Budget Reaction from The Fraser Institute

Contact:

Michael Walker, Executive Director
The Fraser Institute, (604) 714-4545, Email: michaelw@fraserinstitute.ca

Release Date: 16 February 1999

VANCOUVER, BC, 16 February 1999>>>"The new federal budget unfortunately did not contain any surprises—it was what we had been led to expect by the leaks from the Department of Finance during the last few weeks. We must say ‘unfortunately’ because the government has missed an important opportunity to provide meaningful tax reductions and has instead sent the message to Canadians that the government knows how to spend taxpayers money better than taxpayers themselves," says Michael Walker, Executive Director of The Fraser Institute.

Taxation and Productivity

While the budget does provide modest tax relief, the net implication is that Tax Freedom Day will come only about one day earlier for the average family. (Tax Freedom Day, calculated annually by The Fraser Institute, is the day in the year when Canadians start working for themselves rather than to pay their tax bill.)

The failure to provide significant tax relief will make the goal of enhanced productivity unattainable. The OECD has recently documented Canada's lagging productivity and traced it, in part, to our higher tax rates. In fact, while Canada had the 8th lowest top income tax rates in 1990 (of OECD countries), in 1997 Canada was in 17th place as our overall tax rates rose while those in other countries fell.

There has been no change in capital gains taxes in this budget. Meanwhile, capital gains taxes in Canada are nearly double those in the United Statess. Although payroll tax rates (CPP, EI and Workers Comp.) are low compared with other OECD countries, the same is not the case for total taxes payable on labour income. The average effective tax rate on labour income in Canada is 29% while in the US it is 23% including income tax and social security contributions.

The productivity gap has produced significant losses for Canadians incomes. Income per person in the US is $36,634 which is 30% above the Canadian level of $28,234. Over the last decade Canadian income per person grew by 7% while it grew 17% over the same period in the US. If Canadian productivity had grown at the US rate since 1979, Canada's income per person would be $7,000 higher today ($28,000 for a family of four).

Spending

The Auditor-General in the 1998 Auditor-General's Report noted that, "Business firms cannot depart from objective accounting standards established by the Canadian Institute of Chartered Accountants, to hide losses or divide profits. Parliamentarians should expect no less from the government". The Auditor General then refused to certify the governments accounts. Unfortunately this budget contains further accounting irregularities which give the impression that the spending of the government is not increasing. The budget presents program spending in 1997/98 as $108.8 billion and $111.2 billion in 1999/00. Making adjustments for deviations from standard accounting practice yields program spending of $106.3 billion in 1997/98 and $113.2 billion in 1999/00. As Chart 1 shows, one is a relatively "flat" profile while the other demonstrates a two year increase of 6.5 percent.

Chart 1

Most of the increased expenditure will go to the provinces as part of the new arrangements between the federal government and the provinces. Most of the increased provincial income is earmarked for health care spending. The increase—about 3.5 billion dollars in the first year—will, according to The Fraser Institute estimates, only result in a (best case scenario) three day reduction in the median surgical waiting list time.

Most Canadians will see no benefit from this large increase in health care spending since there has been no attempt to restructure the incentives which are faced by participants in the health care system and which are the central cause of the lengthy waits.

OECD Rankings of Top Marginal Tax Rates

Source: Economic Freedom of the World 1998/99 Interim Report: The Fraser Institute

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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