Canada slipping in terms of economic freedom

Canada, after decades as one of the top-10 economically freest places on earth, has fallen into the teens for two years running, according to the just released 2021 Economic Freedom of the World report, raising concerns about a long-term trend away from freedom.

Canada dropped to 14th in the new report based on 2019 data, the most recent available, down slightly from 13th the previous year. In all previous years, dating back to the first measurement in 1970, Canada was in the top 10. As recently as 2014, Canada ranked 6th. This is profoundly important. Numerous fact-based studies show economic freedom powers growth, prosperity, and poverty reduction.

And it risks getting worse. Both major parties in the most recent election promised to increase spending as a percentage of GDP, even as COVID, hopefully, recedes. Big spending reduces economic freedom by limiting the space for free exchange and by increasing government economic control. Soaring debts and deficits may be harbingers of worse., as some governments will be tempted to increase taxes, rather than reduce spending to get deficits under control.

To see the path forward, we need to know where we are now. A recent Fraser Institute study shows that Canada was the 2nd biggest spender among advanced nations in 2020; had the highest deficit-to-GDP ratio; and the 25th worst economic performance.

The International Monetary Fund (IMF) has produced comprehensive fiscal projections, which are scary and show huge increases in government spending, deficits, and debts around the globe, and for Canada.

In 2019, government spending in Canada equaled 41 per cent of the economy, rising to 52 per cent in 2020, and falling to 48 per cent in 2021, compared to an advanced economy average of 39 per cent in 2019, 47 per cent in 2020, and 46 per cent in 2021.

And Canada’s government has been getting bigger for years, according to the Economic Freedom of the World’s measure of Size of Government. In 2014, Canada was 68th out 165 jurisdictions dropping to 112th in 2019, with lower ranks indicating bigger government.

Debt burden is also a big problem for Canada. Net government debt will increase from 88 per cent of the economy in 2019 to 116 per cent in 2021. And Canada already has significantly more debt than the average of advanced nations, which was 94 per cent in 2021.

IMF projections show fiscal improvements across the board as COVID recedes, but therein danger lies. As government spending increases, Canada and the world could be headed to a long-run slump in economic freedom and thus in economic growth and prosperity.

For example, the income of the poorest 10 per cent in the freest nations is over US$14,000 but under US$1,600 in the least-free nations. In the least free nations, over one in three people live in extreme poverty ($1.90 a day) compared to under one percent in the most-free nations.

The list goes on: economically-free nations have increased life expectancy, better health care, more educational achievement, and higher levels of happiness. Research has shown that happiness is driven even more by economic freedom than the increased prosperity it generates. People just like to be in charge of their own lives.

Re-establishing economic freedom is vital for future growth, prosperity, and other good things. None of the parties in the recent election spoke of economic freedom or its shrinking role in Canada’s economy. For a brighter future, Canada needs to halt the long-term decline in the economic freedom of Canadians, something evident well before COVID.