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Cost of Government Debt in Canada, 2017

Budget deficits and increasing debt are key fiscal issues as the federal and provincial governments prepare to release their budgets this year. Combined federal and provincial net debt has increased from $833 billion in 2007/08 to a projected $1.4 trillion in 2016/17. This combined debt equals 67.5% of the Canadian economy or $37,476 for every man, woman, and child living in Canada.

Debt accumulation has costs. One major consequence is that governments must make interest payments on their debt similar to households which must pay interest on borrowing related to mortgages, vehicles, or credit card spending. Spending on interest payments consumes government revenues and leaves less money available for other important priorities such as spending on health care and education or tax relief.

Canadian governments (including local governments) collectively spent $62.8 billion on interest payments in 2015/16. That works out to 8.1% of their total revenue that year and $1,752 for each Canadian or $7,009 for a family of four. The total amount spent on interest payments is approximately equal to Canada’s total spending on public primary and secondary education ($63.9 billion, as of 2013/14, the last year for which we have finalized data).

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Did the Coal Phase-out Reduce Ontario Air Pollution?

In 2005, the province of Ontario began a process that would eventually lead to the phasing out of its coal-fired power plants, the largest of which were the Lambton and Nanticoke facilities in southern Ontario. The rationale for shuttering these plants was a 2005 cost-benefit analysis that assumed that about $3 billion in annual savings to the health care system would come from the reduction of smog-related air contaminants. However, that analysis, and another one done for the province the same year on the effects of cross-border air pollution, reported that the phase-out of coal would have only very modest effects on Ontario air quality, which is consistent with emissions inventory data showing that electric power generation was a minor contributor to particulate and ozone pollution at the time. The cost savings estimate came from assuming very large health effects associated with very small changes in air pollution.

In the aftermath of the coal phase-out, and the extremely costly changes to the electricity system this transition required, we examine whether the removal of coal from the grid explains changes in air pollution levels since 2002. We develop statistical models of air pollution concentrations in Hamilton, Toronto, and Ottawa, looking at monthly average levels of fine particulates (PM2.5, or particulate matter smaller than 2.5 microns), nitrogen oxides (NOx) and ground-level ozone (O3). Our explanatory variables include electricity generation from coal-fired and natural gas-fired power plants, NOx and PM2.5 emissions from other sources in Canada and the US, weather conditions, and seasonal indicator variables.

We find the elimination of coal was associated with a reduction in average urban PM2.5 levels by about 1 to 2 mg/m3 (about 6–12 percent from the peak levels), but the effect was not statistically significant in Toronto or Hamilton. We find no evidence that the coal phase-out reduced NOx levels, which were instead strongly affected by reduction in US NOx emissions. We find a statistically significant reduction in peak O3 levels from the coal phase-out, offset by a significant increase associated with natural gas plant emissions.

Overall, we conclude that the coal phase-out yielded small improvements in air quality in some locations, consistent with projections done prior to the plant closures, which were comparable in size to projected air quality improvements that could have been achieved through installation of new pollution control systems rather than closing the plants. This has implications for understanding the costs and benefits of a coal phase-out, such as the one being contemplated in Alberta.

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Comparing Government and Private Sector Compensation in British Columbia

Main Conclusions

  • Using data on individual workers from January to December 2015, this report estimates the wage differential between the government and private sectors in British Columbia. It also evaluates four available non-wage benefits in an attempt to quantify compensation differences between the two sectors.
  • After controlling for such factors as gender, age, marital status, education, tenure, size of firm, type of job, industry, and occupation, British Columbia’s government sector workers (from the federal, provincial, and local governments) were found to enjoy a 7.4 percent wage premium, on average, over their private sector counterparts in 2015. When unionization status is factored into the analysis, the wage premium for the government sector declines to 4.2 percent.
  • The available data on non-wage benefits suggest that the government sector enjoys an advantage over the private sector. For example, 91.6 percent of government workers in British Columbia are covered by a registered pension plan, compared to 18.7 percent of private sector workers. Of those covered by a registered pension plan, 95.9 percent of government workers enjoyed a defined benefit pension compared to just under half (46.8 percent) of private sector workers.
  • In addition, government workers retire earlier than their private sector counterparts—about 2.5 years on average—and are much less likely to lose their jobs (3.0 percent in the private sector versus 0.4 percent in the public sector).
  • Moreover, full-time workers in the government sector lost more work time in 2015 for personal reasons (12.4 days on average) than their private sector counterparts (8.0 days).
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Regulation and Funding of Independent Schools: Lessons from Australia

Among industrialized countries, Australia is the most similar to Canada with respect to its economy, history, and culture. There are therefore opportunities to learn from one another, including in the area of regulation and funding of independent schools, which in Australia as in Canada exist outside of the public system, and are known as non-government schools.

