Canada West Foundation Blog

By: Robert Roach

The federal government recently announced a “Plan for Responsible Resource Development” that will streamline the federal regulatory review process. While this is a step in the right direction, a report from the Canada West Foundation being published on May 3 argues that the task at hand is much larger. Keeping Pace: Improving Environmental Decision-Making in Canada reveals an environmental decision-making process that, while one of the best in the world, is dogged by a number of significant shortcomings. These weaknesses include insufficient integration of scientific research; a lack of clarity regarding exactly what trade-offs between environmental protection and economic development are acceptable to the government of the day; and the ongoing need to ensure that the various government departments and agencies at the federal and provincial levels are cooperating as much as possible.

You can download this timely new report for free from the Canada West Foundation website on Thursday.

As reflected by the results of the 2011 census, the creation of new House of Commons Seats and the ongoing news about the westward titling of the economy, it is clear that the nature of the Federation is shifting. The latest research from the Canada West Foundation looks at the consequences for the region and the country, now that the West is truly “in”.

Taking Stock of the Federation by Dr. Roger Gibbins, President & CEO and Robert Roach, VP, Research, is the synthesis report from a roundtable held on February 9, 2012 in Calgary. This roundtable gathered sixteen participants who provided their insights on the contemporary political landscape, the likely direction of future change, and the potential for strains within the federation across the four western provinces.

“Each region in Canada is vitally important,” notes Dr. Gibbins. “While differences between the regions have evolved, they are still key variables in both Canada’s political environment and the economy. For the federation to work well, we must ensure that all regions— including the West—are heard, understood, and integrated into the whole.”

While participants expressed a general sense of optimism about the region’s future, they also highlighted some significant challenges western Canadians will face in securing a new position within Canada and the global economy. By addressing issues like market access, sustainable environmental management, labour shortages and a fiscally unbalanced federal state, we can ensure that the future remains bright.

Taking Stock of the Federation is part of Foundation’s The West in Canada initiative, which examines public policy innovation in the West, discusses and recommends ways to improve the Canadian federation, and analyzes regional economic, demographic and public opinion trends. Click here for your copy of the report.

Western Canada profits from its abundance of natural resources, however, in the changing global landscape, we need to take action to ensure our future prosperity. The latest research from the Canada West Foundation outlines the main contours of the contemporary energy world and takes stock of the trends shaping energy in western Canada.

State of the West: Energy – 2012 Western Canadian Energy Trends, by Senior Economist Michael Holden and Policy Analyst Robbie Rolfe, provides an overview of the provincial energy systems in western Canada, including the current state of energy production, consumption, and other associated activities and impacts. That information is framed in the context of the energy-related policy issues and challenges facing the four western provinces.

“Western Canada is characterized by a profound diversity of resources, consumption patterns, and economic and environmental impacts” said Michael Holden. “The energy picture in each province is unique, but their strengths are complementary. Through a more coordinated approach to energy policy, the western provinces can become more than the sum of their parts.”

Given the extent to which it permeates our daily lives, energy has come to dominate the economic, social, and political agenda in the region. State of the West: Energy provides a one-stop information resource on energy in western Canada, informing the debate surrounding energy policy in the West, and providing context to both where we are today and where we may go in the future.

State of the West: Energy – 2012 Western Canadian Energy Trends is part of the Foundation’s Powering Up for the Future initiative, which facilitates constructive debate on sustainable energy policy solutions for Canada and promotes the vital importance of western Canadian energy systems in the national, continental, and global economy. Click here to download a copy of the report.

By: Robert Roach, VP, Research

In an article in today’s Globe and Mail, John Ibbitson argues that "One question will define national politics in our time: Are Western Canadians prepared to sacrifice for the sake of the nation, now that Ontario is less able to help?"

In addition to incorrectly implying that western Canadians chipping in to help the rest of the country is a new phenomenon, the question is the wrong one to ask.

The question Canadians should be focused on is how to ensure that the nation successfully adjusts to the evolving global economy. It is a mistake to start with a negative question that assumes the need for "sacrifice"—whatever that means—or puts pressure on the nation’s fault lines by immediately assuming that regional wealth redistribution is the solution to central Canada’s problems. This is the old way of thinking and this is not the time to bring it back.

The West knows what it is like to have its interests and economic prospects ignored and how damaging this is to the country and its potential. It will not, therefore, make the same mistake that central Canada has made in the past and be blithe to the blight of the other regions.

