November 2001

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Budget Performance Index, 2001

by Joel Emes & Jason Clemens

The Fraser Institute has been analyzing the fiscal behaviour of governments in Canada for close to three decades. The Budget Performance Index, begun in 1995, provides Canadians with information about how their local and provincial governments tax, spend, and manage debt relative to other Canadian jurisdictions. It measures the recent fiscal conduct of the provinces and the federal government with 17 variables in 3 subindices. The main purpose of the index is to give Canadians a consistent, easily understandable survey of the fiscal policies of their governments.

Table 1 contains the overall performance scores and ranks for each of the Canadian jurisdictions as well as the scores and ranks for the three performance categories, namely, Spending, Tax Rates and Revenue, and Debt and Deficits.

Alberta is the top ranked Canadian jurisdiction with its score of 71.9 (out of a possible 100), followed closely by the federal government with a score of 69.8. All told, 6 jurisdictions receive scores in excess of 50.0, indicating a passing performance, while the remaining 5 jurisdictions, namely, Nova Scotia, Manitoba, Quebec, British Columbia, and Prince Edward Island, fail to obtain passing scores. Prince Edward Island has the dubious distinction of ranking last with a score of 30.2.

Three provinces experienced rather pronounced shifts in their overall rankings. Newfoundland and Labrador improved its ranking, moving from tenth position in the 2000 rankings to fourth position this year based largely on improvements in its Spending score, but also because of improvements in its Tax Rate and Revenue score.¹

The rankings for Prince Edward Island and Manitoba, on the other hand, declined significantly, dropping from sixth to eleventh, and from fourth to eighth positions, respectively. Both provinces received lower scores in the Spending subindex. Prince Edward Island’s Debt and Deficits score and Manitoba’s Tax Rates and Revenue score also declined.

The first component of the Budget Performance Index is the Spending subindex. It measures government spending in four ways. Three of the four indicators measure spending performance over the last five years: average annual change in spending (less transfers) per capita, as a percentage of GDP, and per $1,000 of personal income. The final measure assesses government spending compared to the size of the economy for 2000/01.

As table 2 indicates, the federal government received a perfect score of 100.0 for its performance in government spending. The nexthighest ranked jurisdiction, Ontario, only received a score of 63.6, indicating the strength of the federal government’s performance. The federal government did well in this category largely because of cuts made to provincial transfers, decreases in defence and securityrelated spending,² and reductions in the Employment Insurance program. Further, of the 11 jurisdictions assessed, only four, the federal government, Ontario, New Brunswick, and Quebec, received passing scores (in excess of 50.0). The remaining 7 provinces, including Alberta, received failing scores.

Four of the 11 jurisdictions maintained their rankings from last year: the federal government, Ontario, New Brunswick, and Saskatchewan. Unfortunately for Saskatchewan, it maintained the relatively low ranking of ninth, while the other three jurisdictions kept their top three positions.

The rankings for three provinces changed significantly: Prince Edward Island, Newfoundland and Labrador, and Alberta. Newfoundland increased its ranking from tenth in 2000 to sixth this year with improvements in all four of the government spending indicators.

On the other hand, Alberta and Prince Edward Island experienced declines in their rankings, dropping from fourth to eighth and from sixth to eleventh, respectively. Alberta’s performance on three of the spending indicators deteriorated while Prince Edward Island’s performance on all four spending indicators deteriorated.

Among the provinces, Quebec maintains the largest provincial government (consolidated to include both provincial and local spending) at 25.2 percent of GDP (see column 4 of table 2, “Spending less transfers as a percentage of GDP, 2000/01”). Quebec is followed closely by Saskatchewan (25.1%), Manitoba (25.0%), and British Columbia (24.4%) in terms of having large provincial governments. Alberta had the smallest government, with spending by government representing only 19.4 percent of GDP, a full 5.8 percentage points less than in Quebec. Ontario, at 21.2 percent of GDP, had the second smallest government.

