Following the Money Federal and Provincial Budget Balances with Canada’s Major Cities

Residents of Canada’s major cities tend to pay far more in taxes than they receive in federal and provincial programs. Why?urban taxation

The Canadian unemployment rate – with and without Alberta’s Boom

Over the past two decades there has occurred a shift in economic power from central Canada to other parts of the country. Saskatchewan and Newfoundland and Labrador have both claimed a noticeably larger share of Canada’s GDP since 1995 but easily the largest shift of economic output has been to Alberta. This adjustment in the Canadian economy is most easily observed in the large migration between provinces of Canadians seeking employment. Data from Statistics Canada’s Labour Force Survey shows that over the period 1995-2014 Alberta has maintained an average annual rate of growth in employment of 2.50 per cent. This is well above the 1.44 percentage rate of employment growth in second-place Ontario and double the average rate of growth in neighbouring British Columbia. This begs the question: What would Canada’s unemployment rate be today if Alberta’s job creation boom hadn’t happened? Since the national jobless rate is a weighted average of the provincial figures, getting an answer is straightforward. Assume Alberta’s employment growth was no higher than Ontario’s over the same period and the impact on Canada’s unemployment rate is startling. By August 2014, Canada’s unemployment would have been 9.39 per cent — 2.23 percentage points higher than the real figure of 7.16 per cent — and the Alberta economy would have created 411,000 fewer jobs; jobs which typically pay $200 to$300 per week more than jobs in Ontario and Quebec. This gloomy scenario means that Canada’s present unemployment rate would be 2.5 percentage points higher than it was in mid-2000, and 411,000 Canadians, along with their dependents, would be clearly much worse off were it not for the boom in Alberta. Obviously this simple experiment can’t capture the situation’s full economic complexity. Would some of those jobs have cropped up in other provinces? Stubbornly lacklustre growth could very well have forced governments and the Bank of Canada to adopt desperate measures; it could also have damaged postrecession recovery by increasing the federal budget deficit and limiting the Bank’s room to manoeuvre. While admittedly simple, this exercise highlights how reliant is Canada’s international reputation for economic strength and fiscal parsimony on Alberta’s prolonged economic boom

A Primer on the Government of Alberta’s Budget

Provincial budgets may normally make for dry reading, but in Alberta’s case, there is plenty of suspense lurking inside the pages — and that’s not necessarily a good thing. Your average family may know certain things about balancing a budget: keeping spending roughly in line with income; not relying on volatile, unpredictable income streams to cover expenses; and not leaving the kids with an inheritance of significant debt. But look at how Alberta has been managing its budget in the last decade, and it is obvious that the provincial government is breaking a lot of the financial management rules that most Albertans are disciplined enough to live by at home. A clear way to get a sense of how the Alberta government has managed its finances is by analyzing how much provincial program spending relies on depleting provincial savings, either in the form of savings funds or non-renewable resource deposits, such as oil and gas. By 2011, Alberta’s “Budget Gap” had grown to almost the same level it was in 1993, when the province was forced to adopt wrenching budget cuts in order to close what had become a yawning gap between revenue and costs amounting to $4,000 in spending for every man, woman and child in the province. This paper suggests there are three key questions that should be posed to our government and to any political party seeking to represent our interests as our government: 1. How tolerant are they of annual deficits? Do they advocate a strategy of relatively lower levels of government spending and/or higher tax rates, so as to avoid deficits no matter the state of the economy? Or will they tolerate deficits during economic slowdowns to enable higher levels of spending and/or lower tax rates? 2. To what extent are they willing to trust the payment of health-care costs and the costs of education and social assistance to oil and gas royalties as opposed to taxation? 3. How, exactly, does one define investments in social infrastructure; investments that can be funded by borrowing or by spending non-renewable resource royalties? What limits should be put on borrowing to fund such expenditures

