Canada’s federal government disregards its own fiscal rules—unlike Sweden

During the 1970s and 1980s, Canada and Sweden both saw a deterioration in government finances. However, hard times in the early 1990s transformed the approach to fiscal policy by governments in both countries, including reducing spending and borrowing, and ultimately returning to balanced budgets. While Swedes have carried on the legacy of fiscal responsibility in subsequent decades, Canadians seem to have forgotten the hard lessons of recent history and have fallen back on the fiscal approach that got us into trouble in the first place.

In his recent book, Swedish economist Johan Norberg explains that for most of its modern history Sweden has been a testament to the success of the free market, rather than a model socialist economy. The country only experimented with socialism for a short period, with disastrous results.

Sweden’s socialist experiment during the 1970s and 1980s saw substantial income redistribution and the introduction of a large welfare state. As a result, the size of government doubled as a share of the economy (measured by GDP). Yet despite increases in taxes, particularly targeting corporations and the wealthy, the government could not raise the funds to pay for such a sizable expansion of the welfare state. Instead, Sweden ran deficits in every year from 1970 to 1987, government debt rose from less than 18 per cent of the economy (GDP) in 1970 to over 70 per cent in 1985, and the private sector completely stagnated.

This approach brought about a financial crisis in the early 1990s that saw interest rates briefly rise as high as 500 per cent. In the wake of this crisis, the Swedish government declared the socialist experiment a failure, and the country saw substantial reform that emphasized balanced budgets, lower taxes, and an open business environment. Rules were set in place to ensure fiscal discipline, and as a result the country has enjoyed consistent surpluses and government debt has fallen from 83.2 per cent of the economy in 1998 to 58.8 per cent in 2021, despite still maintaining a large welfare state.

During the 1970s and 1980s, Canada also experienced a deterioration in government finances. Canada’s issues stemmed from a substantial expansion in the size and role of government in conjunction with rising interest rates. The federal government ran uninterrupted budget deficits from 1970 through to the mid-1990s. Federal government debt rose to over 70 per cent of GDP during this period and debt interest costs were consuming more than one-third of federal government revenues.

By the early 1990s federal finances were in shambles and the economy was stagnant. A new federal government was elected, led by Jean Chrétien, which implemented significant fiscal reform in 1995 based on spending restraint, balanced budgets and lower taxes. The provinces enacted similar reforms, and from the late 1990s through the 2000s, Canadians enjoyed consistent surpluses, debt reduction, and strong economic growth.

While there are clear parallels between the countries, unlike Sweden, Canadians has since reverted back to the risky fiscal approach of the 1970s and 1980s. Since 2015, Canada has seen historically high federal spending, and a string of federal and provincial budget deficits. Consequently, government debt and its associated costs have grown substantially.

Since the 1990s, both Canada and Sweden have had fiscal rules in place to help ensure the health of government finances. But while the Swedish government has largely stuck to its surplus goal by being disciplined with finances, Canada’s current federal government has consistently disregarded its own commitments. Indeed, it has violated its own fiscal anchors several times since 2015, and rather than adopt the discipline necessary to get back on track, the government simply moves the goalposts.

Simply put, Swedes have learned their lesson from their experience in the 1970s to 1990s, whereas Canadians appear to have forgotten. This raises the question—do Swedes have better memories?

Authors:

Grady Munro and Jake Fuss

Related Topics:#CanadaEconomy #CanadaVSSweden #FraserInstitute #GradyMunro #JakeFuss #JohanNorberg #SwedenEconomy

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Prime minister’s misleading capital gains video misses the point

Published on May 19, 2024

Todayville

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:

Jake Fuss

Director, Fiscal Studies, Fraser Institute

Alex Whalen

Associate Director, Atlantic Canada Prosperity, Fraser Institute

Economy

Canadians experiencing second-longest and third steepest decline in living standards in last 40 years

Published on May 17, 2024

Todayville

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.