The second subindex, Tax Rates and Revenues, is composed of nine performance indicators. Six of the nine indicators deal with tax rates, both in terms of changes over time as well as their current levels. Specifically, we look at both the current rates, and the change in rates for personal income taxes (top statutory rate only), sales taxes, and general corporate income taxes. Two of the remaining three measures deal with the size of tax revenues relative to the economy. The remaining measure looks at the portion of provincial revenue received in the form of transfers from the federal government.

Alberta achieved the top score on the Tax Rates and Revenues subindex, garnering a score of 82.2 out of a possible 100.0. Ontario followed in second place with a score of 64.3. Only 6 jurisdictions receive passing scores while the remaining 5 receive failing scores.

As was the case in 2000, the federal government received the lowest score (29.2) and rank (11) of all jurisdictions for its performance in Tax Rates and Revenues. Of the 11 jurisdictions assessed, 6 of them maintained their rank from the previous year. Only Saskatchewan, British Columbia, New Brunswick, Newfoundland and Labrador, and Manitoba changed ranks, and these were relatively small changes, not nearly as dramatic as some of the movements noticed in other subindices. Saskatchewan, British Columbia, and Newfoundland all moved up, while New Brunswick and Manitoba moved down.

Interestingly, every jurisdiction in Canada has reduced its top marginal personal income tax rate since 1996. Table 3 clearly shows this movement. More recently, many dramatic corporate income tax rate reductions have been implemented or announced. Several provinces, most notably Ontario and Alberta, announced wide, sweeping rate reductions in corporate income tax rates that will be implemented over the next several years.

Not surprisingly, provinces with large governments (as measured by government spending), also perform relatively poorly when they are assessed according to the percentage of the economy or personal income they take in tax. Quebec, Saskatchewan, and British Columbia lead the nation in terms of the portion of the economy extracted in taxes.

The final subindex of the Budget Performance Index provides a broad overview of the extent a jurisdiction uses deficits to finance current consumption and the relative burden of accumulated debt. Specifically, the subindex measures the average annual surplus or deficit on a per capita basis, as well as relative to GDP (size of the economy). It also measures the change in the per capita debt in both dollar terms and compared to the size of the economy. Note that provinces that have run a surplus over the period of analysis are treated as though they had balanced their budgets. This is done because, by definition, surplus money is either spent, or reduces net debt. As spending and changes in debt are measured in other indicators, leaving these indicators with surplus amounts would result in double counting. For a more complete explanation of the rationale behind this and for any other methodological questions, please refer to Budget Performance Index 2000 available at: http://www. fraserinstitute.ca/publications pps/39/.

Alberta received a perfect score of 100.0 on this subindex. Over the last 5 years, Alberta has aggressively paid down its provincial debt to the point where it now has no net debt and is relatively close to eliminating its overall gross debt. Saskatchewan, once on the threshold of bankruptcy, received the second highest score of 81.8, and ranked second overall. Saskatchewan’s per capita debt has fallen by $1,386, and debttoGDP has fallen by 22.8 percentage points.

The Debt and Deficit subindex had the highest number of jurisdictions, seven, receiving a passing score.

In a world of diminishing borders and increasing international competitiveness, the fiscal performance of national and subnational governments is becoming increasingly important as a catalyst for economic wellbeing. The Budget Performance Index is a succinct presentation of the three core areas of fiscal performance: government spending, taxation, and debts and deficits. Those jurisdictions faring well should be commended, while those lagging behind should use other jurisdictions as a model for reform.

In general, it is important to recognize that even those jurisdictions that fared well in the Budget Performance Index have room to improve. For instance, Alberta, the topranked jurisdiction, clearly has room for improvement in the Spending area while the federal government, the second highest ranked jurisdiction, can improve its Tax Rates and Revenue score.

1. Decreases and increases in the Budget Performance Index from year to year are due to two main influences: the change in the jurisdiction’s indicator values; and the change in other jurisdictions’ indicator values relative to the jurisdiction of interest.
2. The BPI measures overall spending. While the federal government’s performance on the BPI was aided by reductions in defence spending, The Fraser Institute has been calling for increased defence spending financed by reductions in other spending areas for some time now.
3. This unusual result is partially due to the fact that our debt data covers the period 1995/96 to 1999/00, while our deficit data covers the period 1996/97 to 2000/01.

Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute.

Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute.

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