Small and Exposed: Debt Accumulation in Canada’s Small Provinces

It hardly takes a shrewd premier to keep a province from racking up debt when economic times are good, and it does not necessarily take a reckless government to accumulate debt when economic times are tough. What matters more, when assessing a government’s fiscal responsibility, is how policy decisions — as opposed to cyclical effects — influence a province’s debt ratio. With economically small provinces being especially vulnerable to exogenous shocks, the need to avoid chronic deficits and debt accumulation is particularly high, since minimizing deficit and debt at least improves the resilience of these provinces to recover from shocks when they do occur. An analysis of the provincial government finances of Canada’s four smallest provinces— P.E.I., New Brunswick, Nova Scotia and Manitoba — finds that some are better at preparing for inevitable exogenous economic shocks. Taxpayers in Nova Scotia and P.E.I. in particular have legitimate reason to be worried. Taxpayers in New Brunswick and Manitoba can breathe a little easier, but both provincial governments have in recent years begun introducing policies that have reduced their potential for resiliency, too. From 1982–2008, New Brunswick’s governments — both Liberal and Progressive Conservative (PC) — were the most successful of the four provinces in keeping its operating account more or less in fiscal balance. However, to best manage future economic shocks the province will have to reverse a six-year string of sizeable policy-induced deficits amassed first under a Liberal government and more recently under a PC government. Currently, New Brunswick’s policies are doing more to increase provincial debt than are cyclical influences, by a factor of more than two. Manitoba also has one of the stronger records of the four provinces but labours under the burden of the consequences of a rapid accumulation of policy-induced debt incurred during the mid-1990s. Unfortunately, during the last three years of our period of analysis, policy-induced deficits have the province sliding in the wrong direction, adding 2.6 percentage points of GDP to its accumulated operating account deficit. Notably, there appears to be little difference between NDP and PC governments when it comes to policy-induced debt accumulation. The one distinction appears to be that the PCs have tended to begin governing by adding debt, and reducing it later, while the NDP has followed the opposite pattern. The record of P.E.I.’s policy decisions, meanwhile, has been the reverse of Manitoba’s: After managing to keep its debt in check for 20 years, the government since 1999 has added 11 percentage points of GDP to its accumulated operating account deficit almost entirely as the result of policy choices. Particularly worrisome is the recent rapid accumulation of debt between 2009 and 2014. In the meantime, Nova Scotia continues working to undo the risky policies of the “lost decade” from 1984 to 1994, where PC governments increased the debt ratio by nearly a third. In all four provinces the ability to keep debt ratios under control will depend heavily on constraining the growth in health-care spending. Health spending has soared in all provinces since 1999–2000, the most extreme case being in New Brunswick where the share of revenue spent on health has leaped from 25.4 to 35.9 per cent. Even if these provinces cannot change the fact that they are small and exposed, and are stuck with the specific economic risks that entails, they do have the ability to make policy choices that mitigate the length and severity of the effects of exogenous shocks. With three of the provinces (save P.E.I.) expected to enjoy faster growth in 2015, the work in better preparing their economies for shocks should begin right away

Sources of Debt Accumulation in Resource-Dependent Provinces

Governments in provinces relying on natural resource commodities for significant amounts of revenue face the distinct challenge of unpredictably fluctuating budget circumstances. As politicians routinely point out, much of that challenge is in the volatility of global commodity prices. But a big part of it is actually the policies of the governments themselves. In fact, when effects of commodity prices, economic cycles and fiscal policy are separated from one another, one of the biggest impacts on government debt over the last 30 years in Canada’s four resource-dependent provinces — Alberta, Saskatchewan, British Columbia and Newfoundland and Labrador — has been government policy. While years of booming economies have offset years of busts, virtually all the debt racked up by these provinces over more than three decades has been a combination of movements in commodity prices and political decisions. In Alberta, over three periods since the early 1980s, totalling more than 15 years cumulatively, it was policy — not energy prices or economic factors — that had the biggest impact on government debt levels. From 1988–89 to 1993–94, Progressive Conservative policies were the biggest factor in raising Alberta’s debt, and from 1995–96 to 1999–2000, the Klein government’s policies were the biggest factor in reducing Alberta’s debt. The policies of then premier Ralph Klein also played the biggest role in reducing debt from 2001–02 to 2003–04, while from 2006–07 to 2013–14, the policies of the Stelmach and Redford governments outweighed economic and commodity-price effects in ways that both reduced debt at times, and then raised it again. Over the entire period from 1982–84 to 2013–14, PC government policy increased Alberta’s debt ratio by 9.5 percentage points of GDP, while the business cycle decreased it by only one percentage point, and the commodity-price cycle decreased it by only 1.9 points. In Saskatchewan, the policy component raised the provincial debt ratio by 11.6 percentage points of provincial GDP from 1982–84 to 2013–14. The business cycle added 1.5 points and the commodity-price cycle decreased the debt ratio by 6.1 points. Ironically, given assumptions about party proclivities, it was Progressive Conservative government policies that added most of that debt, and NDP government policies that made the most progress in reducing it. In Newfoundland and Labrador, where a reliance on resource revenue is a more recent phenomenon, the policies of both PC and Liberal governments were almost indistinguishable, together reducing the debt ratio by 9.8 percentage points of GDP from 1982–84 to 2013–14, while the effect of commodity prices reduced it by 16.9 percentage points. But in B.C., government policy was, as in the other western provinces, the biggest factor on the debt ratio: decreasing it by 12.5 percentage points of GDP, compared to the increase of two points caused by economic cycles, and the reduction of 4.9 percentage points caused by commodity prices. Whatever the politicians in resource-dependent provinces say about their unpredictable budgeting challenges, clearly policy can have the biggest impact on debt accumulation. As it happens, that is also the one factor over which those politicians actually have total control.

