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Measuring the Fiscal Performance of Canada's Premiers 2016

The relative fiscal performance of 10 Canadian premiers (six current and four former) is measured up to the 2014/15 fiscal year for three components of fiscal policy: government spending, taxes, and deficits and debt.

Overall, the premiers ranked (of 10) and scored (of 100), as follows:

  • 1st Christy Clark, BC (78.5)
  • 2nd Philippe Couillard, QC (78.2)
  • 3rd Brad Wall, SK (77.1)
  • 4th Stephen McNeil, NS (69.3)
  • 5th Greg Selinger, MB (63.0)
  • 6th Kathleen Wynne, ON (61.4)
  • 7th former premier Alison Redford, AB (53.8)
  • 8th former premier David Alward, NB (47.2)
  • 9th former premier Robert Ghiz, PE (44.1)
  • 10th former premier Tom Marshall, NL (37.8)

On the government spending component, McNeil took top position (scoring 92.6), followed closely by Couillard (90.1) and Clark (84.4). Three premiers scored below 50: Marshall (49.4), Redford (33.7), and Ghiz (22.8).

On the taxes component, Redford led the premiers (scoring 90.2). Premiers from Canada’s most populous provinces, Wynne (62.7) and Couillard (57.1), ranked 5th and 7th, respectively. Alward ranked last (27.7).

On the deficits and debt component, Wall topped the list (scoring 100). Clark came second (89.4), followed by Couillard (87.5) and McNeil (82.2). Three premiers scored below 50: Alward (48.4), Redford (37.3), and Marshall (0.0).

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Comparing the Costs of the CPP with Public Pension Plans in Ontario

Proponents of the CPP and those who argue for its expansion often claim it has low costs and economies of scale, whereby the ratio of costs to assets declines as the value of assets under management grows.

This paper examines that claim by comparing the total costs (investment and administrative) of the CPP with five other large public pension plans based in Ontario including the Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS), the Healthcare of Ontario Pension Plan (HOOPP), the Ontario Pension Board (OPB), and the OPTrust.

Overall, the paper finds no systematic relationship between the size of pension plan assets and their cost (measured as a percentage of assets). The CPP, the largest plan with $269 billion of assets, had the highest expense ratio at 1.07% of its assets on average for the whole period between 2009 and 2014. The OTPP, the next largest plan at $154 billion of assets, had the fourth highest average expense ratio (0.63%).

In fact, there may be diseconomies of scale for larger public pension plans because of the complexity of implementing their investment strategies, which include contracting out for external experts—a practice that has become increasingly popular, with plans investing more in non-traditional assets such as real estate, infrastructure, and private equity.

These more aggressive investment strategies raise costs. Whether they are justified by higher rates of return will not be known for decades, and depend on whether the assumption that markets have mispriced these assets is borne out.

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An Economic Analysis of Rural Land Use Policies in Ontario

There is a widely held public perception that agricultural land is being converted to non-agricultural uses at a high—even an alarming—rate in Ontario. This perception has had an appreciable effect on public policy. Frankena and Scheffman (1980) conducted the most recent comprehensive economic analysis of rural land use policies in Ontario. Their primary findings were that the rate at which agricultural land had been converted to non-agricultural uses was not high for the period 1951 to 1976, and that conversion of agricultural land to urban uses represented a small share of overall conversions at a provincial scale. They also concluded that rural land use policy and planning in Ontario had been conducted with insufficient regard for the contributions that economic analysis could make to policy development.

The purpose of this report is to revisit Frankena and Scheffman’s findings to determine if they still hold for the years that have elapsed since 1980. Our analysis proceeds along two lines. First, we examine the empirical evidence on the amount of agricultural land in Ontario and how that has changed over time. Our empirical work covers the 1951 to 1976 time period studied by Frankena and Scheffman, but we also examine data up to 2013, the most recent year for which data are available. We consider several data sets that provide empirical estimates of the amount of agricultural land in Ontario.

We conclude that Frankena and Scheffman’s major findings still hold. The area of cropland in Ontario, which we argue is the most meaningful measure of the amount of agricultural land in the province, has been essentially constant, with perhaps a slight increase in area, since 1951. Farmland area, which is defined on a different basis from cropland area, has been decreasing, but we explain that this is a less meaningful measure of the amount of agricultural land in the province.

