Canada West Foundation Blog

By: Jacques Marcil, Senior Economist

This is the season of budgets and baseball spring training. While there is no true link between the two, one could not help think of Alberta Finance minister Lloyd Snelgrove as a relief pitcher.

Snelgrove was brought in last month as an emergency caretaker minister of Finance in replacement of Ted Morton, who resigned to join the PC leadership race. (One of the worst-kept secrets in Alberta is that Morton essentially resigned because his views on government cost-cutting were too drastic for outgoing Premier Ed Stelmach’s taste.)

There were no real surprises in the February 24 Alberta budget. Usually, the absence of surprises is considered to be a positive sign. Is this the case here? Yes and no.

On the expense side, the 2010 approach is somewhat repeated: sustained financing for health, education and other “social” ministries, with modest cuts to the other ministries to offset this. This results in program spending increases of 0.5%, 1.3% and 3.1% over this year and the two following years.

On the revenue side, nothing much is done except some service fee increases. However, Snelgrove expects Alberta revenues to grow solidly on their own, reflecting very positive forecasts for economic growth and for natural resource royalties. The latter are expected to jump by 23% and 16% in 2012-13 and 2013-14 respectively. (This is not impossible, but who knows?)

As a result, the province’s deficit gets erased by 2013-14, one year later than originally planned. This delay is not bad in itself given the severity of the recession in Alberta. The problem is that the balancing act is accomplished by drawing down most of the Sustainability Fund—a meager $1.7B is left in it by that date, one-tenth of what was in the Fund in 2009-10.

So the Alberta government has little margin of maneuver and lots of hope hanging on energy price forecasts. Past experience has taught Albertans that those prices are full of surprises, positive and negative. We might have reached the point where Alberta taxpayers have had enough of this uncertainty.

You can’t have your cake and eat it too—Albertans have long enjoyed low taxes, but if they want to enjoy the same level of services as other parts of the country they will have to start considering other sources of revenue for their provincial government.

Energy royalties are nice but they are irregular and unpredictable. The province pays for most of the steadily-growing cost of its services using rollercoaster energy money. If Alberta needs to reform its tax system, it should do so. Taxes are not an ideological issue, they are a practical one. Decisions on tax policy should be fact-based, period.

To return to my baseball analogy (a very agreeable thought when the windchill factor is -36ºC outside), walks are “bad things” but even the best pitcher sometimes has to issue an intentional walk depending on the game situation. No one likes taxes, but sometimes we need them.

Given the unpredictability of Alberta politics (a misnomer until a few years ago), maybe now is not the time to start complex discussions on what size of government Albertans want, or about what taxes are needed for its proper functioning.

Thinking again about it, maybe it is the right time.

A few blogs ago I mentioned that the March budget contained hints that the Conservative minority government was attempting to leave a shrunken government as its permanent legacy. In a recent op-ed I also lamented the absence of long-term thought in current federal economic policy. But now, Industry Minister Tony Clement has apparently accomplished both of these feats by altering the way Statistics Canada collects demographic data across the country. I am talking here of the decision, in anticipation of next year’s Census, to replace the usual Long Form (which was randomly sent to one Canadian household out of five) with a voluntary survey.

Does this matter? Isn’t this just a data collection methodology debate among statistical eggheads and data geeks? Well, the instant uproar was started among that group (of which I am a proud, card-carrying member), but the impact of this decision will be felt everywhere in Canada. Other people have explained very well how the loss of detailed census data will greatly complicate the work of anyone in this country whose job it is to make informed decisions requiring some detailed knowledge of who Canada’s population is. This is especially the case for public policy specialists who work in areas concerned with planning. Just think of people who must figure out the location and the size of hospitals, public transit and roads.

Census information forms the backbone of too many Canadian systems and processes to count. The new approach is the statistical equivalent of changing the diametre of gas pump spouts across the country. It can physically be done and there is a way for everyone to adapt to it, but the adjustment itself is so complicated that you better have a pretty darn good reason for making the change in the first place. I do not think that this is the case here.