There are a number of Australian policies regarding the regulation and funding of independent schools worth consideration. First, like Quebec and the western provinces, Australia provides funding to qualifying independent schools in order to reduce the direct cost of tuition for parents choosing such schools. The base value of the government grant is determined as a percent of the equivalent funding provided to public schools. In 2013, the average operating grant provided to a public school (referred to as a government school in Australia) was $15,649, compared to $8,781 for an independent school (in Canadian dollars using Bank of Canada conversions of Australian dollars).

Second, like all Canadian provinces save for Ontario, Saskatchewan, and Alberta, all religious schools in Australia exist as independent schools outside of the public system. The three Canadian provinces in question provide Catholic education as part of the overall public education system. Indeed, Australia actually classifies their independent schools into two categories, one covering Catholic schools and the other covering all other independent schools.

Third, and perhaps most interestingly, Australia adjusts the value of the payment made to independent schools to reflect the socio-economic status of individual students. This is achieved by adjusting the value of the government grant to the school to reflect the socioeconomic profile of the area in which each individual student in a school resides. Specifically, government funding for students from the highest socioeconomic status (SES) areas is limited to 20 percent, while grants for students from the lowest SES areas can reach 90 percent. The remaining portion of the tuition costs must be covered by the parents or through fundraising by the school. Unfortunately, this innovation is currently being reviewed in Australia and hard data allowing for rigorous evaluation of the differential funding will not be available until 2018.

These and other independent school policies have impacted enrolments in Australia. In 2014, the share of students enrolled in independent schools in Australia was more than five times that of Canada: 34.9 percent compared to 6.8 percent. Of the 35.0 percent of students attending independent schools in Australia, 20.6 percent attend independent Catholic schools and the remaining 14.4 percent attend other independent schools.

Like Canada, Australia has experienced marked growth in independent school enrolment. For instance, for the decade between 2001 and 2011, enrolment in independent schools in Australia grew by 34.6 percent, compared to just 1.8 percent in public schools.

The main reason for the more standardized Australian approach to regulating and funding independent schools is the encroachment of the federal government in this policy area, which should not be emulated in Canada. While the outcome of this federal intervention in Australia has been deemed beneficial by many education observers, it violates a core tenet of federalism and ultimately leads to centralization, which prevents experimentation, innovation, and the tailoring of services to local needs.

There are insights for the Canadian provinces—both those that provide funding to independent schools and those that do not—from the Australian experience, including the treatment of religious education, the broad funding of independent schools, and potentially the differential level of funding provided for individual students based on their social-economic profiles.

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This paper examines the extent to which the tax policy changes introduced in Alberta in 2015 have diminished Alberta’s tax advantage relative to peer jurisdictions.

Specifically, we compare key tax rates in Alberta before and after the recent tax policy changes to assess whether Alberta still holds a significant tax advantage over other provinces and peer jurisdictions in the United States. We focus on three areas of tax policy that have historically composed the main pillars of Alberta’s “tax advantage”: personal income taxes, corporate income taxes, and sales taxes.

We find that whereas in each of these areas Alberta until quite recently enjoyed a substantial advantage over all Canadian provinces and most US energy states, that advantage has been substantially undermined or completely erased for two of the three pillars (personal income taxes and corporate income taxes).

Specific findings include:

  • Before the tax policy changes, Alberta had the lowest corporate tax rate in Canada. Alberta’s “advantage” in this area is gone. Alberta’s new provincial corporate tax rate is higher than British Columbia’s and Ontario’s, and is almost identical to those in Saskatchewan, Manitoba, and Quebec. Alberta can now be considered “middle of the pack” within Canada on corporate taxes.
  • In 2014, Alberta had the lowest top combined federal-provincial/state tax rate out of 60 Canadian provinces and American states. After the tax policy changes, Alberta’s top personal income tax rate is now the 46th lowest. That means Alberta’s top rate is now in the highest third of North American jurisdictions. Comparing the marginal personal income tax rate at four different income levels reveals that Alberta no longer has a distinct tax advantage in any of those levels examined.
  • Alberta retains one pillar of its tax advantage in the Canadian context, as it alone among the provinces does not have a provincial sales tax. Relative to American energy jurisdictions, however, Alberta does not necessarily enjoy a sales tax advantage as there are several states with neither a federal nor a state-level sales tax.

We conclude that the notion of a uniquely competitive and pro-growth tax regime that provides the province’s economy a distinct advantage is largely obsolete.

