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What Kind of Canada?
16/01/2003

One of the issues I hope to write about here relates to defining a successful, independent strategy for Canada. I am working on some thoughts on my own, and I plan on interviewing others who can contribute.

So far, however, things seem to be going better than many on Bay Street or on the opposition benches in Parliament would have you believe. Here are some excerpts from recent articles…

Last Friday, Barrie McKenna of the Globe and Mail pointed out that despite recent US tax cuts, life can be a lot more affordable here in Canada

In general, Canadians pay higher sales taxes, while Americans pay substantially heftier social security, or payroll taxes.

Yet, it's the personal income tax rates over which many Canadians obsess, particularly as they ponder their looming tax returns.

And there, the differences are less stark. A Canadian married couple with one income and two children paid an average of 16 per cent of their gross earnings in taxes, including payroll taxes, according to the OECD. An identical U.S. couple paid 15.3 per cent.

For an individual, the average government take was 26.6 per cent in Canada and 25.5 per cent in the United States. That's not quite the yawning gap you might expect.

But the real litmus test comes down to how people really live and how far their incomes take them in the respective countries.

What many Canadians fail to recognize when they look enviously across the border is that most Americans pay much more for their health and education -- two expenditures that are critical to most peoples' quality of life.

He goes on to explain that once health care premiums and tuitions are considered, the personal Canadian tax burden is lighter.

Things are also decent on the business side. In today's Globe and Mail, Murray Dobbin writes,

Canada wins the competitiveness contest with the U.S. hands down. Since 1997, the international business consulting firm KPMG has done yearly, in-depth comparisons of business costs in eight countries in North America, Europe and Japan. Every year, including 2002, Canada has come out No. 1 -- and by a wide margin over the United States.

According to KPMG, "Canada is the overall cost leader for 2002 with a . . . 14.5-per-cent cost advantage over the United States." Canada beat the United States in all major business cost categories: labour, employee benefits (largely due to medicare), investment, electricity, and telecommunications costs, and -- lo and behold -- taxes.

and

It used to be that Canadian tax-cut promoters complained about our corporate income tax. But they can't do that any more, because Canada's corporate-tax rate is now 23 per cent (headed for 21 per cent in 2004), while the U.S. comes in half again as high at 34 per cent.

And for all the talk about taxes and investment, ask any CEO in the privacy of their office, and he or she will tell you that taxes are well down the list of factors determining where and when to invest in new productive capacity. A highly trained work force, access to markets, energy-price stability, strong infrastructure, actual demand -- all these come in ahead of taxes.

Although there are many ways that we could be doing better, there are many reasons for our strength today.

One is the fiscal lessons we have learned in the past decade or two. Coming out of the Mulroney years, it seemed impossible to open the newspaper without seeing articles about how Canada's debt and deficit were going to turn us into a "third-world nation". It may have been hyperbole emanating from New York's financial community, but we seem to have taken the lessons to heart... even better than the United States. As Bruce Little writes today in the Globe:

Whatever the actual numbers, the federal government is solidly committed to surpluses in good and bad years alike. Even when the economy flirted with recession in 2001, Ottawa declared that it would not let the books slip back into the red again.

That's the new reality of Canadian public opinion. Former finance minister Paul Martin did such a good job of selling the evils of deficits in the mid-1990s that Canadians will no longer tolerate anything less than a surplus. In the past two years, Ottawa hasn't even come close to a deficit, despite the economic slowdown.

Compare that with the record in Washington, where the chatter two years ago was that the U.S. government might just pay down all of its debt one day, so mighty were its surpluses. A 10-year projection by the Office of Management and Budget foresaw surpluses (excluding the big social security surplus) totalling over $3-trillion (U.S.), a sum that soon fell to $575-billion after President George W. Bush got his first big tax cut through Congress.

Another year on -- in which the United States launched its war on terrorism and the economy continued to be sluggish -- and the projected surplus had turned into a deficit of $1.5-trillion, according to the Congressional Budget Office. Tack on the tax cut announced last week and the next calculations will be even grimmer.

Washington swung from a $127-billion surplus in fiscal 2001 -- the year of the recession -- to a deficit of $159- billion in fiscal 2002 -- the year of tax cuts and slow recovery. Three months into fiscal 2003 and the year-to- date deficit is already a staggering $109-billion. Is it any wonder that there's talk of a $350-billion deficit this year, with some analysts going as high as $500-billion?

The U.S. economy can handle a deficit this size with ease in the short term. It's the long term that's worrisome. The last time Washington ran deficits this big, it took tax increases and several years of supercharged economic growth -- not to mention hypercharged stock gains that generated taxable capital gains -- to get the budget back in balance. That's not likely in this decade.

There's more. Part of Canada's strength is based on our public services. In the book The Efficient Society, Joseph Heath argues that Canada does a better job of optimizing the balance between which goods are offered by the market, and which by the government.

In other words, there are some goods or services that are more effectively provided by the free market, whereas there are others that are more efficiently provided by the state. He claims that Canada comes closer to getting this right than do the United States or most European countries. (Thus his controversial and off-target subtitle of the book, Why Canada is As Close to Utopia As it Gets.) He sites health care as an example. Not only can we consider universal public health care to be a fair approach, but, he claims, it is also more efficient in terms of benefit for cost.

Education has also been mentioned as a strength contributing to our prosperity. A recent UNICEF study has ranked Canada 4th in the World -- well ahead of the United States -- for its education system. Surely this contributes to both our quality of life, and the quality of our workforce.

I don't mean to imply that everything is perfect in Canada. I intend on regularly writing pieces critical of our current direction, and articles suggesting strategy for future development.

Nevertheless, it is good to know that things aren't so bad, either.


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