The Importance of Growth

Of the current issues facing the Canadian economy, the biggest of them depend on how Canada’s trade negotiations with other countries settle. The Comprehensive Economic and Trade Agreement (CETA) with Europe, for instance, creates enormous potential for Canada’s export-oriented industry to expand. In Atlantic Canada, however, there could be severely negative consequences if the provinces fail to take steps that bolster economic growth and attract new talent to the region. The new method of determining health transfer payments, which focuses on population and GDP, is just one illustration of how important economic and demographic development is in Eastern Canada.

Canada’s economic success is rooted in exports, and the export-industry, which is composed primarily of natural resource extraction, has an opportunity to not only supply other countries with raw materials and manufactured goods, but also value-added products. Reducing and eliminating barriers to trade with the European Union (EU) will likely benefit key economic sectors, such as energy, manufacturing, and seafood, and freer trade between Canada and Europe will encourage domestic economic activity, as it expands the market available to Canadian industry. The EU is currently Canada’s second-largest trading partner–behind the United States–and, in 2012, exports to Europe totalled $41 billion. However, it is critical that Canadian industry remains competitive in foreign markets and focuses on value-added products, as well as supplying factors of production. In fact, CETA eliminates protective barriers that currently prevent Canadian industry from exporting value-added products into Europe, and vice-versa, which levels the competition, in addition to providing an opportunity for Canadian-EU businesses to produce the most desirable products.

CETA also creates enormous potential for the Atlantic Provinces to expand the agriculture and seafood sectors into the EU, but they face significant demographic challenges that could restrict new prospects. In the last several years, Atlantic Canada’s population has declined and the average age has increased dramatically. In 2011, roughly 16 per cent of Atlantic Canada’s population was aged 65 or above, compared to 14.4 per cent of Canada’s entire population, and by 2036, Statistics Canada expects it to be around 29.1 per cent (compared to 23.7 nationally). Furthermore, Canada’s labour force increased by 1.1 per cent between 2012 and 2013, however, Atlantic Canada’s increased by half that amount, which is due in large part to an outflow of young individuals and families and an influx of retirees. As a result, the region is not equipped to attract large-scale industry, especially compared to British Columbia, Alberta, and Saskatchewan, and has contributed much less than other regions to Canada’s GDP in recent years. This is an important caveat, considering the federal government will begin calculating the Canada Health Transfer using population and GDP in 2018. If the Atlantic Provinces fail to generate economic growth and attract newcomers, they will receive less than other provinces to fund their healthcare systems, which will become more cumbersome in the future due to an ageing population and declining tax base.

In coming years, these two developments–freer trade and the new healthcare funding mechanism–will play a large role in determining Canada’s economic prosperity and the viability of its healthcare system. Canada’s export sector and healthcare system are rooted historically in the country’s history and it is unclear what changes will materialize because of modifications to them. In any case, the Atlantic Provinces need to take measures that bolster economic growth and attract new talent, both of which will allow them to take full advantage of CETA and other free trade agreements and create a sustainable source of funding for their healthcare systems.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Free-for-all, free for none: Campaign financing in Newfoundland and Labrador

The past year has shaken Newfoundland and Labrador’s political parties significantly. Former Premier Kathy Dunderdale’s resignation prompted the Progressive Conservative Party to begin searching for its new leader; the Liberal Party elected its new leader following a long and expensive campaign; and infighting forced the New Democratic Party to perform a leadership review, scheduled for this May.

Chaos at the top of Newfoundland and Labrador’s three major political parties happened to spark debate about provincial campaign financing rules. In the Liberal leadership race, candidates could accept donations of any amount from individuals, corporations, and unions, had no spending limits, and did not have to disclose the origin of donations made to them. Election rules are similarly scant. There are no donation limits, although there are spending limits: candidates can spend roughly $4.30 per elector in each district.

In a democracy, candidates must convince voters why they are suited to govern and campaigning allows the former to provide the latter with information necessary to make a decision at the ballot box. Winning requires candidates to compete with each other and persuade voters in their direction, whether by connecting with them through advertisements, lawn signs, websites, phone calls, or knocking on doors. Politicians need money to make these connections, though, which is why strong financial support is a primary determinant of candidate success.