After reviewing the empirical evidence and research on the supply of agricultural land in Ontario, we develop a framework for evidence-based policy making with respect to land use. This framework draws on the theories of market and non-market failure, as well as the lessons learned from the economic calculation debate on central planning. We also differentiate between the theories of absolute and comparative advantage as competing perspectives on resource use. Evidence-based policy making has been endorsed by both the Government of Canada and the Government of Ontario. This approach to policy making originated in education policy and public health policy. In more general contexts, a conceptual framework is needed to integrate some of the more normative elements in policy decision making that are perhaps less prominent in the original contexts of this approach. Our view is that the economic theory of government policy can make an important contribution to the application of evidence-based policy making in new areas.

We proceed to identify and describe the major changes in land use policy that have occurred in Ontario since 1980. In particular, we examine the series of four Provincial Policy Statements, the Niagara Escarpment Act and Plan, the Oak Ridges Moraine Act and Plan, and the Greenbelt Act and Plan. We then apply our theoretical framework to these major changes in policy with a view to addressing the following questions:

  1. Is the rationale for policy consistent with at least one category of market failure? What evidence of the existence and severity of market failure was used to develop the rationale for policy?
  2. Was there evidence of consideration of potential non- market failure problems arising from the policy measures in question?
  3. Was implementation analysis applied before policy implementation?
  4. Was there evidence that consideration was given the lessons learned from the economic calculation debate?
  5. Was there acknowledgement of the theory of comparative advantage?
  6. Are there any general trends toward increased provincial control over local land use decisions?

Sadly, we found that, generally speaking, Frankena and Scheffman’s conclusion that land use policy could benefit from increased regard for critical economic concepts still holds. Policy documents make frequent and general references to concepts like efficiency, prosperity, optimality, and even cost-benefit analysis of alternative policy measures. Unfortunately, there seems to have been little in the way of application or follow-through on these concepts. Lessons learned from the economic calculation debate on the viability of central planning, in our view, have application in land use planning. The theory of comparative advantage, as opposed to the theory of absolute advantage, deserves more serious consideration in land use policy. In addition, the widespread reliance on land use designation, and the abandonment of the prior provincial policy approach of purchase of environmentally sensitive lands financed through tax revenue, are inconsistent with the economic theory of public goods and have created important equity concerns for rural land owners, who have ended up bearing a disproportionate share of the burden of providing benefits shared among the citizens of the province.

The final section discusses alternative approaches that might be considered for rural land use policy. These include the use of tradeable development rights, compensation for land owners adversely affected by a development proposal, restrictive covenants and deed restrictions, proprietary community models, land trusts, and a club goods model.

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ladder of upward mobility

Over the last 20 years, the percentage of the Canadian population living in poverty has declined. Specifically, the percentage living in households below the basic needs poverty line has fallen from 6.7 percent in 1996 to 4.8 percent in 2009 (latest year of available data). Meanwhile, the percentage living in households below Statistics Canada’s low income cut off (LICO) has also decreased from a height of 15.2 percent in 1996 to 9.7 percent in 2013 (the latest year of available data). The incidence of low income among specific vulnerable groups (children, seniors, and persons in lone-parent families) has also dropped over time.

That said, the annual incidence of poverty and low income is a snapshot that does not distinguish between people who experience short spells of poverty or low income versus those who are stuck there for longer periods (six years or more). The snapshot therefore misses important dynamics over time. The low income population is constantly changing as people enter and leave low income. Indeed, a large share of people in low income in one year is not in low income the following year. For instance, more than a third (36.9 percent) of Canadians with incomes below LICO in 2009 was above LICO in 2010.

For the overwhelming majority of Canadians who experience low income, it is a temporary situation, not a lifelong condition. Young people, for instance, often have relatively low incomes when they are in school or first enter the workforce, but their income typically increases as they gain skills and work experience. In other cases, households may encounter a temporary negative shock to their income, perhaps due to a loss of employment, from which they may be able to recover relatively quickly. According to Statistics Canada data, the average time spent in low income is brief with the average spell being 2.4 years over the 2002 to 2007 period.

Overall, a very small portion of the Canadian population is stuck in low income year after year. Research from Statistics Canada shows that 1.5 percent of Canadians were in persistent low income from 2005 to 2010 (the latest available six-year period). And the percentage of the population in persistent low income has been falling since the 1990s. In the earliest available six year period (1993 to 1998), the percentage of Canadians in persistent low income (3.6 percent) was considerably higher than it was in the most recent six-year period.

Statistics Canada research also shows that certain characteristics put Canadians at a higher risk of experiencing persistent low income. Some of the at-risk characteristics include having a physical or mental disability, being part of a lone-parent family, and having less than a high school education.

