March 2001

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Fraser Institute/Cato Institute Fiscal Performance Index

by Joel Emes

The Fiscal Performance Index measures the performance of the Canadian provinces and the US states with 15 variables that reflect changes in spending, changes in government revenue, and changes in the structure of taxation. The purpose of the Index is to provide Canadians with information about how their own provincial government taxes and spends their money relative to how other North American jurisdictions spend and tax.

The method of constructing the index is taken from a US study, conducted by the Cato Institute, of the fiscal performance of 47 American governors. The fiscal performance index consists of two sub-indices. The first sub-index examines to what extent the governments have controlled spending during their term of office. The second sub-index looks at how tax rates and revenues have changed over the same period.

Fiscal performance ranking

Massachusetts out-performed all the provinces and the 46 other states that were ranked on the Fiscal Performance Index to end up in top place for 2001. Table 1 gives the fiscal performance ranking, from highest score to lowest, as well as the spending sub-index, and tax rate and revenue sub-index scores. Fourth place on the spending sub-index, and eighth place on the tax rate and revenue sub-index gave Ontario the highest provincial ranking and third place overall. Third place on the spending sub-index, and twentieth place on the tax rate and revenue sub-index gave Alberta the second highest provincial ranking and ninth place overall. On the other end of the spectrum, British Columbia has the distinction of holding the 32nd spot on the spending sub-index and the second-to-last spot on the tax rate and revenue sub-index, giving it the worst fiscal performance among the provinces and the third worst fiscal performance in the two countries. Manitoba, Nova Scotia, and New Brunswick could not be ranked because recent elections in these provinces resulted in changes of government and, therefore, not enough data are available to include them in the index. Ontario, Alberta, Quebec, Newfoundland and Labrador, Prince Edward Island and Saskatchewan received scores of over 50 out of 100 in the overall index (50 is a passing score). Only British Columbia failed.

Spending ranking

The provinces that have had the most success in eliminating and reversing large deficits (Alberta, Ontario, and Saskatchewan) performed the best on the spending index. In general, the provinces performed well on this index; six of the seven that could be ranked are in the top half of the spending sub-index; the exception is British Columbia. This is due to the general spending restraint in Canada in the late 1990s, and the fact that states have been more likely to use surpluses to increase spending rather than return excess revenue to taxpayers. Roughly one quarter of US state governors recommended budget increases of more than 7 percent for fiscal 2000, and more than half proposed increasing spending by more than 5 percent. For the past three years, state spending has grown more than twice as fast as US federal spending. Table 2 provides the provincial background information for the spending scores. The background information for the spending scores for the states is included in the CATO Institute report.

Tax rate and revenue ranking

The provinces did not perform as well on the tax rate and revenue ranking as they did on the spending ranking because the US states were more likely to have no change or a decrease in tax rates than were the provinces. Also, in general, the states had larger decreases, or smaller increases, than the provinces on the revenue variables. Table 3 provides the provincial background information for the tax rate and revenue scores. The background information for the tax rate and revenue scores for the states is included in the Cato Institute report.

Methodology

The Fiscal Performance Index is part of The Fraser Institute’s on-going program of assessing the tax and expenditure behaviour of governments in Canada. The Cato Institute study provides the methodology for constructing the index which consists of two sub-indices: spending, and tax rate and revenue. All variables, unless otherwise noted, measure from the year that the government was first elected. The person identified as premier is the one in power at the time the index was compiled. Since state governments cannot run deficits, provincial deficit amounts are added to provincial revenues to force budget balance in order to provide a fair cross-border comparison.

