Nation Government Page 14 Health There is a strong relationship between good health and income. Studies show that in Canada, the richest one‐fifth of the population has substantially better health than the poorest one‐fifth (Osberg, 1990; p. 33). It stands to reason then that First Nation health would be on average below the Canadian average and thus drive costs upwards. In addition, in fact, according to a human development index study completed by the DIAND, First Nations have a life expectancy 8 years lower than other Canadians and have higher incidences of many diseases. Unfortunately, the precise nature of the relationship between poverty and health care costs is difficult to calculate for the following reasons: (1). While poverty undoubtedly leads to poor health on average, poorer health can also lead to poverty. (2). It is difficult to determine the precise relationship between health and incomes for First Nation persons owing to poor quality data. (3). Poorer health for First Nation persons also reflects First Nation conditions such as poor quality housing and infrastructure and the remoteness of many communities. Notwithstanding these complications, studies consistently show a strong cause and effect relationship from low incomes to poor health. Poorer people tend to have less access to health care, they tend to be subjected to more hazardous conditions, they are more likely to have been neglected as children, they have poorer nutrition, they are subject to greater stresses, and finally, they have poorer health maintenance. All of these factors lead to higher health care expenditures particularly later in life. Social Assistance Unemployment rates are much higher among the Aboriginal population than the public. As a result, social assistance dependency is much higher as are expenditures on other social services. Police and Protection There is a correlation between income levels and the likelihood of being incarcerated or in trouble with the law. The incidence of Aboriginal incarceration is well documented and is certainly consistent with statistics regarding other disadvantaged groups. (Solicitor General, 1996). Fiscal Realities Economists The True Cost of First Nation Government Page 15 Housing The demand for social housing is partly driven by poverty but there are other factors that contribute to the higher costs. For example, because First Nation land cannot be pledged as security, it is difficult to obtain mortgages and on First Nation land, housing must be heavily subsidized. 13 . Education Elementary and secondary education costs on average twice as much for an Aboriginal school child. Part of the explanation is the remote location of many of these children, which necessitates higher capital and operating costs on average. However, poverty also plays a significant role. Rates of Aboriginal child poverty are at least two times higher than for the rest of the country. Children raised in poverty are far more likely to require expensive special needs programs regardless of whether they are Aboriginal or not. 13
The federal – provincial First Nation service delivery disputes are related to the place of residency of First Nation citizens. This can create perverse economic incentives. Fiscal Realities Economists The True Cost of First Nation Government Page 16 Summary of Findings The costs of governance associated with First Nation persons are, on average, higher than for other Canadians. This study investigated many possible explanations including the proposition that First Nation government is simply too expensive because these governments are numerous and relatively small. The first conclusion is that the focus on the costs of maintaining First Nation government administrations is a red herring. In the first place, there is considerable precedent in Canada for many small local governments. Secondly, there is sometimes a mistaken assumption that replacing services delivered by small local governments with large bureaucracies will lower administration costs. Some people even believe that abolishing First Nation governments would magically remove all the costs related to First Nation governance. The notion that large bureaucracies are more cost effective is highly debatable. The belief that eliminating First Nation government will remove program delivery costs is clearly wrong. Finally, administration costs are really only a small percentage of the total costs of government. Most costs are accounted for by program delivery and the programs delivered to First Nations are substantially the same as those delivered to any other Canadian. In other words, even abolishing First Nation government altogether will not make a large difference in the overall costs of governance with respect to First Nations. The second conclusion is that the costs of program delivery are high primarily because of First Nation poverty. There is some evidence to support the proposition that costs are higher as well because of the relative remoteness of many First Nation communities. There is also some evidence to support the proposition that some of the difference is accounted for by differences in the mix of services. For example, market failures have forestalled the creation of a private housing market on First Nation lands. However, the principle reason is that so many government programs are driven by “means” and First Nations tend to be poorer than the rest of the country. Cost differentials created by the relative remoteness of communities would exist regardless of the governance structure in place. Cost differentials created by a different mix of services and by poverty are both related to the system of governance. This leads to the principle finding. The system of governance that best provides economic opportunities to First Nation persons will produce the greatest fiscal benefit. Even small improvements in economic opportunity will create larger fiscal benefits than relatively large savings in administration costs. Therefore, the “fiscal” debate over First Nation governance must focus on what provides the greatest economic opportunity. If the fiscal debate becomes focused on narrow issues such as the cost of First Nation administrations then this will be at the expense of Canadians, not to their benefit. Fiscal Realities Economists The True Cost of First Nation Government Page 17 Projections The fiscal benefits of focusing on a system of governance, which reduces First Nation poverty, swamp the potential benefits of focusing on administration costs. Despite this, most media attention and public debate is focused on the latter question. This is unfortunate because as these projections will show, the gap in potential benefits between these strategies is actually growing. The tables below project the costs attributable to First Nation poverty for different program areas. These projections are based on the medium projection for population growth. Fiscal Costs of First Nation Poverty ($ millions) Expenditure