How You Pay Determines What You Get: Alternative Financing Options as a Determinant of Publicly Funded Health Care in Canada

A Canadian returning home from a visit to a physician has no idea of the cost of providing the service just received. This is true for two reasons. One is because he or she does not receive a bill to pay. The other reason has to do the myriad of ways provincial governments fund the provision of health care. Health care is financed by a wide variety of types of taxation, by intergovernmental transfers determined by opaque and changing rules, by borrowing against future taxes and by drawing down savings. Confusion over how health care is funded creates a fiscal illusion that it is cheaper than it really is; a fiscal illusion that grows larger the less provincial governments rely on taxing individuals. In this paper it is shown that when provincial health spending is financed in ways other than taxation, it grows two to three times more quickly than it would have otherwise. From 2001-2008 alone, these distortions amounted to $6.75 billion at the national level, draining funds from other government services many of which have been shown to keep Canadians healthier and so reduce their demand for health care. Simply put, when Canadians are clear about the true cost of health care they more effectively play the traditional role of consumers by guarding against waste and inefficiency and so contribute to a more efficient and effective publicly-funded health care system

Mind the Gap: Dealing with Resource Revenue in Three Provinces

Alberta, Saskatchewan, Newfoundland and Labrador have each enjoyed a “rags to riches” story. Each of these provinces entered Confederation as poor cousins relative to the rest of the country; Alberta and Saskatchewan in 1905 and Newfoundland and Labrador in 1949. Rather remarkably, almost exactly four decades after entering Confederation each province began to enjoy the strong economic growth resulting from the development of their natural resources; Alberta and Saskatchewan in the late 1940s with the discovery of large pools of oil and Newfoundland and Labrador in the early 1990s with the development of off-shore oil. The governments of these provinces have similarly enjoyed the benefits of large amounts of revenue realized from the sale of these natural resources. In 2013-14, resource revenues accounted for 21 per cent, 22 per cent and 32 per cent of provincial revenues in Alberta, Saskatchewan, Newfoundland and Labrador, respectively. Unfortunately, the benefit of receiving large amounts of resource revenue must be weighed against two costs. The first is that these revenues, having flowed into provincial coffers without the need to impose high tax rates on citizens, are easily spent. The second cost is that the prices of resources are determined in international markets and so a significant amount of the revenues of these provinces is largely unpredictable and often volatile. All three provinces have fallen prey to the temptation to allow a large fiscal gap to open between the costs of providing health care, education, social assistance and other areas of provincial responsibility and the taxes imposed on citizens to pay for these services. Doing so has put all three provinces at financial risk should resource prices fall. Using a newly constructed data set spanning the period 1970 to 2014, I review the history of how Alberta and Saskatchewan have dealt with commodity price shocks and what this has meant for provincial finances. With that history as background, I review the response of the government of Newfoundland and Labrador to the flood of revenue it has received over the past decade as a result of the development of off-shore oil fields. The evidence is clear that Newfoundland and Labrador has adopted the same high-risk budgeting strategy as Alberta and Saskatchewan; a strategy that has seen the province choose to fund health care, education and social assistance using revenues that are unreliable and unpredictable. As Newfoundland and Labrador prepares for the release of its budget for 2015-16, it must begin to deal with the effect on its revenues of a dramatic fall in oil prices, a historically large budget deficit and a threat to the financial viability of its health, education and social assistance programs

Shelter from the Storm: Weather-Induced Patterns in the Use of Emergency Shelters

In Calgary, where winters are almost always long and temperatures can plummet below -30 C, it seems logical to assume that the highest rate of emergency-shelter use would occur on the coldest of days. On very cold days one might expect rough sleepers – those who for a variety of reasons sleep outdoors – to sleep in shelters. And yet, if social agencies were to operate on that assumption, and were to focus on significantly augmenting capacity on only bitterly cold days, the result could well be that not enough beds are made available when they are in fact needed. The number of people using emergency shelters follows a more or less regular pattern over the course of a week, a month and a year. Weekends, for example, find fewer people using emergency shelters. Seasonal influences are also important as are major holidays and the timing of income support cheques. An analysis of weather effects on emergency-shelter stays in the city of Calgary finds that the conditions that are most likely to move rough sleepers into shelter do not only occur during the depths of winter, but also during the so-called “shoulder seasons” of early spring and late fall. Weather related changes in the demand for shelter spaces is greatest when temperatures hover between 0 and -10 C, and when these temperatures are accompanied by wet snow or sleet. Those conditions can produce a temporary increase of 10 to 15 per cent over the average number of emergency-shelter users. The importance of realistically estimating shelter use should not be understated. Emergency shelters are so named for a reason: When an extraordinary number of homeless people face an urgent need for shelter, it is critical that shelter operators not find themselves caught unawares, and left either scrambling to secure additional capacity or, worse, forced to turn away those in need. Being adequately prepared for significant spikes in shelter usage requires an understanding of what causes shelter use to vary and this requires an appreciation of the role of weather conditions. Understanding that inclement weather in the spring and fall, when temperatures are only moderately below zero and wet snow or sleet is falling, drives large numbers of rough sleepers into shelters gives shelter operators the ability to better prepare for spikes in demand. Given the scarce resources available for shelter provisions, this improved preparation ensures enough beds are available at the times when they are most needed, and decreases the likelihood of potentially catastrophic outcomes

