New Brunswick’s waning economic freedom part of region-wide crisis

According to the new Economic Freedom of North America report, the four Atlantic provinces rank last among the 10 provinces and 50 U.S. states, due largely to massive government spending.

New Brunswick lands in 57th, followed by Nova Scotia (58th) and Newfoundland and Labrador and Prince Edward Island are tied at 59th. But that doesn’t say much. The economic freedom scores are so close, the four provinces are effectively tied.

Among other factors, the economic freedom index measures regulatory restrictions on free exchange and contracting, taxation levels and government spending.

In 2019, government spending equaled a remarkable 55 per cent of the Atlantic region’s economy—and even more in New Brunswick (57 per cent). New Brunswick does slightly better than the other provinces in taxation and regulation, but again the scores in all areas are very close.

To put Atlantic Canada’s government spending in context, consider Sweden, which is world famous for big government. Swedish government spending equaled 50 per cent of Sweden’s economy compared to 55 per cent in Atlantic Canada in 2019. The average across Canada (around 40 per cent) is close to the OECD average.

Sensible regulation and reasonable taxes may seem obvious components of economic freedom but government spending is also key, whether the money falls from heaven, is borrowed from the next generation or subsidized by taxpayers outside Atlantic Canada.

High levels of government spending reduce the space for free exchange, create dependence and a politicized economy as government—not the marketplace—becomes an ever more important business customer, weakening competitiveness with the rest of the world.

Not only does big spending suppress business competitiveness, it damages Atlantic Canada’s labour market. A regionally-rich employment insurance system pays many workers every year not to work for most of the year, increases the cost of employing workers, and frustrates the ability of many businesses to hire year-round workers and create sustainable private-sector jobs.

Sweden compensates for big government with an extremely open free-market economy and business-friendly laws and regulations, which are efficiently and quickly administered. Sweden, like Norway and Denmark, ranks in the top 10 of the World Bank’s Ease of Doing Business report. Canada is 23rd. The Doing Business data are only available nationally for Canada, but businesses in Atlantic Canada seldom praise governments for having world-class business friendliness and efficiency.

Moreover, Sweden has virtually no corruption. Transparency International ranks Sweden the fourth-least corrupt country in the world (Denmark is 1st and Norway, 7th). Canada is 12th. Government spending in Sweden is largely depoliticized, something that would be difficult to argue in Atlantic Canada where every election politicians traverse their province promising goodies. Yes, Sweden’s big government weakens economic growth, but the Swedes have significant advantages in government efficiency and transparency.

Finally, Atlantic Canada faces a political vulnerability. Much of the money governments spend in Atlantic Canada comes from Canadians outside the region due to our structure of fiscal federalism, which creates large unbalanced flows of funds between provinces. Federal spending (between 2007 to 2019) in Atlantic Canada equaled $390.7 billion compared to government revenues of $209.3 billion—a net inflow of $181.4 billion of federal money. (Statistics Canada’s latest government fiscal series is limited to the 2007 to 2019 period.)

Subsequently, opposition to fiscal federalism is rising in Alberta and even Ontario. Between 2007 and 2019, Albertans contributed $570.4 billion in revenue to the federal government but Ottawa spent only $313.1 billion in Alberta, for a net outflow of $257.3 billion.

Alberta’s 2020 budget and that province’s newly-created Fairness Alberta program demand fiscal reform. In Ontario, fiscal federalism faces pushback from studies issued by organizations such as the Institute for Competitiveness and Prosperity, Ontario 360 and the Ontario Chamber of Commerce. Fiscal federalism faces further political and economic problems in the post-COVID world, with budget deficits soaring at all levels of government.

Clearly, Atlantic Canada (including New Brunswick) must recover from its growth-suppressing addiction to big government if it wants to catch up with the rest of Canada economically and provide opportunity for young Atlantic Canadians.

Reducing government spending in Atlantic Canada would help power economic growth in the long-term, but it also may be unavoidable. Without the billions Ottawa ships to the region, the current level of spending is unsustainable. Governments in the region should not only to prepare for changes to fiscal federalism, but welcome them.