1999
2000
2001
2002
2003
2004
2005
2006
2007
Housing
$
528.96
$
544.82
$
561.10
$
569.88
$
579.48
$
589.53
$
611.13
$
615.42
$
626.36
Health Care
$
938.42
$
966.56
$
995.44
$
1,011.01
$
1,028.05
$
1,045.87
$
1,084.20
$
1,091.81
$
1,111.22
Social Services
$
601.01
$
619.04
$
637.53
$
647.50
$
658.41
$
669.83
$
694.38
$
699.25
$
711.68
Protection of Persons and Property
$
389.25
$
400.92
$
412.90
$
419.36
$
426.43
$
433.82
$
449.72
$
452.88
$
460.93
Elementry and Secondary Education
$
1,044.74
$
1,076.07
$
1,108.22
$
1,125.56
$
1,144.52
$
1,164.36
$
1,207.04
$
1,215.51
$
1,237.12
$
3,502.40
$
3,607.42
$
3,715.21
$
3,773.32
$
3,836.90
$
3,903.41
$
4,046.48
$
4,074.86
$
4,147.30
Total Cost
In 2001, First Nation poverty will increase the direct costs of government in Canada by $3.7 billion. If nothing changes, this will rise to $4.1 billion by 2007. Please note, these are purely costs associated with delivery of government programs. If the costs of foregone productivity are included, the total costs will rise further. First Nation poverty reduces the national wealth and creates costs for all Canadians and these costs are rising as the First Nation population increases. If nothing changes, the costs will be significantly higher by 2010, just when government begins facing the cost pressures of baby boomer retirement. This means that the policy goal of sustaining government services and the Canadian standard of living as society ages is supported by the policy goal of addressing First Nation poverty. Federal Government Spending on Aboriginals - Projection
10,000
9,000
8,000
7,000
Millions ($)
6,000
5,000
4,000
3,000
2,000
1,000
1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10
Administration Costs
Program Costs
Source: DIAND & own estimates
Fiscal Realities Economists The True Cost of First Nation Government Page 18 If First Nation poverty could be reduced to average Canadian levels today, it would reduce government expenditure obligations by $43 billion over the next 10 years. To put that number in perspective, the federal contribution to the Canadian Health and Social Transfer (CHST) last year was $29.4 billion (1999‐00). The chart above shows the projected growth in federal spending on Aboriginals. Clearly, cost pressures are arising because of growth in program delivery costs and not administration costs. Impact on Productivity First Nation poverty and under development is having an impact on the Canadian standard of living, productivity and indices of equality. For example, if First Nations could magically be made as productive as the Canadian average, Canadian productivity would rise by 7% over night. Canada would then surpass Japan and Germany in terms of real per capita GDP. Fiscal Realities Economists The True Cost of First Nation Government Page 19 Conclusions The principle conclusion has already been stated. It would be a big mistake to focus the debate about the costs of First Nation government on the costs of maintaining First Nation administrations. There is some danger of this happening because of the media attention being given to the issue of financial accountability by First Nation governments. If the intention is to deliver maximum fiscal benefit to the Canadian taxpayer then the debate should be focused on how the system of First Nation governance can provide economic opportunity to First Nation persons. In order to re‐focus the debate it needs to be cast in the correct terms. First, the “fiscal” debate is only a subset of a larger debate concerning the rights of First Nations’ persons in Canada. There are those who would argue against developing First Nation governments even if this delivered fiscal benefits because they believe it undermines national unity. There are also those who consider it immoral to even consider the fiscal implications because the issue is about the right to self‐determination of an entire people. This paper doesn’t touch this level of debate although there is some bias towards the view that the fiscal implications do matter to most people. Second, it is often mistakenly assumed that the costs of First Nation government are all discretionary. Many people actually believe the debate is about whether or not to spend this money as if all expenditures on First Nation persons could be eliminated by ending the system of First Nation government. In fact, most of these costs are accounted for by programs that are received by all Canadians. Third, the debate about the appropriate governance should consider the entire constellation of what constitutes governance. It must consider not only the costs of First Nation administrations and the costs of program delivery by First Nations but also the responsibilities of the other orders of government. It would be a mistake to focus the debate on the costs of First Nation government administrations or the notion that First Nation governments are “too small”. Focusing the debate on First Nation administrative systems is like telling a giant his shoe lace is untied just as his other foot is about to crush you. As is illustrated below, we are arguing about reducing administration costs instead of addressing the real issue – the high government service costs associated with poverty. Fiscal Realities Economists The True Cost of First Nation Government Page 20 However, administrative savings should be pursued. It does however appear that more savings could be found by exploring models of local government for their application to First Nation government than by replacing First Nation governments. This would be more consistent with trends elsewhere in the world. Administrative efficiencies often result by moving away from centralized delivery because of the reduction of bureaucracy and because small governments find ways to share administrative and physical infrastructure through service agreements and the like. The main question for debate Program
Costs
Associated
with Poverty
must be what system of governance will promote economic development on First Nation lands? The causes of Can you believe
it? His shoe lace
is UNDONE!