The West gets it—all regions benefit when all regions are heard and respected. The West will do its part, as it always has.

Ensuring Canada’s prosperity will happen naturally as the western economy continues to provide jobs and returns on investment. It will also happen at the political level through the equalization program, a strong tax base in the West that helps fill the national treasury, and by ongoing efforts by Canadians to ensure strong regional representation within the national government.

Ultimately, however, the economic recovery of Canada's industrial heartland will depend on the efforts of individual Canadians and their ability to harness the changes happening at a global level.

By: Shawna Stirrett

In November 2011 the Canada West Foundation in partnership with the National Round Table on the Environment and the Economy (NRT) conducted a series of roundtables about developing a low-carbon growth strategy for Canada with particular emphasis on the opportunities and risks facing the West.

You can read all about the main themes, policy recommendations, and overview issues in the report (click here to view) but, just for fun, here is a visual overview of the roundtables:

These word clouds were created from my notes, which were typed up during each of the sessions. Words that appeared more often in the conversation appear larger in the clouds and words that were less common are smaller. In a sense, these clouds give a visual overview of what ideas were most prevalent during the roundtables and which topic generated the most interest.

What is really fun is to see how the conversations—which were all structured around the same questions—varied from province to province.

For example, in Saskatoon, one of the main themes was on how to deal with carbon constraints in an environment of economic growth.

Those in Vancouver were most concerned about how carbon should be constrained, should it be a tax or cap and trade?

Calgary roundtable participants were pretty set on the need for a national framework around energy and emissions.

While in Winnipeg the discussion centered on how challenging it can be to put in place carbon policies when power is so cheap and emissions rates are so low in the province.

Of course these word clouds do not tell the whole story, but they do provide an interesting visual overview of what issues were important to roundtable participants and how the conversation varied across the region.

Click here to download a copy of Cautious Optimism: Western Perspectives on a Low-Carbon Economy.

By: Michael Holden

Just in time for Christmas, the federal government has announced a new funding plan for health care. The present funding agreement, in which federal cash transfers to the provinces and territories grow by 6% per year, is set to expire in 2013-2014. The new ten-year plan will see that 6% annual escalator maintained through to 2016-2017. Thereafter, federal cash transfers for health care will be tied to annual growth in nominal (i.e., not adjusted for inflation) economic output, with a floor provision that guarantees a minimum increase of 3% per year, regardless of how well the economy actually does.

This unilateral announcement caught many people off guard. Federal-provincial transfers have always been a sensitive and nuanced subject and new funding agreements typically come only after extensive, public, and often bitter negotiations between Ottawa and the provinces. Many people were just beginning to get geared up for the next round of talks, which now appear to have been cut off at the pass.

Reaction across the provinces to the new arrangement has been mixed. Alberta is strongly supportive, for reasons that I will discuss below, while BC and Saskatchewan are also largely in favour. In the rest of Canada, however, the backlash has been harsh. It being the Christmas season, “lump of coal” metaphors abound.

This backlash is rooted in the interpretation of a Conservative Party campaign promise during the last election; several provinces had expected the 6% escalator to be maintained over the entirety of the new funding arrangement. Tying federal transfers to economic output will almost certainly result in slower growth in health transfers beginning in 2017-2018.

How much slower is anyone’s guess at this point. However, historical data suggest that nominal economic growth in Canada has actually been quite consistent over the long term, averaging 4.2% over the past 10 years, 4.7% over the past 15 years and 4.5% over the past 20 years. Assuming growth at the low end of that range (4.2%) over the duration of the new plan, total federal health transfers to the provinces can be expected to increase from about $30 billion in 2013-2014 to about $47.7 billion in 2023-2024. Had the 6% escalator remained in place, transfers would have reached $53.7 billion.

As I hinted at above, Alberta is the clear winner under this new funding arrangement. One of the less-publicized changes it will bring is that cash transfers for health care will be distributed across the provinces on an equal-per-capita basis. At present, this is not the case. The history and complexities of federal transfers are too complicated to get into here, but the end result is that wealthy provinces (with strong tax bases) currently receive less cash per person from the federal government for health care than poorer provinces. Since Alberta is by far the wealthiest, it receives far less on a per-capita basis than the other provinces.