The root causes of poverty among these at-risk groups are complex and varied, meaning the solutions for how best to provide assistance are also likely to differ. Simple proposals, such as increased cash transfers, may not help particular groups and could, in some cases, be detrimental. For instance, cash transfers could be detrimental for someone who is suffering from a drug or alcohol addiction if they use the additional monetary resources to feed and reinforce their addiction. If the addict’s problem is maintaining stable employment, the cash transfer does not necessarily help their situation.

This paper serves as a starting point for a broader research agenda that will investigate the root causes of persistent poverty among these at-risk groups with the ultimate goal of providing workable options to assist them.

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Select Cost Sharing in Universal Health Care Countries

A prominent feature of Canada’s health care system is the absence of any charge for publicly insured health care services at the point of consumption. This feature is mandated by the Canada Health Act along with a prohibition on extra-billing by health care providers.

A strong argument can be made that “first-dollar” coverage leads to an inefficient overconsumption of health care services. Specifically, it encourages the consumption of health care services whose costs exceed the associated benefits of those services.

Most developed countries with universal coverage for health care services do not mandate first-dollar coverage. Rather, insurers (whether public or private) typically impose some type of cost sharing for the health care services they cover, including services that are similar to those that are covered by provincial health care plans in Canada. Exemptions from cost-sharing, or subsidies to help pay for cost sharing, are typically provided to low-income insurance subscribers, the chronically ill, and children. There are also usually caps or limits on the total out-of-pocket expenses that different groups of subscribers can incur as a result of cost sharing.

A prominent argument against cost sharing is that it will discourage the consumption of “necessary” medical services with the potential consequence of much larger future costs being imposed on the insurance system to remediate the discouraged earlier consumption.

Empirical evidence generally suggests that cost sharing at the point of consumption does lead to a reduced use of health care services at the margin; however, the evidence does not consistently establish that cost sharing results in adverse long-term health outcomes. This latter result might reflect the fact that exemptions and subsidies that are granted for specific services and for low-income and other “vulnerable” patient groups mitigate risks that cost sharing will discourage the consumption of necessary medical treatments and procedures.

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Effect of Corporate Income and Payroll Taxes on the Wages

A long held misperception in public policy debates is about who ultimately bears the bur-den of business taxes. The tax incidence is determined by the group that ultimately bears the burden of the tax, which can be different from the entity responsible for collecting and remitting the revenue to government. When it comes to corporate taxes, some simply—and wrongly—assume that corporations pay them in an economic sense, leading to inaccurate claims about the desirability of raising such taxes. And, when it comes to payroll taxes, those levied on employers are assumed—again, incorrectly—to be paid by employers.

The corporate income tax (CIT) is ultimately “paid” for by individuals either as: workers through lower wages; consumers through higher prices; and/or corporate owners (shareholders) through lower profits and returns of investment. While the objective of groups pushing for a higher CIT may be to increase the tax burden on owners of capital, taxes shifted to consumers or workers are clearly not paid by “corporations”, even in the loosest meaning of the term. With respect to payroll taxes, an increase in the total cost of labour is not always and easily absorbed by employers, meaning increased payroll taxes can result in a reduction in compensation (either wages or fringe benefits, or a combination of both). Thus, studying the incidence of corporate income and payroll taxes is important for an informed public-policy debate.

In practice, empirical evidence suggests that the burden of both taxes is partly shifted to workers. This study examines the effect of the statutory (federal and provincial combined) corporate income-tax rate and the employer portion of the payroll tax rate on the wages of Canadian workers.

Economists generally accept that the burden of corporate income and payroll taxes falls to some extent on workers through reduced wages, especially in open economies where capital is mobile and sensitive to tax rates. This can be the result of: [1] short-term adjustments to the level, or more likely, the rate of wage increases at the time when wages are set; and [2] long-term adjustments that reduce labour productivity and thus wages when capital (investment) declines in higher taxed regions or sectors. The empirical analysis in this study focuses on the first explanation and thus most likely captures only part of the impact of such business taxes on wages.

We use a sample of individual-level data from Statistics Canada’s Labour Force Survey (LFS) to measure the effect of corporate income and payroll taxes on the wages of workers over the period from 1998 to 2013, while controlling for individual determinants of wages such as a worker’s age, sex, education, marital status, occupation, and industry. We also control for a worker’s union status and firm size, and use provincial fixed effects, time fixed effects, the unemployment rate, and inflation as variables when relevant.