Apparently, the Harper cabinet decided to proceed with the change because of growing complaints from the population. Minister Clement told the press that “every MP has had complaints” about what is perceived as intrusions into people’s privacy. Well, I have two things to reply to this. First of all, filling in a census form with personal information is a very small price to pay in order to benefit from informed public policy. Secondly, the complaints the government will receive about this change probably outnumber the initial privacy-related batch already. From left to right, in both the private and the public sector (ranging from federal to municipal), not to mention NGOs and think tanks like Canada West Foundation, many people have expressed concern about the risk of losing access to precious information.

One of the most unexpected aspects of this is the stealth surrounding the change. No consultation whatsoever took place, and the announcement consisted in a mere posting in the Gazette of Canada on June 26 (a Saturday). Contrast this with all the opinion-seeking our Prime Minister went through before selecting the next Governor General.

Statistics Canada has been ranked the world’s no. 1 statistical agency many times and takes great pride in producing good data. As an “arm’s length” federal agency, it is supposed to be outside of the small politics game. When I worked there in the 1990s, the only time we realized we had a Minister at all was during budget cut time. Apart from this, we were allowed to do our number-crunching work alone with no interference. Otherwise, how could our data be credible?

Some will say “This is not a truly important issue. Get your priorities right. Do something about child poverty instead.” Sure. Now, tell me, how do you measure child poverty to start with?

(Note: click PM Harper July 5 to read the letter sent to the Prime Minister by Dr. Roger Gibbins, President and CEO of the Canada West Foundation.)

Posted by: Jacques Marcil

If you’re like me, the name Alberta Climate Change and Emissions Management Corporation doesn’t ring a bell. It sounds like a crown corporation (it isn’t) with a vague mandate (quite the contrary). So what exactly does it do?

In the spring of 2009 Alberta put in place a climate change policy. Large greenhouse gas emitters had to cut down emissions, buy carbon offsets or pay $15 per tonne emitted per year. Alberta then created CCEMC (for short) as an arms-length corporation to act as the money jar for the funds resulting from the third option.

In fact, CCEMC does more than just pile up the “polluter fine” money, it also redistributes it as grants to finance research and development projects aimed at mitigating climate change. A rigorous evaluation process has been put in place for all the applications it receives, some of them highly technical. This year’s grants (the first batch in CCEMC’s short history) will spread $71 million among 16 projects, each one jointly funded 50/50 by CCEMC and the project’s proponent.

I learned this (and more) at a public speaking event in Calgary, part of a series named Changing the Climate: Canada’s New Energy Environment, which was hosted by Canada West Foundation and the Calgary Chamber of Commerce.

Eric Newell, the chairman of CCEMC (and former CEO of Syncrude) talked about the grant program but also about the overall energy/environment picture in Canada. Plenty of interesting stuff. He wrapped up by reminding us that under current conditions, the growth in the global demand for energy is so high that huge investments would be necessary to allow supply to keep up. Therefore, the need to reduce demand is very high. He did not elaborate as to how to reduce demand – that would require a whole new presentation, I’m sure.

Personally, I think that a national carbon tax is the way to go, especially for gasoline, one of my pet peeves. In my view, the day taxes on gasoline are high enough will be the day idling cars have become as rare an occurrence as someone smoking inside a public building.

Jacques Marcil is Senior Economist at Canada West Foundation and author of Currents, the Foundation’s monthly economic bulletin.

Posted By: Jacques Marcil

A lot of people are probably scratching their heads this morning, wondering what to make of recent economic news. For Canada at least, this news mark the return of Harry Truman’s famously feared two-handed economist.

On the one hand, Statistics Canada announced on Monday the acceleration of national GDP growth. In the first quarter of 2010 we reached a rate of 6.1% (annualized), following 4.9% in the last quarter of 2009. The 2010 Q1 result is significant for a number of reasons. First of all, this growth is not just caused by a bounce-back effect from a stagnant situation–it is the real thing. Second, the expansion is spread across all economic drivers: consumption, exports and investment. Finally, the pace we reached in the first quarter is quite impressive compared to that of the US (+3.0%) and the euro zone (+0.8%).