When the new funding arrangement comes into effect, there will be a large increase in per-capita cash transfers to Alberta in order for it to reach the same level as the other provinces. This change is bound to be controversial. Alberta is already the richest province in Canada. For it to receive a perceived “windfall” of cash may not sit well with some provinces, especially since the increase in payments to Alberta will, by definition, come at the expense of increases to other provinces (because all funds come out of a fixed pool).

One thing is for certain; after a few quiet years, fiscal federalism and issues about federal-provincial transfers suddenly are back in the public policy spotlight. We will be writing more on these subjects in the months ahead.

By: Tom Carson, Director of the Manitoba Office

Manitobans head to the polls on Tuesday, October 4, 2011, and with only 169 days to go it is not surprising that the budget tabled on April 12 seemed designed both to benefit the largest number of interests and to create the least possible controversy.

On the revenue side, no increases are planned for major corporate or personal income taxes and expenditure increases will be sprinkled across many sectors, reaching a very broad public. These increases include the freezing of administrative costs for the regional health authorities and tying tuition increases to the consumer price index (CPI).

However, there was also some disappointment, especially for those who viewed the budget through a lens where the economy and our future spending ability is of preeminent importance. While the minister stated that overall expenditures were expected to rise by 2.3%, year over year, spending on core programs actually rose by 4.89%.

Going into the preparations for this budget, consultations generated a few hot points:

• The Business Council of Manitoba had what seemed to be an unprecedented recommendation; in recognition of the serious impact that Manitoba's infrastructure deficit has on the economy, the leaders of Manitoba's business community actually recommended a 1% increase in the provincial sales tax to be applied for a ten-year period and used only for infrastructure expenditures. This was seen as an opportunity for municipalities to deal with their infrastructure problems with a revenue source that actually grows with the economy.
• The government responded with a commitment to spend the equivalent of one point of the provincial sales tax on municipal infrastructure and public transit. This looks like a bigger commitment than it is. Rather than being incremental to current infrastructure spending, this commitment blends current grants for infrastructure and public transit. While blending both grants identifies a secure and growing source, for the City of Winnipeg it would represent an estimated 9% increase from funds they already receive. Winnipeg will benefit by having this increase funded from a growth stream, whereas previously approximately 50 to 60% was funded in this manner. Over time the value of that growth will become more obvious, however, it is not a substantial investment and will not contribute significantly to correcting the infrastructure deficit.
• Comparatively, Manitoba's universities have been both underfunded and, due to a decade-long tuition freeze which ended in 2009, prevented from using tuition increases as a means to help balance their books. The government has committed to increased grants of 5% over the next three years and has reinstituted a tuition freeze, although this time tying it to growth in the CPI. Although this commitment is not enough to bring them on par with the support received in most other provinces in Canada, it does at least begin to reflect the importance of universities to our provincial economies.
• For those hoping that the budget would reflect a major commitment to cut spending, the tone of the budget speech demonstrates that it was clearly not something the government wished to lead with. The publicly stated commitments to restraint are quite narrow—they are striving to negotiate a 0% increase for the general civil service, freeze discretionary salary and operating expenditures, maintain last year's reduction in ministerial salaries and carry on a freeze on salaries for members of the legislative assembly along with their staff. They will be attempting to freeze salaries for senior management in the regional health authorities and generally seeking ways to foster innovative, cost-effective services. (Government will likely also expect all public-sector employers to seek the same wage freeze—presenting an interesting dilemma for university administrators).
  
  

The question yet to be answered for Manitobans is whether the right policy choices are being made through the current budget. Were there alternatives which could have resulted in balancing the budget more quickly? If these choices were not made in this budget, will it be incumbent on the government formed after October's general election to initiate them?

It might be tempting to say that no government going into an election would choose to add 1% to the sales tax or to introduce themes of restraint and program redesign. However, Saskatchewan is also heading into an election in November of this year, and unlike Manitoba and most other provinces, has already posted a surplus. Both provinces saw greater revenues last year and both spent more than they had budgeted in 2010/11. Saskatchewan's revenues and expenditures have grown significantly more than Manitoba's, but their treatment of the budget challenge in 2011/12 is quite different despite the upcoming elections. While Saskatchewan plans to be spending 5.48% more than their printed estimates of last year, they will be spending 2.45% less than their actual previous year expenditures. And the untouchable—spending in the Department of Health will actually be reduced compared to the previous year.