This development has important implications for Alberta’s future economic growth prospects. To provide context for these implications, this paper briefly discusses the research literature on the relationship between tax rates and economic growth, as well as the evidence surrounding the economic impact of different types of taxes.

The literature suggests low and competitive tax rates are generally beneficial for economic growth, particularly with respect to corporate income taxes and personal income taxes. We demonstrate that Alberta’s experience is consistent with this evidence, by providing an analysis of the province’s economic performance during the life of the province’s “tax advantage.” This analysis shows that generally, the province economically outperformed the rest of the country and most peer jurisdictions during that time. For example, Alberta’s real GDP growth rate between 2001 and 2014 (at 3.3%) was higher than all other provinces and behind only North Dakota among US energy states.

In a discussion section, the paper also considers the fiscal context in which recent tax policy questions were made, assessing the extent to which they were necessitated by the emergence of large budget deficits. We find that the provincial government had other options available to it to shrink the province’s deficit, such as reducing and reforming provincial expenditures, which have increased rapidly in recent years. This approach would have preserved Alberta’s tax advantage, and economic theory suggests it would have been beneficial for the province’s short- and long-term economic growth prospects relative to the course the government has in fact taken.
 
In short, the erosion of Alberta’s tax advantage documented here should be viewed as the result of discretionary policy choices rather than a necessity imposed upon the government by fiscal circumstances. As a result of these choices, we conclude that the Alberta tax advantage has been, in large measure, erased.

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Does Constitutional Protection Prevent Education Reform in Ontario?

The Canadian Constitution entitles Ontario Catholic schools to be funded by the public purse. That funding is shielded from Charter review, meaning that citizens cannot challenge it in the courts. However, the constitutional entitlement does not tie the hands of the Ontario government because amending or eliminating it is not legally difficult.

Unlike amendments to other parts of the Constitution that are subject to more onerous amending requirements, amending separate school funding as it affects Ontario requires only a resolution passed by the Ontario legislature and federal Parliament. Essentially, the Ontario government could simply legislate its way out of the commitment. The federal resolution should follow as a matter of course.

Given the ease with which the provision can be amended, broad education reform is possible.
 

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Generosity in Canada and the United States: The 2016 Generosity Index
  • Manitoba had the highest percentage of tax filers that donated to charity among the provinces (24.8%) during the 2014 tax year while New Brunswick had the lowest (19.6%). Manitoba also donated the highest percentage of its aggregate income to charity among the provinces (0.81%) while Quebec donated the lowest (0.27%).
  • The general trend in recent years is that a declining percentage of Canadian tax filers are donating to charity and they are donating less as a percentage of income.
  • Nationwide, a lower percentage of tax filers donated to charity in Canada (21.3%) than in the United States (24.5%). Similarly, Canadians (at 0.56%) gave a lower percentage of their aggregate income to charity than did Americans (at 1.42%).
  • The percentage of tax filers donating to charity varies significantly among US states and Canadian provinces and territories. On this indicator, Manitoba is the only Canadian jurisdiction that ranks among the top 20 (ranked 19th out of 64).
  • The percentage of aggregate income donated was generally less in the Canadian provinces and territories than in the US states. There was only one US state (West Virginia) where the percentage of aggregate income donated was less than the percentage donated in Manitoba (0.81%), Canada’s highest ranked province.
  • US jurisdictions top the overall Generosity Index rankings. Utah places first (scoring 8.8 out of 10.0), followed by Maryland (7.5) and District of Columbia (6.8). Manitoba is the highest-scoring Canadian province (3.7) but ranks only 37th overall out of 64 North American jurisdictions.
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Economic Freedom of North America 2016

Economic Freedom of North America 2016 is the twelfth edition of the Fraser Institute’s annual report. This year it measures the extent to which the policies of individual provinces and states were, in 2014, supportive of economic freedom, the ability of individuals to act in the economic sphere free of undue restrictions. There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. The former, our subnational index, is for comparison of individual jurisdictions within the same country. The latter, our all-government index, is for comparison of jurisdictions in different countries.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. In the case of the all-government index, we incorporate three additional areas at the federal level from Economic Freedom of the World (EFW): 4. Legal Systems and Property Rights; 5. Sound Money; and 6. Freedom to Trade Internationally; and we expand Area 1 to include government enterprises and investment (variable 1C in EFW), Area 2 to include top marginal income and payroll tax rate (variable 1Dii in EFW), and Area 3 to include credit market regulation and business regulations (also at the federal level). These additions help capture restrictions on economic freedom that are difficult to measure at the provincial/state and municipal/local level.