On the other hand, on Tuesday, the Bank of Canada took advantage of its scheduled “rate target announcement” to raise its overnight interest rate from 0.25% to 0.5%. The rate remains very low when compared to historic levels, but if the increase is just the first of a few consecutive increases, that will certainly make many pause before considering getting further into debt. In some regions of Canada, the real estate market had quickly swung back to “very hot” following the recession. Today’s announcement (and subsequent increases) could cool this down. Also worth noting, the Bank mentions that the rate hike is not related to inflation fears but more to the fact that “the global economic recovery (…) is increasingly uneven across countries”.

So, in a nutshell, are things good or bad right now? Well, things are pretty good for Canada as a whole (with some regional variations), but they will be even better once other countries catch up. Canada is dependent on other countries to sustain its growth through trade, so the imbalance in global growth matters a lot.

Posted By: Jacques Marcil

The other day I came across this article in the Wall Street Journal about the US federal administration’s attempt to cut costs by modifying the metallic composition of American coins. (In the US, like in Canada, the penny costs more to produce than it is worth.) It doesn’t take much imagination to discern elements of pure comedy between the lines of a serious and informative news in this story.

At least ten groups, from coin collectors to metal smelters to vending machine operators have something to say about the issue. As one would expect, nearly all the groups are opposed to the change (no pun intended), with each one trying to pull the blanket in its direction by saying that what is good for its constituency is good for the country as a whole. I’m sure that had they been asked, Canadian nickel producers (the ore, not the coin) would have had a thing or two to say about this as well.

This got me thinking about the huge challenges Canada, the US and other countries too numerous to count are facing in the area of public finance. Government deficits need to be reined in all over the world over the next few years, but each measure being considered by each government will generate some form of lobbying.

Think of the multitude of national, sub-national and local governments there are out there, each with dozens, if not hundreds of cost-cutting measures getting lined up in back offices. Then imagine that at least ten lobbies will have something to say about each measure once it is made public, even if it is a plain, common-sense one. Doesn’t it make your head spin? Doesn’t it make the job of governing and managing the public purse look like ridiculously thankless burden?

A few “deep” questions about this:

• Should democracy reach all over our public administration system, or should some areas be “exempted” to make governments easier –and cheaper– to run?
• Is lobbying a necessary evil to keep our elected officials accountable to voters?
• What would the world look like if we only allowed purely altruistic lobbying, meaning that people likely to benefit from a piece of policy could not legally pressure government about it?

And,

• Where can I buy stocks in the companies that make those glossy plastic covers used to package the “information material” handed out by lobbyists?

Posted By: Jacques Marcil

They are as different from each other as St. John’s is from Vancouver, but all of Canada’s provincial health care systems fall under two “laws.” The first law is the Canada Health Act, which defines the national rules of the game. The second law you may be more familiar with: it is the law of continuously growing costs.

Health care costs represent the largest single expense in every province’s budget and they keep on rising and rising. Unless something changes, governments will soon have no choice but to scale down health services or go bankrupt. The only way to avoid a reduction in services is to use expenditure and/or income measures to return to health care financial sustainability.

On the expenditure side, many of this year’s provincial budgets featured a section on each province’s plan to curb health care costs over the next three, four or five years. The majority of observers expressed skepticism about those plans, and rightly so. Provinces have shady track records in this area. In short, an expenditure-based solution is very unlikely in the near future.

As to the income side, two obstacles stand in the way of any province that wants to raise revenues to mitigate rising health care costs. First, the Canada Health Act says that necessary medical services must be available to all on a prepaid basis. (In other words, the sick do not pay more than the healthy). Second, tax increases are very unpopular and most of the time they spell doom for the governments who implement them. No elected provincial government in their right mind would want to increase its revenues to finance health care.

Well, wait a minute. That’s what the Quebec government just did. Last March, the province’s budget introduced a new annual tax levy earmarked for health care, as well as a user fee to be applied each time someone uses the public health system. Not surprisingly, there was a strong backlash in Quebec against the Charest government following those announcements. However, as unpopular as those measures may be, they are the right thing to do.

