What Governments Can Learn from Startups

Every few years the electorate votes the ruling party out of office — often in favour of a new, reinvigorated opposition party. Effectively we vote in a ‘startup government’ led by a few individuals with political experience, marketing savvy and the support of political opportunists with deep pockets, or at least committed ‘followers’ who ‘like’ a particular party.

The parallels with startup culture are clear except for one thing:

Canadian governments control organizations that employ about 18% of all working Canadians. The percentage of public sector employees seems consistent across the country — at least in BC and Ontario.

All of which means that every few years we can expect to be governed by a team of relatively inexperienced cabinet ministers. It is almost frightening to consider that these individuals will take charge of a set of different organizations that collectively represent a huge percent of the workforce — as large and as diverse as only the largest multinational corporations.

Can these (hopefully) well-intentioned individuals effectively adapt and take control of such a large and complex set of organizations?

It is almost inevitable that new governments rely extensively on senior management in the public sector to draft public policy.

While this may be understandable, it also represents a significant challenge to any new government.

The Art of the Pivot

When we replace governments we don’t replace the civil service. While many of the functions of the civil service are critical, they are incredibly resistant to change. We should look to startup culture to help re-invent the business of government.

Of course there is deep expertise within each organizational component of Government. But, simply because the bureaucracy — and public sector unions — have managed to put a stranglehold on virtually every public sector organization, that does not mean that we must allow them to dictate the way in which government services are delivered.

New governments need to identify groups of creative people with a fundamental understanding of the various business units — both within the regulators and the regulated — and task them with disrupting the status quo by building prototypes of new business models. In other words we need to consider the ‘Minimum Viable Process’ for achieving our organizational goals.

We don’t need to look very far for processes in Canada that need to be disrupted. Consider:

1. The Phoenix Payroll System
2. Support for Disabled Veterans
3. The CRA’s Voluntary Disclosure Program
4. Shared Services Canada
5. Sexual assault in the military and the RCMP
6. The Missing and Murdered Inquiry — and Indian and Northern Affairs Canada generally
7. Bankruptcy Laws (think of Sears Canada)
8. Tackling climate change

However the government’s resources are limited and they need to prioritize. Unfortunately there isn’t all that much bench strength or creativity among our members of parliament. Our partisan approach to politics and our ‘first past the post’ electoral system isn’t very fertile ground for creativity. Instead it is all about conformity to ‘family values’ , improving the lot of ‘working people’ (aka ‘making the rich pay’) or helping ‘the middle class and those who want to join it’ (aka ‘ trying to appeal to everybody’).

All of the power appears to be centred in the PMO (Prime Minister’s Office). This was true under Stephen Harper — and is just as true under Justin Trudeau with his ‘sunny ways’. Individual members are expected to toe the party line. Our political system actively works to stifle creativity.

The horrible truth is that our governments don’t have the right DNA to act as disruptors. What’s more — we do need predictability in Government — so while disruption must occur, it must be controlled.

HOW TO PIVOT THE CRA

Like a great many Canadians I have opinions about how we could do things better. But realistically my expertise lies within our tax system. I am one of the 40.25% of professional accountants that works in “professional, scientific and technical services” (most of whom practice as public accountants).

The CRA is administering the most complex set of legislation in the country. It relies on individuals and corporations assessing themselves. This is generally referred to as a ‘self-assessment system’.

The majority of complex returns are prepared by professional accountants. For their part the CRA hires and/or trains accountants to administer the Income Tax Act (and the Excise Tax Act).

According to Industry Canada 11.01% of accountants work in public administration and 40.25% work in “professional, scientific and technical services”. (Of course not all of these work in CRA or in public practice — however the CRA is the largest federal employer of accountants.) My point is that if we can encourage better compliance the administrative costs — paid for by the government — goes down.

The question is:

How do we take what is supposed to be a ‘self-assessment’ system and improve both compliance and efficiency? 