Our findings show that corporate income and payroll taxes have a negative and statistically significant impact on wages even in the very short term. Specifically, controlling for other factors, we find that a 1% increase in the statutory corporate income-tax rate reduces the (inflation-adjusted) hourly wage rate by between 0.15% and 0.24%, depending on the model specification (these results are for workers employed in the private sector). Based on these results, if the 2012 unweighted average combined corporate income-tax rate for the ten provinces (27.34%) increased by just one percentage point to 28.34%, the national hourly wage rate in the following year would decrease by between $0.13 and $0.20, which translates into annual wages that are lower by between $254 and $390.

For a 1% increase in the employer portion of the payroll tax rate, we also find a negative effect on the hourly wage rate ranging from 0.03% to 0.14%. In dollar terms, this suggests that a one-percentage-point increase in the 2012 unweighted average combined employer-portion payroll tax rate (10.52%) would decrease the national average hourly wage rate in the following year by between $0.07 and $0.31, which translates into annual wages that are lower by between $137 and $605.

In addition, we produce regression analyses including both private- and public-sector workers and sub-samples of private-sector workers grouped by firm size and by union status. In all cases, the results point to a negative and significant effect on the hourly wage rate from increases in corporate income and payroll taxes, albeit by different orders of magnitude.

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pipelines or policies

While an analysis of the share prices of firms show that savvy investors have already “priced in” many of the concerns about oil transport and access to outside markets, the Fraser Institute’s annual Global Petroleum Survey shows that investor confidence in Alberta is taking a serious hit.

The survey’s Policy Perception Index measures the extent of policy-related investment barriers within each jurisdiction. The higher the score, the more negative the sentiment on the part of respondents, indicating that they regard the jurisdiction in question as relatively unattractive for investment. Alberta’s score deteriorated from a value of 26.6 in 2014 to 34.2 in 2015, and its global rank as a desirable location for investment fell to 38th (out of 126) in 2015, down from 16th (out of 156) in 2014.

Areas such as political stability, fiscal terms, uncertainty concerning protected areas, and taxation experienced large negative shifts, indicating that more investors are viewing these areas as barriers to investment in Alberta.

During Alberta’s last royalty review, when investors also downgraded Alberta’s ratings in the Global Petroleum Survey, exploration and development spending in Alberta declined, while neighboring Saskatchewan and British Columbia saw increases in investment.

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Are the Provinces Really Shortchanged by Federal Transfers?

In recent years, government officials from several provinces and a number of commentators have suggested that inadequate transfers from the federal government are a contributing factor to the persistent deficits that exist in several provinces. This study steps away from the political rhetoric and examines data on federal transfers to the provinces to assess whether these transfers have been growing or shrinking in recent years, and at what rate. It also compares the rate of growth for federal transfers to other metrics—including spending growth, own-source revenue growth, and the combination of inflation and population growth—to begin to assess the validity of claims that inadequate federal transfers are partially responsible for the fiscal challenges facing many provinces.
The study finds that federal transfers to the provinces and territories have grown substantially in recent years, increasing by 62.3 percent from 2005/06 to 2015/16—a rate much higher than would have been required to keep pace with inflation and population growth. Furthermore, the share of all provincial revenues that come in the form of transfers from Ottawa has increased significantly between 2005/06 and 2015/16.

Contrary to claims that federal transfers to the provinces are inadequate, the study finds that major federal transfers to the provinces and territories are currently higher on an inflation-adjusted per-capita basis than at any other point in Canadian history (see figure). The most important reason for the persistence of budget deficits at the provincial level in Canada has been significant spending growth over the past decade. Provincial program spending increased by 56.1 percent during this timeframe, whereas spending would only have needed to increase by 31.6 percent to offset the effects of inflation and population growth. Spending growth, which has dramatically outstripped own-source revenues and inflation plus population growth, is the primary cause of persistent deficits in the provinces, not inadequate federal transfers.

After discussing trends on aggregate transfers to the provinces, the study turns to recent developments surrounding transfer payments to specific provinces, identifying the jurisdictions that have experienced particularly rapid growth in federal transfers and discussing the reasons for these trends. In both nominal and real per-capita terms, transfer payments to Alberta, Quebec, and Ontario have increased at a significantly faster rate than transfers to other provinces.