Results for Canada, the United States, and Mexico
The all-government index
In Economic Freedom of the World (Gwartney, Lawson, and Hall, 2016), for several years now Canada has been ahead of the United States, which is in turn even further ahead of Mexico. The inclusion of variables from that report in our all-government index allows us to display more accurately the gap between Canada, the United States, and Mexico. Thus, in the all-government index for 2014 two of the top three jurisdictions were Canadian, with Alberta in first place with a score of 8.1 and British Columbia tied for second with New Hampshire at 7.9. Alberta’s hold on first place is not secure, however, as from 2015 its gov-ernment has been making changes in taxation, spending, and regulation that are likely to have a significant negative effect on the province’s economic freedom. Saskatchewan, Ontario, and Newfoundland & Labrador were tied for fourth (with Florida, Texas, and 14 other US states) at 7.8.

It is important to understand just how close the scores are in this index. In addition to the 19 jurisdictions tied for fourth, there are 23 jurisdictions tied for 23rd at 7.7 (20 states and three Canadian provinces) and 13 more tied for 46th at 7.6 (11 states and two Canadian provinces). The highest ranked Mexican states are Jalisco and Baja California, tied at 61st with 6.5. Those three are behind all 60 of the US and Canadian jurisdictions. The lowest ranked state is Distrito Federal at 5.6, followed by Colima at 5.7 and Campeche at 5.9. The lowest-ranked Canadian provinces are Prince Edward Island and Nova Scotia at 7.6, tied for 46th with California and 10 other states. The lowest-ranked states in the United States are New York and Delaware, tied at 7.5 in 59th place.

Historically, economic freedom has been declining in all three countries. Since 2004, the average score for Canadian provinces on the all-government index has fallen from 7.90 to 7.78; the average score for US states fell from 8.26 to 7.70; and for Mexico, from 6.68 to 6.19. However, economic freedom has increased in all three nations since 2013 when Canadian provinces aver-aged 7.73, the US states, 7.64, and the Mexican states, 6.09.

The subnational indices
For the purpose of comparing jurisdictions within the same country, the subna-tional indices are the appropriate choice. There is a subnational index for each country. In Canada, the most economically free province was, in 2014, Alberta with 8.0, followed by British Columbia with 6.4 and Ontario at 6.2. The least free by far was Quebec at 3.9, followed by Nova Scotia and Saskatchewan, tied at 5.2.

In the United States, the most economically free state was New Hamp-shire at 8.3, followed at 8.1 by Florida. South Dakota and Texas are tied for third at 8.0. (Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least free state was New York at 5.7; California was slightly better at 5.9. Alaska, Hawaii, and New Mexico were tied for 46th at 6.0.

In Mexico, the most economically free state was Baja California at 7.8. Jalisco was second at 7.6, followed by Coahuila at 7.3. The least free Mexican state was Chiapas at 4.3; slightly better were Campeche at 4.5 and Oaxaca at 4.9.

For the first time this year, we have produced for each province and state a one-page summary that contains all the 2014 scores and rankings for each of the components of the index as well as historical data on the overall and area scores. For brevity, these are not included in the report, but they are available below.

Economic freedom and economic well-being at the subnational level
The jurisdictions in the least economically free quartile (one fourth) on the all-government index had, in 2014, an average per-capita income of just US$2,485 compared to US$43,847 for the most economically free quartile. On the subnational index, the same relationship holds, with the least-free quartile having an average per-capita income more than 3% below the national average, while the most-free quartile was nearly 5% above it.

In addition, economic freedom at the subnational level has generally been found to be positively associated with a variety of measures of the per-capita size of the economy and the growth of the economy as well as various measures of entrepreneurial activity. There are now more than 200 articles by independent researchers examining subnational economic freedom using the data from Economic Freedom of North America. (Appendix C lists some of these articles that either use or cite Economic Freedom of North America.) Much of that literature discusses economic growth or entrepreneurship but the list also includes studies of a variety of topics such as income inequality, emi-nent domain, and labor markets. The results of these studies tend to mirror those found for these same relationships at the country level using the index published in Economic Freedom of the World.

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Comparing Government and Private Sector Compensation in Canada

Using data on individual workers from January to December 2015, this report estimates the wage differential between the government and private sectors in Canada. It also evaluates four available non-wage benefits in an attempt to quantify compensation differences between the two sectors.

After controlling for such factors as gender, age, marital status, education, tenure, size of firm, type of job, industry, and occupation, Canada’s government sector workers (from the federal, provincial, and local governments) were found to enjoy a 10.6 percent wage premium, on average, over their private sector counterparts in 2015. When unionization status is factored into the analysis, the wage premium for the government sector declines to 7.2 percent.