Unlimited campaign contributions harm Newfoundland and Labrador’s democracy. They allow candidates to rely on a few large donors for support and, in some instances, permit those donors to fund their own campaigns. In many ways, small groups have more influence over policymakers than do individual voters. Reciprocity, however, is instinctual, and even if it was not, politicians must keep their donors happy if they depend on them for re-election. Moreover, unlimited campaign financing allows affluent candidates to use their personal wealth as an electoral advantage.

The lack of rules governing leadership races is of even bigger concern. In the most recent provincial by-election, candidates were permitted to spend $42,278. This is a large sum of money, but it is not insurmountable for candidates with some of their own money, a respectable donor base, and party support. But the “capital requirement” of a leadership bid is prohibitive for all but the wealthy. In the Liberal Party of Newfoundland and Labrador’s 2013 leadership race, for instance, two candidates spent over $400,000. Much of this came from their own pockets.

Only candidates willing to spend large sums of their own money, or those with donors willing to fund their campaigns, stand a chance to lead one of the province’s main parties, which gives wealthier individuals an advantage or holds leadership accountable to large donors. (Moreover, leadership candidates do not have to disclose their donor lists, exacerbating the situation.) Until the situation ceases, parties will not have an incentive to reduce their own spending or contribution limits to reasonable levels.

The problem is not, strictly speaking, that wealthy people have too much power in politics. Even if corporations, unions, and individuals represented the interests of those without their own wealth to spend on campaigns, their ability to almost singlehandedly fund campaigns makes politicians more accountable to a few voices than to many. Without contribution limits, groups representing people control elections rather than people themselves. This weakens the connections between voters and democracy’s outcomes.

The Government of Newfoundland and Labrador should, therefore, institute a campaign financing regime, similar that of the federal government. It should cap contribution limits, extend its financing laws to leadership elections, and ban corporate and union donations. Taking these steps would make democracy in the province less accountable to money and more accountable to voters.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

 

Equalization, Incrementalism, the Unlikeliness of Rapid Reform

Equalization is a staple of the Canadian Dominion. Policymakers in the 19th century designed and implemented it to ensure that government provided equal services throughout the country and achieve greater balance between the provinces (or, as they were at the time, regions). The rationale is that small provinces, like Prince Edward Island (PEI), should be able to offer the same quality of public services as larger provinces that have greater fiscal capacity. Ottawa collects revenue from each province, based on a complicated formula that takes into consideration income levels, economic growth, and a swath of complex variables, and then redistributes it to those provinces in need.

The structure of Canada’s equalization program results in wealthier provinces contributing to poorer ones. This year, for example, Ontario, Quebec, New Brunswick, Nova Scotia, PEI, and Manitoba–colloquially referred to as the “have-not provinces”–will receive equalization payments, while the remaining four provinces–the “have provinces”–serve as their creditors.

Equalization’s current structure receives a great deal of criticism from both provinces that receive payments and those that provide a net contribution. Although this is a generalization, some believe that the formula no longer works and requires substantial reform. However, there is a disparity between defining the problem and delineating solutions to fix it. In Eastern Canada, for example, critics indicate that the program does not distribute enough wealth throughout the region, whereas those in Western Canada–where three of the four “have provinces” are located–argue that subsidizing the “have-not provinces” is unfair. In fact, some intellectuals question its constitutionality.

The inability to accurately define equalization’s most serious deficiencies precludes the capacity to solve them. For recipient provinces, including natural resource revenues in the equalization formula would increase the scope of its distributional effect. This is problematic, however, as it could also discourage creditor provinces from developing their natural resources (or, much less damaging, it would reduce their total revenue). Furthermore, including natural resources disproportionately penalizes the provinces that rely on developing them.

Conversely, those opposed to equalization argue that eliminating it or reducing its overall scope. Unfortunately, although this would benefit the “have provinces,” it would be severely damaging for those receiving the transfer payment each year–at least in the short-term. Not only would it reduce the size of federal transfer they receive, but also it could encourage residents of recipient provinces to migrate toward the more affluent West, which would only exacerbate the current migratory trend.

Reforming the Canadian equalization programme is difficult: neither those supporting nor opposing it will accept facing negative externalities of whichever reform route the government chooses. Solving this problem requires alternative solutions and, likely, a tremendous compromise between both sides. Alas, it might be better to transfer wealth directly to individuals, rather than provincial coffers, where bureaucratic excess erodes the government’s ability to effectively distribute it to individuals and families.

Ultimately, though, significant reform is unlikely and incrementalism may very well be the only option.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute