Growing government, increased regulation primary threats to economic freedom in Canada

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Since comprehensive data for Economic Freedom became available in 1970, Canada’s had a secure place in the world’s top 10 jurisdictions. But could Canada be at the beginning of a long slow decline, like the one that has afflicted the United States over the last decade and a half?

The U.S. entered the 2000s strong. In 2000, its economic freedom score was 8.65 out of 10 and it was the world’s second freest economy after Hong Kong. This was the peak of U.S. economic freedom. Decay set in under the George W. Bush and Obama administrations. By 2014, the most recent year of data, the U.S. score had fallen to 7.75 and its ranking to 16th. Over that time, it suffered a serious decline in “Size of Government” and worse declines in “Rule of Law and Property Rights” and “Freedom to Trade,” all essential elements of economic freedom.

Canada may be facing a similar decline. Economic freedom has been found in many peer-reviewed and policy articles to be essential for growth and prosperity—so this is serious business for Canadians.

In 2000, Canada had a score of 8.36 and a rank of 7th. By 2014, Canada’s score had fallen to 7.98 though its rank had risen to fifth, given worse records from other top 10 jurisdictions. Like the U.S., Canada suffered significant declines in the “Rule of Law” and “Freedom to Trade.”

The main reason for Canada’s decline in the first was the addition of a new variable, “Legal Enforcement of Contracts” where Canada does very poorly; the key problem in “Freedom to Trade” is the variability of Canada’s tariff rates, indicating the government is using its own preferences to manage trade, rather than allow free and equal choices for all Canadians.

But the big threats to economic freedom in the future focus on size of government and regulation. As government increases the amount of your property it expropriates through taxation or regulation, it reduces economic freedom; as government increases spending (even if the money falls from the sky), it reduces space for free exchange.

The economic freedom of the world index examines government activities on all levels—federal, provincial and municipal—and averages them across the country. Two of Canada’s provinces, Ontario and Alberta, have launched spending sprees and tax grabs that will seriously damage economic freedom in the years ahead.

Prior to recent changes, Alberta had the lowest corporate tax rate in Canada and the lowest combined federal-provincial/state personal income tax rate in both Canada and the U.S. Now its corporate tax rate is higher than British Columbia’s and Ontario’s, and almost identical to those in Saskatchewan, Manitoba and Quebec. Alberta’s combined federal-provincial tax rate is now the 46th highest among the 60 provinces and states.

Ontario’s personal tax rate rose by 15.3 per cent between 2009 and 2016. And the federal government has been piling on, raising the top federal tax rate from 29 per cent to 33 per cent on incomes over $200,000. In 2009, all provinces had combined federal-provincial top rates were all below 50 per cent; now three are above 50 per cent, Ontario, Quebec and Nova Scotia.

Alberta and Ontario, along with the federal government, have or plan to introduce carbon programs, which are effectively taxes on consumers, directly and indirectly. Such laws increase regulation, making our lives more complex and reducing economic freedom.

On the spending side, a simple set of figures tell the story. Government spending rose from 39.0 per cent of our economy in 2014 to 41.4 per cent in 2016, an increase of 6 per cent in just two years—don’t you wish your wages went up that fast. Meanwhile, federal and Ontario debts are skyrocketing and Alberta’s fiscal situation is deteriorating. Mounting debts increase the amount government spends to service the debt and may lead governments to increase taxes rather than the sensible approach of controlling spending.

All this gives reason to think that Canada may be entering a long spiral down that damages our future prospects.

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