The available data on non-wage benefits suggest that the government sector enjoys an advantage over the private sector. For example, 89.3 percent of government workers in Canada are covered by a registered pension plan, compared to 23.8 percent of private sector workers. Of those covered by a registered pension plan, 93.7 percent of government workers enjoyed a defined benefit pension compared to just under half (45.0 percent) of private sector workers. In addition, government workers retire earlier than their private sector counterparts—about 2.3 years earlier on average—and are much less likely to lose their jobs (3.8 percent in the private sector versus 0.5 percent in the public sector).

Moreover, full-time workers in the government sector lost more work time in 2015 for personal reasons (12.7 days on average) than their private sector counterparts (7.8 days).

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Global Petroleum Survey 2016

This report presents the results of the Fraser Institute’s 10th annual survey of petroleum industry executives and managers regarding barriers to investment in oil and gas exploration and production facilities in various jurisdictions around the globe. The survey responses have been tallied to rank provinces, states, other geographical regions (e.g. offshore areas), and countries according to the extent of such barriers. Those barriers, as assessed by the survey respondents, include high tax rates, costly regulatory obligations, uncertainty over environmental regulations and the interpretation and administration of regulations governing the “upstream” petroleum industry, and concerns with regard to the political stability and security of personnel and equipment.

A total of 381 respondents participated in the survey this year, providing sufficient data to evaluate 96 jurisdictions, which hold 66 percent of proved global oil and gas reserves and account for 75 percent of global oil and gas production.

The evaluated jurisdictions are assigned scores on each of 16 questions pertaining to factors known to affect investment decisions. These scores are then used to generate a “Policy Perception Index” for each jurisdiction that reflects the perceived extent of the barriers to investment. The jurisdictions are then sorted into clusters based on the size of their proved reserves, allowing for an apples-to-apples policy perception comparison of the resources that are available for commercialization.

Of the 12 jurisdictions with the largest petroleum reserves, Texas, United Arab Emirates, Qatar, Alberta, and China are the five most likely to attract, or least likely to deter, investment. The five large-reserve jurisdictions least likely to attract investment on the basis of their Policy Perception Index scores (Venezuela, Libya, Russia, Indonesia, and Nigeria) account for 45 percent of the proved oil and gas reserves of all the jurisdictions included in the survey. Alberta is the only Canadian jurisdiction in the group of jurisdictions with large reserve holdings.

In the group of 36 jurisdictions with medium-sized reserves, the 10 that are the most attractive for investment are: Oklahoma, Wyoming, North Dakota, Norway—North Sea, the Netherlands, Arkansas, Norway—Other, Louisiana, United Kingdom—North Sea, and West Virginia. The only Canadian jurisdictions in this group are Newfoundland & Labrador (12th of 36) and British Columbia (18th of 36).

Of the 45 jurisdictions with relatively small proved oil and gas reserves, the top 10 performers are Kansas, Saskatchewan, Mississippi, Utah, Montana, Alabama, United Kingdom—Other, Manitoba, New Zealand, and Morocco. Nova Scotia, Yukon, and the Northwest Territories rank near the middle to the bottom of the small-reserve-holder group. New Brunswick was the least attractive jurisdiction in this group due to its poor Policy Perception Index scores on a number of survey questions.

When the attractiveness for investment is considered independently from the reserve size of jurisdictions (historically the primary focus of this survey), we find that jurisdictions with first quintile Policy Perception Index scores, suggesting that obstacles to investment are lower than in all other jurisdictions assessed by the survey, are almost all located in Canada, the United States, and Europe. According to this year’s survey, the 10 most attractive jurisdictions for investment worldwide are Oklahoma, Texas, Kansas, Saskatchewan, Wyoming, North Dakota, Norway—North Sea, Mississippi, Utah, and Montana. All but three of these jurisdictions—Wyoming, Utah, and Montana—ranked in the worldwide top 10 in the 2015 survey.

The 10 jurisdictions that are least attractive for investment are (starting with the worst): Venezuela, Quebec, Libya, Bolivia, New Brunswick, California, New South Wales, Ecuador, Ukraine, and Russia.

Our analysis of the 2016 petroleum survey results indicates that the extent of negative sentiment regarding key factors driving petroleum investment decisions has increased somewhat in many of the world’s regions. The United States continues to remain as the most attractive region for investment, followed by Australia, which moved ahead of Canada this year. Canada’s fall to the third most attractive region in the world for investment is reflective of Alberta’s continued deterioration, as investors continue to view the province as less attractive for investment.

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