POSSIBLE INITIATIVES

1. Encourage public accountants to provide ‘better’ tax filings in exchange for reduced audit levels on a firm-by-firm basis (contingent on the quality of filings). Try to reduce the number and extent of audits by improving the quality of original filings.
2. Increased penalties for egregious behaviour on the part of public accountants (consider the recent offshore fiasco in which practitioners weren’t sanctioned)
3. Use professional discipline of the CPAs for inadequate work (as part of the toolbox for sanctioning practitioners)
4. Charge a fee for Professional Development courses as a part of their mandatory annual professional development of CPA members (why not monetize training instead of just paying for it)
5. Rather than attacking benefits enjoyed by businesses — make similar benefits available (eg. income splitting) to ordinary employees.
6. Rather than attacking benefits enjoyed by civil servants — allow other taxpayers to simply deduct medical expenses (at least up to a certain level of income).
7. Reduce the number of public sector employees administering the Income Tax Act by beginning a pilot program allowing public practice firms to review income tax returns for a fee — much like lawyers provide legal aid (CPA firms are already capable of auditing large international firms — why not tax returns)

While I am sure that some public sector employees possess the necessary creativity for this kind of re-positioning work, they necessarily have different perspectives than private sector workers.

For example a public sector worker is almost guaranteed a job for life. This differs markedly from unionized workers in the private sector, where collective bargaining often revolves around ‘job security’. In fact unionization rates have fallen precipitously since at least 1981. According to Statistics Canada about 42% of workers were unionized in 1981. By 2012 that number had declined to 29.9%.

Too often public sector unions stifle any kind of initiative that may reduce jobs or job security. Unfortunately it may be difficult to involve them in streamlining business processes, if that view dominates their perspective.

According to Statistics Canada’s Labour Force Survey: 1999, 2007 and 2012, the percentage of public sector workers that were unionized was 71.4% in 2012 (up 0.6% from 1999). By contrast the percentage of private sector workers that was unionized was 16.4% (down 2% from 1999).

Public sector workers almost invariably have defined benefit pension plans. At retirement these plans — which are untaxed during their working years — typically have a present value of between $500,000 and $1.5 million. Except for the legendary ‘one percent’ virtually no other group of workers has anything like the ‘cradle-to-grave’ security of our public sector workers.

Another key difference between public sector workers is that they generally work for regulatory bodies. Those of us in the private sector tend to be regulated as opposed to regulating others. Clearly this causes a difference in the perspective between the regulators and the regulated. In particular I think of the Finance Department and the Canada Revenue Agency and the difference between their perspective and that of accounting professionals in the private sector.

Much has been said about the recent furore around proposals to address issues around “tax fairness” and the use of private corporations to confer an unfair advantage on that same legendary ‘one percent’. In my view this resulted in a rookie mistake by an otherwise competent Finance Minister. In short he relied on the regulators that worked for him.

Predictably the regulator attempted to defeat their rivals in the regulated sector. What’s more they discounted both the costs of compliance (which they routinely do, since they don’t bear these costs), and the value of their own job security and ‘gold-plated’ benefits, which they would rather keep quiet about.

A better approach would have been to create a dialogue between the regulator and the regulated. We need to improve regulations in a much more collaborative way. Neither perspective should be expected to produce a workable system without significant input from the other.

Some years ago, while still in the private sector, our current Finance Minister is purported to have said the following at a private sector conference on pensions:

”Who believes that the average Canadian, without a defined benefit plan, and without the demonstrated capacity to save enough to support their retirement, will, over the long term agree to fund public sector pensions at a level that they can only dream about attaining themselves?”

– Bill Morneau — 2013 (according to an article in the National Post)

Given the current government’s success with so-called ‘progressives’ in the last election, it can be easily understood why this issue wasn’t addressed in their recent foray into ‘tax fairness’. It comes down to math:

In the last 2 elections the winning party earned strong majorities with 39.5% and 39.6% respectively of the votes. If workers in public sector unions account for between 18% and 19% of the working population, it wouldn’t be wise to target their incredibly rich pension plans in any discussion of tax fairness. This is particularly true for a party that is courting progressive voters.

To be clear, I too consider myself a ‘progressive’ voter. However I believe in basing policy on evidence, whether scientific or statistical. When it comes to fairness I am most concerned with the over 60% of working Canadians that don’t have the kind of job security, or defined benefit pension plans enjoyed by most public sector employees.