Administrative
Costs
under development are myriad and the relative importance of each cause is much debated. However, the issues can be boiled down into some fundamental questions. 1. Will First Nation government increase the complexity of government and damage the business environment? Opponents of expanding First Nation government note that with over 600 First Nations, this will greatly increase the complexity of government. They argue that this will substantially increase the challenge of reducing internal trade barriers in the country and as a result substantially increase the costs of doing business in Canada. Their solution would be to make bring First Nation governments into the existing system of local government and thereby bring about jurisdictional harmony. Proponents argue that with the proper institutional framework, First Nation government will make it possible to enhance the economic union and reduce the complexity of government. They argue that the development of First Nation government is a means for resolving outstanding issues of jurisdictional clarity between the federal and provincial governments. Fiscal Realities Economists The True Cost of First Nation Government Page 21 2. Will the development of First Nation government reduce investor uncertainty, promote jurisdictional clarity, and enhance the investment climate? The answer to this question depends upon the aims with which self‐government is implemented. If it is implemented with an eye to resolving Delgamuukw and Treaty rights within fiscal arrangements, it will clearly promote greater clarity and improve the investment climate. 3. Is the system of property rights on First Nation lands a detriment to investment? Opponents of expanding First Nation government argue that this is a principle cause of First Nation under development. Proponents acknowledge that most investors are unfamiliar with how to do business on First Nation lands where they are leaseholders. The extent of the disadvantage is debatable. For example, much land in England and virtually all land in Hong Kong is leasehold and markets operate very successfully there. 4. Can First Nation governments deliver social programming more effectively? One of the keys to enhancing economic opportunities is making a difference in people’s lives at an early age. Experiences with child poverty can permanently affect a child’s chances at success later in life. Similarly, bad experiences with education can permanently affect one’s chances to receive a proper education. The major issue is whether First Nation government can make a difference in the lives of First Nation persons and improve educational attainment. 5. Can First Nations promote economic performance with greater local control? Opponents of First Nation government often argue that a principle cause of First Nation under development is First Nation government. The argument has been made many times that these governments are too corrupt to promote economic growth and that First Nations persons must therefore leave First Nation lands in order to find opportunity. This assertion has become so popular that it has often gone unchallenged. The proponents that do exist however note that there is considerable evidence that under development is not a result of too much authority vested in First Nation governments. It is a consequence of a lack of authority. For example, work done by the Harvard Project on American Indian Economic Development suggests that the most important factor in determining whether tribal governments developed strong economies was having sufficient authority at a local level.14 Their finding was that only at this level were governments capable of responding properly to opportunities. This finding was supported by work done by Fiscal Realities. This work found that the costs 14
For example, see the "Statement of Professor Joseph P. Kalt before the United States Senate Committee on Indian Affairs." September 17, 1996. Fiscal Realities Economists The True Cost of First Nation Government Page 22 of putting together an investment project on First Nation lands were on average four to six times higher than elsewhere. The principle reasons were a lack of capacity at the local level and lengthy lags in decision making time created by the need to seek approvals from Ottawa. 15 This suggests that it is important to develop First Nation government with the explicit aim of creating an institutional framework that promotes investment and growth. This goal may actually conflict with the aim of minimizing administration and ensuring strict financial accountability for transferred funds. Such provisions tend to handcuff administrations in the pursuit of economic opportunity. It is clear that the present system of governance has contributed to under development. For example, project approval times are lengthy because so many decisions must go through Ottawa and this delay can affect the profitability of a project. Similarly, investors often require complex contractual guarantees regarding land use and service quality to compensate for uncertainties created by unclear jurisdiction. The need for such guarantees raises costs and creates delays. Finally, under the existing fiscal arrangements for First Nation governments, there is neither the means nor the incentive for encouraging market based economic growth. First Nation governments are forced into competing with commercial enterprises because they do not have the tax room required to generate other revenues. If private enterprise were allowed to operate on their lands, they would lose these revenues and any tax monies generated would simply flow to other governments. Finally, First Nation governments lack access to capital markets and are unable to finance infrastructure improvements. 15
Fiscal Realities, “Expanding Commercial Activity on First Nation Lands”, 1999. Fiscal Realities Economists