The Government of Alberta Tops Provinces States in Fiscal Performance Index

Joel Emes

The Fraser Institute's Fiscal Performance Index ranks the provinces and states according to their taxation and spending policies. Governments that earned high grades did so by cutting spending and taxes; governments that received low grades did so by raising spending and taxes. On the strength of large cuts in deficits and spending, Alberta achieved the top spot on the Canada/US index for the second time in a row.

Of the "established" provinces (that is, provinces whose current governments were in power before fiscal 1993/94), Alberta received an A (80 percent or better) for its fiscal performance. Saskatchewan received a C (60 to 69 percent). Manitoba, British Columbia, Newfoundland, and New Brunswick received F's (less than 50 percent). Of the "midterm" provinces (that is, provinces whose current governments came into power after fiscal 1993/94), Ontario received a C, and Quebec and Nova Scotia F's.

Fiscal conservatism is on the rise in the US and the growth of government there has all but stopped. In 1995, 21 states, led by New York, New Jersey, Arizona, Connecticut, and Pennsylvania, cut taxes. Last year, the tax cuts continued with 27 governors recommending lower taxes in their budgets. Along with tax cuts, no state has recently enacted a major tax increase.

Canada is undergoing a similar change in the direction of government policy. All provincial governments have embraced the wisdom of balanced budgets and are either working towards fiscal balance or are beginning to pay off accumulated debt. While Ontario is still the only province that has enacted a significant tax cut recently, the steady advance in Tax Freedom Day from the 1960s levelled off or reversed in most provinces in 1996. In 4 provinces, the average family had to work fewer days in 1996 than in 1995 to pay off their all-government tax bill. Three provinces had the same Tax Freedom Days in 1995 and 1996, and three provinces, along with Canada, had small advances in their Tax Freedom Days.

A new feature of this year's Fiscal Performance Index is a "midterm" rank for governments that were not in power before fiscal year 1993/94. The midterm rank contains three provinces and 20 states. Prince Edward Island could not be ranked at all because of its very recent election. Provincial governments that had a change of premier but not of the party in power are treated as a single government. The methodology used in the index is taken from a US study, produced by the Cato Institute, of the fiscal performance of 46 state governors.[Stephen Moore and Dean Stansel, "A Fiscal Policy Report Card on America's Governors: 1996," Policy Analysis, No. 257, Washington, DC: The CATO Institute, July 26, 1996] For the "established" governments, two sub-indices are constructed using data on each provincial and state government in office before the 1993/94 fiscal year.

Twelve spending and revenue variables are used to construct the indices. One sub-index examines the extent to which the governments have controlled spending during their terms of office. The other sub-index looks at how taxes and revenues have changed over the same period. The Canada/US index presents the overall measure of fiscal performance. Since 50 of the 51 state governments have legislated balanced budget requirements, provincial deficit amounts are added to provincial revenues to force budget balance on the provinces, and make provincial and state revenues comparable. The indices for the "midterm" governments are constructed in the same way as those for the "established" ones, except that only nine variables are used, due to data limitations in the US.

The Fraser Institute Spending Sub-Index for the "established" governments is composed of five variables:

The Fraser Institute Tax and Revenue Sub-Index for the "established" governments is composed of seven variables:

The Fraser Institute Spending Sub-Index for the "midterm" governments is composed of three variables:

The Fraser Institute Tax and Revenue Sub-Index for the "midterm" governments is composed of six variables:

Each variable is standardized such that the lowest score is zero and the highest score is 100. The variables are then assigned a weight and summed across their respective categories. All variables are given a weight of one except for "1996 combined top income tax rate (personal and corporate)" and "Change in gas tax, cents per litre, from election through 1996," which have a weight of one-half. This is done to maintain consistency with the Cato Institute study. The "change in sales tax" variable is not included in mid-term governments because there were no changes. All US dollar values were converted to Canadian dollars. The index showing Canada/US fiscal performance is obtained by averaging the "spending" and "tax and revenue" sub-indices.

Why the Fiscal "Surplus" Should Not Be Spent

Karen E. Lam

\In his February 18 budget, Finance Minister Paul Martin implied that fiscal balance could be a reality by 1999/2000-the first balanced budget in 30 years. This possibility has initiated debate about how to spend future surpluses. Those, including Paul Martin himself, who believe that we can now afford to pour more money into social programs, are ignoring the fact that the size of government remains excessive. Any fiscal dividend should be applied to debt reduction and tax cuts.

Since taxes are paid to all levels of government, all-government (consolidated federal, provincial, and local) fiscal performance is what matters. Recently there has been some improvement in controlling government spending at all levels. However, Canada's fiscal situation remains poor by international standards. Other countries maintain high living standards with much lower levels of government involvement. In 1997, total government outlays as a share of GDP are projected to be 45 percent in Canada, which is still well above levels in the US, Japan, and the G-7 average of 33, 36, and 39 percent, respectively. [Includes both current and net capital outlays. Source: OECD Economic Outlook, December 1996, table 28]

Even if we focus only on Canada, government spending is still historically high, despite its improvement over the past few years. In 1995, total government current expenditures were almost 4 percentage points below their peak of 49 percent of GDP in 1992. That said, public spending was still 84 percent higher (or 21 percentage points) than it was 30 years ago when spending consumed only 25 percent of output.

Vito Tanzi and Ludger Schuk-necht, two IMF economists, have shown that smaller governments are more efficient governments. They show that important social and economic indicators which can be measured by variables such as real GDP growth, the unemployment rate, rank in the UN human development index, and emigration, can be achieved with considerably less public spending (say, 30 percent of GDP) than that which prevails in most countries. This means that further spending reduction in Canada need not jeopardize worthwhile policy objectives. Much more significant public sector reform has taken place in other countries. Total public expenditures in New Zealand dropped almost 10 percentage points from 45.6 to 35.7 percent of GDP between 1988 and 1994, while in Chile and in the UK, they dropped by over 12 and 7 percentage points, respectively. [In Chile, public expenditures dropped from 34.1 to 21.8 percent of GDP between 1982 and 1993; and in the U.K; they dropped from 44.7 to 37.5 percent between 1983 and 1989. Source: Vito Tanzi and Ludger Schuknecht, "The Growth of Government and the Reform of the State in Industrial Countries," IMF Working Paper, December 1995, p. 30]

Over time, excessive government spending translates to high debt. While total government net debt in Canada is predicted to fall from 71 to 69 percent of GDP between 1996 and 1997, it will still be well above the G-7 and OECD averages, both around 47 percent of GDP. In 1997, Canadian net public debt is projected to be the third highest of all OECD countries, just below Italy and Belgium.

Some estimates indicate that the debt load will vanish over time, but most of these understate the extent of our indebtedness. They ignore other forms of government obligations, such as commitments to pay Canada Pension Plan (CPP) and civil service employee pensions, the Seniors Benefit (which includes Old Age Security, Guaranteed Income Supplement, and Spouse's Allowance), and medical care expenses, all of which will increase as the population ages. When program obligations, indirect debt associated with government business enterprises, and debt guarantees are included, all-government liabilities are over four times the amount of direct debt-$3.5 trillion in 1996!

Public expenditures must be reduced further so that in the future governments will have the fiscal flexibility to pay for its program obligations and other commitments. Otherwise, governments will need to borrow more money, which will result in higher interest payments. In turn, these higher payments will erode our ability to pay for future social programs. Debt financing costs are already diminishing the funding available for program spending. For example, in 1995/96, public debt charges consumed 34 percent of federal government revenues; in 1965/66 that figure was just 12 percent.

Spending cuts alone are not enough. Tax cuts are also necessary. Despite recent tax freezes and some minor cuts, taxes are still well above historical norms. Direct taxes from people (including income and payroll taxes, such as contributions to Employment Insurance and the CPP) to the consolidated government sector have risen 157 percent-12 full percentage points of the economy-between 1965 and 1995.

How does cutting taxes help? Tax cuts increase economic growth and create jobs by lowering both the cost of doing business and the price of goods and services. [See The Hon. Ernie Eves, "Why Ontario's Personal Income Tax Cuts are the Best Way to Stimulate Growth and Employment" and Fazil Mihlar, "Do Lower Taxes Help Stimulate Economic Growth?" in Fraser Forum, January 1997] Tax cuts also increase the incentive to work, discourage the migration of highly skilled labour to countries with lower taxes, and diminish underground economic activity. In an increasingly global economy, tax competitiveness is more important than ever. Only by reducing taxes can our rates be competitive with those in the US, which inevitably will encourage new firms to locate in Canada.

Recent efforts to control government spending are just the first step in getting Canada's fiscal future under control. It is premature to speak of a "fiscal dividend." We don't have one yet, and won't for the foreseeable future. While we can anticipate a time when the federal government budget will be balanced, it would be folly to celebrate by increasing public spending with money we do not have. Further spending reductions are essential, given our comparatively high levels of government spending and consolidated debt. Smaller governments will not jeopardize Canadian living standards. The government must resist the urge to spend more money. Instead, any "extra" money should be returned to those who earned it through tax cuts. We must avoid any regression to the unsustainable environment of even higher taxes, higher deficits, and higher debts.

March Question and Answer

Joel Emes

Q: How large is the public sector in Canada? How much is paid out to public sector employees in wages and salaries?

A: In 1995, the public sector, including administration, government business enterprises, hospitals, and school boards, employed 2.6 million people and paid out $97 billion in wages and salaries. Table 1 provides the federal, provincial, local, and government business enterprise employment breakdown by province. Note that only British Columbia and the Northwest Territories had absolute public sector employment growth between 1991 and 1995, and only Quebec, British Columbia, and both the Territories paid out more in remuneration in 1995 than in 1991.

Another way to evaluate the size of government is to look at how much of a province's income is spent by the public sector. Table 2 lists provincial expenditure as a percent of provincial GDP and consolidated local and provincial expenditure as a percent of GDP. The average size of government at the consolidated provincial and local levels (excluding the territories) is 31.6 percent of GDP. Quebec, Manitoba, and all of the maritime provinces are above this average. Saskatchewan is very close to the average and the three "have" provinces, Alberta, Ontario, and British Columbia, are below it. Keep in mind that this table only covers the provincial and local governments. When federal spending is added to calculate consolidated federal, provincial, and local spending, public sector spending accounts for 47.7 percent of Canada's Gross Domestic Product.

The March Graph presents two relative measures of public sector employment; the number of public employees per 100 residents and the percent of the total labour force that is employed in the public sector. Both of these graphs also show that, in relative terms, public sector employment in Canada is slowly shrinking.

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Last Modified: Wednesday, October 20, 1999.