But why Quebec? Quebec faces the same pressures as the other provinces: increasing costs due to expensive new technology, and losses in service quality. But on top of this, Quebec’s public debt is the worst across the country on a per capita basis. Also, within a few years, Quebec’s working-age population will start shrinking: there will be fewer workers to finance health care for an increasingly aging population. So Quebec is the canary in the health care coal mine: it is closer to the danger zone than other provinces are.

What happens next? Health care premiums are nothing new (many provinces had or still have them in place), but user fees are a whole different story. The federal government may very well challenge the new “Quebec way” under the Canada Health Act. This should be a cue for other provinces, including the West, to add their voices to the debate. All should make sure that unrestricted availability doesn’t make health care financially unsustainable. Otherwise, the best would become the enemy of the good.

There is some room for negotiation here. If one reads between the lines of the last Flaherty budget, it looks like the federal government wants to gradually move out of provincial areas of jurisdiction. Health is one of those areas. Why not revise the Canada Health Act to reflect today’s and tomorrow’s demographics, and allow provinces to seek new forms of revenue to support their health care systems?

Eventually, all provinces will have to face this issue as Quebec did. In Canadian health care, demographic timing is the only real difference between jurisdictions. Time to open the discussions. Federal-provincial negotiations are not the most exciting way to enjoy a weekend, but they sure beat spending it in the waiting room of an underfunded hospital.

Jacques Marcil is Senior Economist for the Canada West Foundation. This opinion editorial can also be found in the May issue of Currents, the monthly economic snapshot newsletter. Read more Canada West Foundation op-eds.

Posted By: Jacques Marcil

The end of April is not only hockey playoff time — it is also the time of the year when Statistics Canada releases preliminary annual estimates for the previous year’s provincial real Gross Domestic Product (GDP). The 2009 results are just out and as expected, nearly all provinces declined last year, the sole exception being PEI.

Saskatchewan and Alberta registered some of the largest provincial GDP declines last year—only Newfoundland and Labrador dropped more. Saskatchewan GDP fell 6.3%, pulled down by a 50% reduction in the volume of potash production. Alberta did a bit better (or less badly) with a 5.1% decline, as growth in the financial and public sectors helped offset declines in oil and gas and construction. Elsewhere in the West, BC’s economic activity declined by 2.3%, but still performed better than the national average decline of 2.9% due to a real estate boom. Non-residential construction helped Manitoba’s economy surge, relatively speaking, with a minuscule 0.2% decline.

This release of the GDP results also means that April can also be a humbling time for economists like me—we get to learn how good we were at forecasting GDP growth for the previous year. As the Figure shows, it’s probably safe to say that it was a tough year for provincial forecasters. First, the drops in Saskatchewan and Alberta were much more pronounced than expected. And second, perhaps more surprising is that Saskatchewan’s decline was actually steeper than Alberta’s. To the best of my knowledge, nobody predicted that.

What happens now?

These results now represent the most up-to-date and accurate picture of each province’s actual overall economic performance. Public policy makers (and all of us really) should pay attention to them for setting current economic policy, even if this feels somewhat akin to driving a car by looking at the rearview mirror.

Posted By: Jacques Marcil

Statistics Canada’s job numbers for March are out and the data raise a number of interesting questions for the West:

• How much higher would Saskatchewan be if potash prices had held on?
• What would have happened to manufacturing employment in Manitoba with an 85¢ loonie?
• Will BC’s solid upward trend from March 2009 forward keep going?

And perhaps most important of all:

• When will Alberta hit the bottom of the long decline?

Let us know what you think.

Posted By: Jacques Marcil

We’re right in the middle of budget season. Everywhere you look, provincial governments are killing trees and unveiling plans to tackle the deficits they inherited from the recession. While not all provinces were in the black before the recession hit, all are swimming in red ink now.

Saskatchewan brought its budget down earlier this week. I will leave it to others to analyze it in details. All you need to know is that things are tight and that just like the other provinces, Saskatchewan is trying to maintain core services while keeping its deficit under control. What I want to discuss today are the perils of forecasting.

After a few years of good economic times, the best in decades, Saskatchewan went through an economic and public finance drop in 2009. This made the 2010-2011 budget-making exercise somewhat embarrassing. The government had to acknowledge that some of the forecasts featured in the 2009-2010 budget were quite off the mark. Finance Minister Rod Gantefoer had made the classic budget mistake: taking wishes for realities.

Last year, some analysts’ forecasts for potash prices were very high. As I wrote in Against the Grain, my April 2009 report on Saskatchewan’s economy, “the forecast calls for more price growth on top of a potash price level that is already three times what it was in 2007, and nearly six times its level of the 15 previous years.” Instead of treating those as the upper limit of a potentially wide price range, the government took them as its basic scenario.

At least, you can give this to the government: it took those potash price forecasts as they were. When it came to forecasting real GDP growth however, the government averaged the private sector forecasts and added growth to them because they were… well… not high enough for its liking. “Similarly, and not coincidentally, the Province’s forecast of 2.1% real GDP growth in 2009 is well ahead of most private sector forecasts” is what I wrote then.

The rest of the story is well-known: in both potash and GDP’s case, the forecasts proved to be noticeably wrong and made it much harder to put this year’s budget together because last year’s revenues turned out to be well below what was expected.

Economic forecasting is not an easy job. (Hey – my real GDP forecast for Saskatchewan was too high as well at 0.7%, but luckily I managed to aim below the private sector average of 1.0%). To err is human, so let me ask this question: why not err on the side of caution? This is especially true in Saskatchewan, where nearly a third of the economy is directly at the mercy of the world commodity markets’ volatility.

Erring on the side of caution is better because there is only one drawback with being too prudent, and that is the embarrassment of riches that comes from a surplus that was not budgeted for. On the other hand, being too optimistic comes at a cost: deeper deficits and higher debt. Minister Gantefoer did not use a prudent approach last year even though he was fully aware of the global recession by then.

One could argue that if the prudent growth forecast is too low, then the government has no choice but to reduce spending or declare a deficit. I don’t see this as a problem, but rather as transparent public finance management. The forecast information should feed into the spending decisions, not the other way around.

Despite the fact that this year’s financial results are disappointing for Saskatchewan compared to last year’s expectations, they remain quite positive compared to the rest of Canada, where growth prospects are more slim and provincial finances in worse shape. Things are relatively good in Saskatchewan now, the best they’ve been in decades. Hopefully the other provinces will be so focused on their own economic recovery issues that they won’t notice this budgetary “oops” moment.

And by the way, in this year’s budget, the province’s growth forecast is a few notches below what the private sector says. Apparently, some lessons were learned.

Do you agree with government’s optimistic approach to forecasting? Share your thoughts below.

Posted By: Jacques Marcil

So here we are, deep in deficit again.  It’s easy for some to say that Canada’s deficit and debt remain quite manageable compared to those of other Western economies.  The problem is, the debt and the deficit could both have been considerably easier to deal with.  Mr. Flaherty’s government tinkered with the GST rate in 2006 and 2007 for reasons that were more political than economic, and now you can see the result.  If you know a single Canadian economist who thought that lowering the GST rate was a good idea, and if that economist doesn’t happen to be a Prime Minister, you are a very lucky person. Go buy a lottery ticket right away.

In fact, a simple calculation shows that if the GST rate had remained at 7% the government would have faced only four years of deficit instead of the seven (and counting) it now has to deal with. From 2006 to 2015, the government’s cumulated deficits will add $141 billion to the debt, $92 billion of which could have been avoided with an untouched 7% GST rate.  Do you know anyone who fundamentally modified their consumption habits because of those extra GST pennies they saved each day? If you do, you should get another lottery ticket.

Unfortunately, budgets are as much about politics as they are about finances.  The current budget is an example of such politics in motion.  If you put aside temporary stimulus spending, this government (with a small g) looks determined to gradually reduce the size of Government (with a big G) by shrinking both its revenue and expenses.  This represents an ideological shift as much as a financial one, hopefully with better outcomes than the changes to the GST.

Posted By: Jacques Marcil