The rapid increase in transfers to Ontario is primarily a function of that province becoming a “have-not province,” which means that since 2008/09, Ontario has been receiving equalization payments. Ontario’s transition to a have-not jurisdiction and the substantial resulting increase in transfers to the country’s largest province has had a number of important implications. Federal transfers to Ontario increased by 87.8 percent between 2005/06, far faster than the rate of transfer growth for the country as a whole, and also far faster than a number of relevant metrics including GDP, inflation plus population growth, and provincial own-source revenue. Whereas federal transfers represented 12.0 percent of Ontario’s revenue in 2005/06, that figure had climbed to 16.4 percent in 2015/16.

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Income Mobility: The Rich and Poor in Canada

One set of government statistics shows that the average incomes of Canadians in the lowest quintile of the distribution, the “poor”, remained constant during the period from 1990 to 2009. Another set of government statistics indicates that, over the same period, the “poor” enjoyed a 180% increase in income. The same two sets of statistics reveal similarly different results for the middle class and the rich.
 
This study explains the reasons for this difference. Chapter 1 shows that Statistics Canada calculates the average incomes of the different quintiles using survey data on the incomes of all Canadians in a given year, ranks them in descending order, and calculates the average incomes of each quintile. The problem with this methodology is that each quintile contains different persons who have experienced higher or lower incomes than they did in the preceding year and moved into different positions on the income scale.

This income mobility is the outcome of well-known events in human life. The young or new immigrants entering the labour force have low in-comes that increase as they gain work experience and become more productive. Temporary reductions in income are due to unemployment or illnesses while increases are due to temporary events like capital gains, bonus payments or professional success of limited duration.

Chapter 2 documents how income mobility influences the average in-comes of an unchanged set of Canadians over a number of years. This calculation uses the income-tax data of individuals, which has been made possible only recently through the availability of computerized information maintained by Revenue Canada. The information about the income of Canadians derived through the traditional set of statistics provides the rationale for the clichés that “the rich are getting richer and the poor are getting poorer” and that “the poor are trapped in poverty”. The new measure based on income mobility shows, in contrast, that “all Canadians are getting richer, the poor more so than the rich” and refutes the existence of poverty traps.
 
Chapter 3 considers the public outcry over the great income gains en-joyed recently by the very top of the income distribution, the infamous “one-percenters”. The statistics show that income mobility is also high among this group of Canadians. Most important, the data reveal that these high incomes are earned by entrepreneurs and professionals in business, sports, entertainment, and creative arts as a result of their investments in education, training, and risky enterprises. These high incomes are not the result of the illegal practices, immoral behaviour, and political cronyism that produced the plutocrats in Russia, China, and other transitional and third-world economies.

The high growth in the incomes of Canadians at the very top of the distribution started in the 1980s when free-trade agreements led to the globalization of commerce and labour markets and when technological revolutions in communication, transportation, and travel broadened world markets. Canadian business professionals, stars in sports, entertainment, and the arts, and successful innovators now sell in world markets, which are much larger and reward them more richly than the much smaller Canadian market did before.

The policy implications of the findings of this study are presented in Chapter 4. One of them is that the government should be required to pro-duce and publish regularly statistics on income mobility at the same time that it publishes the traditional data on income distribution so that public and political discussions of the need for more income redistribution policies will become more fact-based and consider properly the relative merit of preserving income mobility and equalizing incomes.

For example, the mobility data show that the rich are mostly Canadians at an age where they have the highest incomes of their lives but also have the highest levels of responsibility towards their families. Is it fair to tax them at punitive rates and transfer the funds to the young who have no such responsibilities? Another example is that, according to mobility data, government aid for the poor in the lowest quintile benefits the 87% who will have higher incomes in the future. Would it not be better to cut or eliminate the aid to these individuals and use the saved money to increase aid to the 13% who are the unfortunate victims of permanent physical and mental disabilities?

Finally, debates about higher taxes for the very rich should consider that these Canadians earn their high incomes through investment in education and risk-taking. Is it fair to punish individuals who have made such investments and reduce the incomes of future generations because these taxes reduce incentives to invest in education and risk-taking?

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Cost of Government Debt in Canada, 2016

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 $834 billion in 2007/08 to a projected $1.3 trillion in 2015/16. This combined debt equals 64.8% of the economy or $35,827 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 that 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 an estimated $60.8 billion on interest payments in 2014/15. That works out to 8.1% of their total revenue that year. To further put the amount spent on interest payments in perspective, it is more than what is spent on pension benefits through the Canada and Quebec Pension Plans ($50.9 billion), and approximately equal to Canada’s total public spending on primary and secondary education ($62.2 billion, as of 2012/13, the last year for which we have finalized data).

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