By Nick Mahoney. This post is the first of a regular series coming to Finances of the Nation which will serve to aggregate selected current research from think tanks, journals and other relevant sources relating to the Finances of the Nation project. This installation covers the federal government’s Economic and Fiscal Snapshot, Alberta’s economic recovery plan and recommendations on policy for the post-pandemic world.
Covid-19, the novel coronavirus, has brought about an age of novel challenges in fiscal policy. Finance Minister Bill Morneau’s Economic and Fiscal Snapshot described these challenges as they will be faced in Canada. The government’s response measures, in combination with the recession brought on by shutdown measures, has resulted in an estimated deficit of $343.2 billion in 2020-21.
A recent study by the Fraser Institute details federal program spending growth since 2015. Total program spending growth indexed for inflation is estimated at $50.2 billion or 18.4%. The categories primarily responsible for driving this growth are Indigenous and Northern Affairs ($10.7 billion increase), Children’s Benefits ($9.6 billion) and Elderly Benefits ($9.3 billion).
The provinces also face daunting economic challenges. The Parliamentary Budget Office released a report on provincial government liquidity, which shows that Manitoba and Newfoundland have the largest liquidity needs relative to their GDP.
Canada’s oil producing provinces have suffered a double hit from the pandemic and a fall in world oil prices. In response, Alberta released an economic recovery plan which is centred around infrastructure and cutting corporate income taxes. By cutting these taxes, Alberta’s government hopes to attract business and increase employment.
As one would expect there is some uncertainty regarding the efficacy of this measure. Recent research from the IMF by Jean-Francois Wen and Fatih Yilmaz provides some Canadian evidence in “Tax Elasticity Estimates for Capital Stocks in Canada”. They take advantage of provincial and sector variations in the corporate income tax to estimate the long-run elasticity of the stock of machinery and equipment in Canada with respect to the tax-adjusted user cost of capital, providing a baseline estimate of about -1.3; they find no impact on the stock of non-residential construction. On the other side a paper titled “The Impact of Effective Corporate Tax Rates on Investment” by Sebastian Ballesteros and Thomas Goda concludes that “the conventional wisdom that lower corporate taxes foster private investment cannot be generalized … in the recent era of financialisation profits often are used for financial investment, mergers and acquisitions, debt reductions or share buy-backs instead of capital formation.” The debate continues.
Researchers have begun to put forward proposals and recommendations for the future, knowing there is plenty of uncertainty on how to move forward from this pandemic and recession. The Ontario360 project at the Munk School of Global Affairs and Public Policy has released “A Long-Term Economic Recovery Agenda for Ontario” which includes 6 recommendations on government finances and fiscal policy, including adopting a strategic review process for program spending, placing constraints on program spending until the deficit is reduced and more.
The Covid-19 crisis has exposed in stark terms problems with Long-Term Care facilities in Canada. A review from the Canadian Centre for Policy Alternatives estimates that the cost of increasing care in Ontario would be about $1.8 billion, or about 3% of total provincial health spending. Reforms are also being called for at the federal level.
In a Fraser Institute paper titled “Equalization and Stabilization Post-Recession: Is Canada Ready?”, the federal Stabilization Program is deemed “nearly entirely useless for its stated objective” and the flaws in the equalization system, typically those that arise in times of fiscal convergence, are put on display. Such fiscal redistribution programs are analyzed in a recent Research Paper from members of The School of Public Policy at the University of Calgary (including FON’s own Trevor Tombe). The paper shows that since 1961, Alberta has been the largest net contributor to fiscal redistribution by a wide margin, and since 2000 an average family of four in Alberta contributes an estimated $21,000 annually. Contrastingly, the beneficiaries of fiscal redistribution have been Quebec, Manitoba, and the Atlantic Provinces. The Atlantic Provinces have received an estimated 20% of total personal income from fiscal redistribution. The authors conclude that their findings “provide a strong case for reform”.
Other research out of the Parliamentary Budget Office provides new estimates on the distribution of family wealth in Canada, focusing on the top tail of the distribution. They supplement underreported and missing data of high-net-worth families in the Survey of Financial Security (SFS) with National Balance Sheet Accounts (NBSA) and data from Canadian Business Magazine to form a synthetic data set of families with wealth over $3 million. On the basis of this data set they conclude that Canada’s wealthiest families have significantly more wealth than suggested in the SFS – their data set suggests that the wealth share of the top 1 percent of families is 12 percentage points higher than indicated in the SFS.