A Recovery Program for Alberta: A 10-Year Plan to End the Addiction to Resource Revenues

Alberta has a substance-abuse problem. The substance is fossil fuels, and the province has become hooked on the revenues from oil and gas sales to fund its spending on health, education and social services. As we are so often told, the first step in beating an addiction is admitting that a compulsion has gotten out of control. Recent announcements suggest that Alberta’s leaders appear to have finally taken that first crucial step. We applaud them for doing so. But if they plan to get this addiction under control and so ward off the sort of financial turmoil that has tormented Alberta in the past, they will have to do more. In this note we provide a menu of policy choices all of which take the government to a sustainable budget by 2023. They all involve reductions in what we identify as the government’s Budget Gap — that is, the difference between its spending and all its revenue besides the revenue it earns from nonrenewable resources. The size of that gap summarizes just how much provincial government spending on health care, education and social services is at the mercy of commodity-market swings. If current trajectories of government spending continue, then in another 10 years the gap will be nearly 4 times what it was in 1999. Reducing the size of the Budget Gap is necessary to protect Albertans from repeatedly suffering wide swings in levels of public service, shifting tax rates and plunges into deficit and debt. We identify a variety of ways to achieve fiscal sustainability over 10 years. Our investigation highlights two key results. First, provincial spending on health care currently comprises 40 per cent of provincial expenditures and is growing at a rate that causes it to double every 20 years. Exempting health care spending from cuts comes at the price of draconian cuts to education and social services of over 30% even after adjusting for inflation and population growth. It is therefore hard to fathom that constraints on health spending can be avoided altogether. Second, to reduce the size of the cuts to spending required to achieve fiscal sustainability, the government can raise rates on existing taxes or introduce a new source of revenue like a sales tax. It is important to note, however, that new revenue without spending restraint cannot solve the problem. Additional revenue can only help achieve fiscal sustainability if it is accompanied by a program of spending restraint along with a sales tax of 3, 6 and 9 per cent and an increase in the personal tax rate to between 12 and 17 per cent from its current 10 per cent. None of these are easy options. But weaning itself off of its addiction to resource revenue means Alberta’s days of taking the easy way are over. Spending cuts alone or spending cuts in conjunction with increases in taxes are necessary steps to recovery. The government of Alberta has finally admitted it has a problem. In this note we identify the ways it can fix it

Shrinking the Need for Homeless Shelter Spaces

Recent research has confirmed that only a minority of people who use emergency shelter beds are long-term users. Most shelter clients stay for short periods and do so relatively infrequently. These people use shelters as a temporary solution to problems that stem from poverty as opposed to problems arising from addiction or mental health problems. The implication is that addressing poverty may be an effective way of shrinking the need for emergency shelter beds. Our study uses information describing demographic characteristics and a measure of housing affordability in 51 Canadian cities to identify to what extent efforts at poverty reduction may enable the closing of emergency shelter beds. Across Canada in 2011, 15,493 permanent beds were available in 408 emergency shelters. The provision of emergency shelter beds varies widely across cities. Calgary, for example, provides more than twice as many beds per 100,000 people than does Vancouver or Toronto and more than four times the number provided in Montreal. The number of emergency beds provided is an indication not only of the number of homeless people but it is also a measure of the local response to the issue. We show that an effective strategy for shrinking the need for shelter beds is to provide improved income support to the very poor. Accounting for differences in climate, housing affordability, and demographics that may be associated with discrimination in housing markets, we show how a relatively modest increase in the incomes of those with very low incomes can shrink the need for emergency beds by nearly 20%. We also show that a modest increase in rent subsidies would have a similar impact. Still other policies that can prove effective are those that reduce the cost of building housing that can be profitably rented at prices those with low incomes can afford. These may involve tax incentives to builders and may call into question efforts at urban densification which makes low-cost construction difficult. The wide range of policy choices means that all levels of government have a role to play in increasing the affordability of housing for those with low incomes. Recognizing the broad range of effective policy options is important because the causes of homelessness vary by city and so policymakers need to be flexible in their responses to the issue. We continue to be perplexed why governments fail to index for inflation the income support provided to those in poverty. That policy alone would go some considerable way toward enabling those with low incomes to stay housed and so reduce the need for emergency shelter beds