Economy
Greater oil and gas export capacity will boost Canadian dollar – and productivity
From the Frontier Centre for Public Policy
By Ian Madsen
It may be overly optimistic to think that Canadian producers could reap CAD$10 in gross profit per GJ, let alone the full almost-$20 price differential. However, even if it is just $5 per GJ, that generates $90 million per day, or almost $33 billion per year.
Canada’s productivity performance has been dismal, having not increased over the last nearly ten years. Economists calculate productivity as the value of output divided by hours worked to generate that output. However, the numerator, being the value of the goods and services produced, has been either neglected, or, when it is actually addressed, is looked at from the perspective of new, ‘high tech’ products and services (information technology, artificial intelligence, or advanced equipment, materials and devices). While all these industries are important, other sectors boost value, too.
Foremost among those sectors is energy – where Canada has outstanding competitive advantages, but still does not get full value for its output. Canada’s oil exports now go entirely to the United States, mostly via pipelines from Alberta and Saskatchewan, with a small amount sent by ship from the Vancouver area to U.S. West Coast customers. All Canadian natural gas exports go entirely to the U.S., which already has a surplus.
The situation severely harms Canadian producers’ bargaining power, which causes them to experience severe discounts on natural gas and oil (whether heavy oil sands, Western Canada Select, ‘bitumen’; or conventional crude oil). Fortunately, the situation will change radically, either next year, or, possibly, later this year.
The reason: Canada LNG, the first of possibly several West Coast liquefied natural gas liquefaction export terminals, should soon commence shipments to foreign buyers (South Korean, Japanese utilities, and others in East Asia). The export capacity of the Kitimat, BC, facility is 1.8 billion cubic feet daily, or 1.8 million Gigajoules, ‘GJ’.
Natural gas now sells for about $2.50/GJ Canadian in Alberta, whereas East Asian recent prices were US$16.70: about CAD$22.25. (It costs several dollars to liquify, load, transport and re-gasify at destination each GJ.) Every dollar of after-cost price differential flows directly to producers, and Canada’s balance of payments. The balance of payments determines our loonie’s value, and, thus, Canada’s standard of living (also, to some extent, inflation).
It may be overly optimistic to think that Canadian producers could reap CAD$10 in gross profit per GJ, let alone the full almost-$20 price differential. However, even if it is just $5 per GJ, that generates $90 million per day, or almost $33 billion per year. As total exports were $596.9 billion in 2022, this would constitute an increase of about 5.5%. This amounts to roughly $1,610 per person in Canada’s current 20.5 million-strong labour force – a big productivity increase for ‘little’ extra work (as everything will have already been built).
Yet, that is not all. There is also the TransMountain, ‘TMX’, pipeline expansion, scheduled for completion this year. Its extra capacity of 590,000 barrels per day is all slated to be exported. If ‘just’ $10 extra per barrel is garnered (the U.S. heavy oil differential exceeds that, typically), that would bring $5.9 million more per day: $2.15 billion annually.
This would also contribute to a better balance of payments (perhaps becoming positive once more), a higher loonie, higher productivity, lower inflation, and a higher standard of living. Australia, which now outperforms Canada, does not interfere with its own massive LNG exports. If Canadian politicians can restrain themselves from blocking more oil or gas pipelines and LNG export terminals, a bright future awaits.
Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy
Watch Ian Madsen on Frontier Live on X here.
From the Fraser Institute
By Jake Fuss and Alex Whalen
According to a 2021 study published by the Fraser Institute, 38.4 per cent of those who paid capital gains taxes in Canada earned less than $100,000 per year, and 18.3 per cent earned less than $50,000. Yet in his video, Prime Minister Trudeau claims that his capital gains tax hike will affect only the richest “0.13 per cent of Canadians”
This week, Prime Minister Trudeau released a video about his government’s decision to increase capital gains taxes. Unfortunately, he made several misleading claims while failing to acknowledge the harmful effects this tax increase will have on a broad swath of Canadians.
Right now, individuals and businesses who sell capital assets pay taxes on 50 per cent of the gain (based on their full marginal rate). Beginning on June 25, however, the Trudeau government will increase that share to 66.7 per cent for capital gains above $250,000. People with gains above that amount will again pay their full marginal rate, but now on two-thirds of the gain.
In the video, which you can view online, the prime minister claims that this tax increase will affect only the “very richest” people in Canada and will generate significant new revenue—$20 billion, according to him—to pay for social programs. But economic research and data on capital gains taxes reveal a different picture.
For starters, it simply isn’t true that capital gains taxes only affect the wealthy. Many Canadians who incur capital gains taxes, such as small business owners, may only do so once in their lifetimes.
For example, a plumber who makes $90,000 annually may choose to sell his business for $500,000 at retirement. In that year, the plumber’s income is exaggerated because it includes the capital gain rather than only his normal income. In fact, according to a 2021 study published by the Fraser Institute, 38.4 per cent of those who paid capital gains taxes in Canada earned less than $100,000 per year, and 18.3 per cent earned less than $50,000. Yet in his video, Prime Minister Trudeau claims that his capital gains tax hike will affect only the richest “0.13 per cent of Canadians” with an “average income of $1.4 million a year.”
But this is a misleading statement. Why? Because it creates a distorted view of who will pay these capital gains taxes. Many Canadians with modest annual incomes own businesses, second homes or stocks and could end up paying these higher taxes following a onetime sale where the appreciation of their asset equals at least $250,000.
Moreover, economic research finds that capital taxes remain among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. By increasing them the government will deter investment in Canada and chase away capital at a time when we badly need it. Business investment, which is crucial to boost living standards and incomes for Canadians, is collapsing in Canada. This tax hike will make a bad economic situation worse.
Finally, as noted, in the video the prime minister claims that this tax increase will generate “almost $20 billion in new revenue.” But investors do not incur capital gains taxes until they sell an asset and realize a gain. A higher capital gains tax rate gives them an incentive to hold onto their investments, perhaps until the rate is reduced after a change in government. According to economists, this “lock-in” effect can stifle economic activity. The Trudeau government likely bases its “$20 billion” number on an assumption that investors will sell their assets sooner rather than later—perhaps before June 25, to take advantage of the old inclusion rate before it disappears (although because the government has not revealed exactly how the new rate will apply that seems less likely). Of course, if revenue from the tax hike does turn out to be less than anticipated, the government will incur larger budget deficits than planned and plunge us further into debt.
Contrary to Prime Minister Trudeau’s claims, raising capital gains taxes will not improve fairness. It’s bad for investment, the economy and the living standards of Canadians.
Authors:
Economy
Canadians experiencing second-longest and third steepest decline in living standards in last 40 years
From the Fraser Institute
From 2019 to 2023, Canadian living standards declined—and as of the end of 2023, the decline had not yet ended, finds a new study published today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.
“Despite claims to the contrary, living standards are declining in Canada,” said Grady Munro, policy analyst at the Fraser Institute and co-author of Changes in Per-Person GDP (Income): 1985 to 2023.
Specifically, from April 2019 to the end of 2023, inflation-adjusted per-person GDP, a broad measure of living standards, declined from $59,905 to $58,111 or by 3.0 per cent. This decline is exceeded only by the decline in 1989 to 1992 (-5.3 per cent) and 2008 to 2009 (-5.2 per cent). In other words, it’s the third-steepest decline in 40 years.
Moreover, the latest decline (which comprises 18 fiscal quarters) is already the second-longest in the last 40 years, surpassed only by the decline from 1989 to 1994 (which lasted 21 quarters). And if not stabilized in 2024, this decline could be the steepest and longest in four decades.
“The severity of the decline in living standards should be a wake-up call for policymakers across Canada to immediately enact fundamental policy reforms to help spur economic growth and productivity,” said Jason Clemens, study co-author and executive vice-president at the Fraser Institute.
- Real GDP per person is a broad measure of incomes (and consequently living standards). This paper analyzes changes in quarterly per-person GDP, adjusted for inflation from 1985 through to the end of 2023, the most recent data available at the time of writing.
- The study assesses the length (number of quarters) as well the percentage decline and the length of time required to recover the income lost during the decline.
- Over the period covered (1985 to 2023), Canada experienced nine periods of decline and recovery in real GDP per person.
- Of those nine periods, three (Q2 1989 to Q3 1994, Q3 2008 to Q4 2011, and Q2 2019 to Q2 2022) were most severe when comparing the length and depth of the declines along with number of quarters required for real GDP per person to recover.
- The experience following Q2 2019 is unlike any decline and recovery since 1985 because, though per person GDP recovered for one quarter in Q2 2022, it immediately began declining again and by Q4 2023 remains below the level in Q2 2019.
- This lack of meaningful recovery suggests that since mid-2019, Canada has experienced one of the longest and deepest declines in real GDP per person since 1985, exceeded only by the decline and recovery from Q2 1989 to Q3 1994.
- If per-capita GDP does not recover in 2024, this period may be the longest and largest decline in per-person GDP over the last four decades.
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