The Fraser Institute Spending Sub-Index is composed of 4 variables:

• average annual change in real per capita spending through 1997/98
• average annual change in spending per $1,000 of personal income through 1997/98
• average annual change in real per capita spending through 1999/00
• average annual change in spending per $1,000 of personal income from 1997/98 through 1999/00

The Fraser Institute Tax and Revenue Sub-Index is composed of 11 variables:

• average annual change in real per capita tax revenue through 1997/98
• average annual change in tax revenue per $1,000 personal income through 1997/98
• average annual tax changes as a percent of the prior year’s spending through 2000/01
• average annual change in tax revenue per $1,000 personal income through 2000/01
• average annual change in real per capita revenue from 1997/98 through 1999/00
• change in top personal income tax rate through 2000/01 (state and provincial portion only)
• change in top corporate income tax rate through 2000/01
• 2000/01 combined top income tax rates (personal plus corporate) (1/2 weight)
• change in sales tax rate through 2000/01
• change in gas tax rate through 2000/01
• change in cigarette taxes through 2000/01

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 "2000/01 combined top income tax rates (personal plus corporate)" which has a weight of one-half. This is done to maintain consistency with the US study. The index showing state-provincial fiscal performance is a weighted average of the spending and the tax rate and revenue sub-indices.

Quebec’s variables, where appropriate, have been adjusted to factor out the federal tax abatement. Specifically, the value of the abatement is subtracted from provincial revenues and expenditures. The tax point value of the abatement is removed from Quebec’s 2000/01 combined top income tax rates (personal plus corporate) variable and its change in top personal income tax rate variable. These changes have been made to ensure Quebec’s data are consistent with that from the other provinces. Failing to make this adjustment would penalize Quebec for choosing to take on taxing responsibility and spending authority for programs for which the federal government has responsibility in the rest of the country.

Limitations of the study

The focus of the Fiscal Performance Index ranking is on state-provincial comparisons because there are several limitations in the methodology that make the state-provincial comparisons more valuable than province-to-province ones. The main limitations with the province-to-province comparisons are that debts are not considered, local government spending is not incorporated, and that only the changes and not the absolute level of the spending and revenue variables are used. The possible implications of these limitations for the province-to-province rankings are briefly discussed below. These limitations exist because there is less information available for the states, and to use different definitions for the provinces than the states would bias the results. The Fraser Institute also publishes a province-to-province only comparison, the Budget Performance Index, that deals with these limitations. Thus, for purely Canadian comparisons, the Budget Performance Index is best; for Canada-US comparisons, the Fiscal Performance Index is more appropriate.

The possible impact of the limitations:

• Debts are excluded because, for the most part, states are not allowed to accumulate debt. Including debt measures would likely decrease the scores of all provinces, although less so for low-debt provinces like Alberta and British Columbia, and more so for high-debt provinces like Prince Edward Island and Newfoundland and Labrador.
• Most of the variables measure flows and ignore stocks. Stocks should be taken into account so that, for example, a province that already has low spending is not penalized for not making further cuts. Adding stock measures would likely have an adverse effect on the scores of higher-spending provinces such as Newfoundland and Quebec, and a positive effect on the scores of lower-spending provinces such as Alberta and Ontario.
• Local-provincial consolidated spending and revenue figures may provide a more accurate picture of the relative fiscal performance of the provinces than provincial only data because of the different levels of spending and taxing responsibility held by the local governments. Consolidated data was not used in this study because of a lack of comparable US data. Quebec and British Columbia have a high level of consolidated spending per capita. Therefore, these provinces’ scores would probably fall if consolidated data were used, whereas Prince Edward Island, which has a relatively low level of consolidated spending per capita, would likely see its score rise.

Sources

The data for this study come from Stephen Moore and Stephen Slivinski (2001), Fiscal Policy Report Card on America’s Governors: 2000 Cato Policy Analysis no. 391 (Washington, D.C.: The CATO Institute, February 12) (Available on the Cato web site at www.cato.org); Statistics Canada, Public Institutions Division, Financial Management System; Canadian Tax Foundation, Finances of the Nation (various issues), The Nation’s Finances (various issues); provincial public accounts, budgets and updates; and calculations by the author.

Joel Emes is Senior Research Economist at The Fraser Institute. He is co-author of Tax Facts 10, Tax Facts 11, and Canada’s All Government Debt (1996, 1998 and 1999 editions). He is also the primary researcher for Tax Freedom Day and the Institute’s province-to-province fiscal comparison, the Budget Performance Index. He received his M.A. in Economics from Simon Fraser University.

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