Now, that would have raised eyebrows amongst those looking for more attention to the bottom line in Manitoba!

by Michael Holden, Senior Economist

Resource royalties are a valuable source of revenue for provincial governments in western Canada. In fact, they have been rising steadily in importance since the early 1990s and are nearly as important to provincial government revenues today as they were at the tail end of the 1979 energy crisis . While royalties are a boon to governments’ bottom lines, they present considerable challenges when it comes to long-term planning and fiscal management.

I began examining trends in royalty income as part of my preliminary work on the Canada West Foundation’s "Powering Up" Project. My colleagues and I have been working on creating a detailed and comprehensive snapshot of the existing energy system in the four western provinces, including the impact of resource extraction on government revenues.

In 1981, resource royalties accounted for 23.8% of all provincial government revenues in western Canada. There was a considerable range from province to province: in Alberta, royalties were as high as 43.2% of revenues, while the corresponding figures for Saskatchewan (21.0%), BC (5.6%) and Manitoba (1.4%) were much lower.

After tumbling in the 1980s and early 1990s, a surge in oil and other commodity prices in the mid to late 2000s have meant that royalties are once again a major source of income in the region, particularly in the three western most provinces. For western Canada as a whole, royalties made up 20.6% of government revenues in 2008 (the most recent year for which Statistics Canada data are available). Alberta still leads the pack at 33% of provincial revenues, but Saskatchewan and BC have seen the importance of resource royalties grow considerably since the early 1980s. In Saskatchewan, royalties grew to 24.1% of provincial revenues in 2008, while BC saw the share of income from royalties double to 11.2%.

Is this increasing reliance on royalty revenues a good thing for the western provinces? It really depends on your perspective. On one hand, royalties provide governments with more available funds to spend on goods and services—like health care, education, and infrastructure—or to put towards deficit elimination or debt reduction. This, in turn, eases the burden on provincial taxpayers; the more government revenues that come from resource rents, the less taxpayers have to pay out of our own pockets. By reducing the fiscal burden on taxpayers, royalties also contribute to creating a more competitive tax environment which could help attract businesses, investments and skilled workers to western Canada.

However, overreliance on resource royalties comes with its own set of problems. For one, royalties and royalty rates are closely linked to commodity prices which are notoriously volatile and completely beyond our control. While all government revenue sources are prone to fluctuations, royalty income is far more erratic than most. Responsible fiscal planning is an extraordinary challenge when a major source of revenue can fluctuate so dramatically, and unexpectedly, from one year to the next. How do governments make stable, predicable and long-term spending commitments in such an environment? How do they resist the pressure to increase spending when royalty income rises? And how do they maintain that spending level in the face of a negative price shock?

Additionally, the resources in question are non-renewable. To be sure, some of our resource deposits—like the oil sands—are vast, and some like shale gas are only beginning to be developed, but even these won’t last forever. Moreover, environmental concerns and development of alternative energy sources could change future market conditions in unforeseeable ways.

Should we be concerned about the long-term sustainability of our royalty revenues? Should some of this resource wealth be saved for future generations? Are Albertans missing out on the opportunity to add to the Alberta Heritage Savings Trust Fund and convert part of their present wealth into a form that could provide interest revenue in perpetuity? Should Saskatchewan re-introduce its Heritage Fund? Should BC consider starting up such a fund? These questions are further explored in the Canada West Foundation’s "Investing Wisely" Project.

These questions all require careful study and debate in the community, but two things are immediately clear. First, as resource royalties grow in importance for provincial governments in western Canada, steps need to be taken to minimize the impact of resource price volatility on government revenues. Secondly, better public policy is needed to ensure that both current and future generations benefit from present-day extraction of non-renewable resources. 

Michael Holden is Senior Economist and is currently working on creating a detailed and comprehensive snapshot of the existing energy system in the West as part of the Powering Up Project.

by Roger Gibbins

Today the Canada West Foundation released a comprehensive study of tax reform options for Saskatchewan.  A Tax Framework for Saskatchewan’s Continuing Prosperity was commissioned by the Saskatchewan Chamber of Commerce, the Institute of Chartered Accountants of Saskatchewan, Association of Saskatchewan REALTORS®, Certified General Accountants of Saskatchewan and the Certified Management Accountants of Saskatchewan. It can be found at here and at www.sasktaxplan.ca

This report comes in the wake of sustained, even dramatic growth in the Saskatchewan economy, conditions often associated with the opportunity for tax cuts. However, given the inherent volatility of a commodities-driven provincial economy, the report focuses more on what is taxed, how it is taxed and by whom (provincial or municipal governments) than it does on tax rates. Getting the tax system and its incentives right will contribute more to Saskatchewan’s competitive position than will tax rates themselves.

The report was prepared at a time when the newly harmonized sales tax was facing a populist revolt in BC, when the government of Manitoba dismissed the possibility of a Manitoba HST, and when Alberta had no provincial sales to harmonize. Given this competitive environment, the report explores a variety of alternative ways to meet many of the HST goals without directly endorsing harmonization.

At the present time, it should be stressed, Saskatchewan’s tax system is not wildly out of line with its provincial competitors in western Canada. Nonetheless, the report provides a number of options for further improving Saskatchewan’s competitive position.

On a different front, the Foundation continues to staff up for Powering Up for the Future, a major multi-year project on the western Canadian energy system. Mike Holden, our new senior energy economist, has been recruited from the Library of Parliament; and three Executives-in-Residence and a Research Associate have been recruited to help craft and animate the project’s policy research agenda. Mike Cleland comes to the Foundation from the Canadian Gas Association, Sheila O’Brien and Barry Worbets from extensive careers in the oil and gas industry, and Jeff Reading from the City of Calgary.

An impressive team is in place, and work is already well under way on the potential impact of unconventional gas on the political landscape in North America, the challenges of reaching Asia-Pacific markets, the opportunities and challenges posed by the emergence of the new energy economy, and the role that western Canadians can and should play in shaping a Canadian energy strategy.

The Foundation is also preparing a comprehensive atlas of the western Canadian energy system—State of the West: Energy will be released in the spring of 2011—and within a few weeks will go into the field with a national survey of public attitudes towards energy and environmental policy issues.

There is no doubt that 2010 will go out with a bang, not a whimper!

In the last decade the economy of Saskatchewan has changed dramatically—the Canada West Foundation now refers to it as the West’s Powerhouse.  While I believe this accurately capture what Saskatchewan has become, we in Saskatchewan must continue to be aware and evaluate our situation in comparison to other jurisdictions in the world.  We rely on trade to generate a significant portion of our GDP and we compete with the world for this business. Therefore, not only must the Saskatchewan tax system be fair, transparent and easily administered—it must be competitive.

The Canada West Foundation has just launched a new project that will make recommendations on keeping the Saskatchewan tax regime competitive. There have been significant changes in the economy and public policy since the last independent tax review was completed in 2005.  These changes include:

• The Province of Saskatchewan becoming part of the New West Partnership;
• The lingering global financial crisis and its impact on government revenue sources (and expenditures);
• The significant decrease in personal taxes that were introduced in the fall of 2008;
• The changing provincial revenue structure (less reliance on federal transfers and own source taxes and more reliance on royalties from non-renewable resources);
• The revamped royalty structure in the Province of Alberta; and,
• The growing amount of revenue collected from the Corporate Income Tax.

This project is the broadest independent review of the tax regime since 1965.  It is sponsored by the Saskatchewan Chamber of Commerce, the Institute of Chartered Accountants of Saskatchewan, the Association of Saskatchewan Realtors, the Certified Management Accountants of Saskatchewan and the Certified General Accountants of Saskatchewan. The review and recommendations will pertain to all provincial sources of tax revenue, the royalty structure as it relates to oil and gas and the municipal property taxes as they are levied in Regina and Saskatoon.

If you are a resident of Saskatchewan, the Canada West Foundation is looking for your input to this project. We want to hear from you so that our discussions and debates can be as well informed as possible. I encourage you to complete a short survey (10 minutes) at www.sasktaxsurvey.ca

There are number of questions in the Survey that relate to these taxes:

• Are the right types of taxes (income, consumption or wealth) being relied on?
• Is there a different impact on the economy by different types of taxes?
• Do people tend to avoid taxes if possible?

Before you go to the survey, think about this statement:

Businesses don’t pay taxes, only people do

Amounts initially paid by businesses could be passed forward to consumers (higher prices) or back to the suppliers of capital or labour (lower dividends or wages).  The timing of these shifts will depend on a number of circumstances.

It is important to participate—we can continue to be the West’s Powerhouse if we have the right social and economic framework.

This survey will be open to the public until July 31, 2010 and we will report on our findings in the fall of 2010.

Mr. Jack Vicq is the Director of the Saskatchewan Office of the Canada West Foundation.

Posted By: Jack Vicq