Mr. Speaker, I want to acknowledge the speech that was made by the Parliamentary Secretary to the Minister of Finance and recognize one of the major points that he struck which was that the 2003 budget is on fiscal fundamentals. He said that it is fundamentally correct and fundamentally sound because there is no deficit. That was the major plank in terms of its fiscal responsibility and fundamentals.
The other point my hon. colleague mentioned was that there is more transparency, a greater accountability.
I would like to point out that one of the major statements that was given to us as Canadians in the prebudget consultations was that this budget was designed to make Canadians more competitive.
I wish the hon. member had mentioned exactly what he meant by that. One way of measuring the competitiveness of Canadians would be to compare the relative tax that they have to pay to certain other people. He did use the comparison between Canadians and Americans.
I wish to draw attention to a particular category of persons in Canada and compare them to the United States. The example I will use is an individual who earns about $65,000 a year and has a $2,000 dividend income in his annual revenue.
Such a person in Canada would pay on the tax dividend of $2,000 a tax of $498. On the salary of $65,000 the person would pay income tax of $15,160 leaving a discretionary income of roughly $51,342 of the $65,000 that he or she earned in the first place.
Let us compare that to a person in the United States who earns $65,000 and has a $2,000 dividend. The taxes on the dividend would be zero, compared to $498 in Canada. On the salary the tax in the United States would be $3,795, for a discretionary income of $63,205.
There is a considerable difference between the disposable income of an American vis-à-vis a Canadian. If we want to make Canadians more competitive vis-à-vis an American, surely we would like to leave more discretionary income in the hands of the Canadian than of the American. This is one measure of competitiveness that we really want to address.
I am sure there are other members across the way who will say that is based on American dollars. Indeed the adjustment here is on similar dollars.
I do not want to go to that particular area any further. I wish to address a further issue with regard to budgets and with regard to fiscal responsibility and fundamental considerations as to what it means for Canadians and what it means to the economy generally.
Here I must address you, Mr. Speaker, and also the hon. member opposite that I am heavily indebted to the research that has been done in the comparison of economic freedom in North America, which was done in comparing the United States and Canada in terms of the relative economic freedom enjoyed by these two countries and the people in those countries.
The question I am sure listeners would want to ask is what in the world is economic freedom? I wish to address the definition as it was used in this particular study:
Individuals have economic freedom when (a) property they acquire without the use of force, fraud or theft is protected from physical invasion by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Thus, an index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.
That is economic freedom. What the researchers did is they compared the economic freedom of people in Canada vis-à-vis the economic freedom of people in the United States. They ranked on the basis of this index all of the states in the United States, as well as the provinces in Canada and guess what? Most of the provinces in Canada rank at the very bottom. In fact, Prince Edward Island is at the very bottom. The state of Delaware is at the top. Alberta is about halfway through and Ontario is quite a way down.
The study went on to describe this economic freedom a little further:
The freest economies operate with a minimal level of government interference, relying upon personal choice and markets to answer the basic economic questions such as what is to be produced, how it is to be produced, how much is produced, and for whom production is intended.
There are four elements.
As government imposes restrictions on these choices, the level of economic freedom declines.
From the earlier statement I made, we can tell that the researchers found there is less economic freedom in Canada than there is in the United States.
The research flowing from the data generated by the Economic Freedom of the World reports, a project the Fraser Institute initiated almost 20 years ago, shows that economic freedom is important to the well-being of a nation's citizens. This research has found that economic freedom is positively correlated with per capita income, economic growth, greater life expectancy, lower child mortality, the development of democratic institutions, civil and political freedoms, and other desirable social and economic outcomes.
The hon. member opposite mentioned the significance of dealing with child poverty. I agree wholeheartedly. We want to deal with child poverty. I would suggest that one of the reasons we have child poverty is because the parents are poor. One of the reasons the parents are poor is because their disposable income is down, and the reason that is the case is because their taxes are so high. If we really want to get serious about dealing with child poverty, let us deal with the disposable income of the parents.
Just as Economic Freedom of the World seeks to measure economic freedom on an international basis, Economic Freedom of North America has the goal of measuring differences in economic freedom between the Canadian provinces and U.S. states.
I just indicated that.
This study looks at the 10 Canadian provinces--excluding Yukon, the Northwest Territories, and Nunavut--and the 50 U.S. states from 1981 to 2000. Each province and state is ranked on economic freedom at the subnational and all government levels. This helps isolate the impact of different levels of government on economic freedom in North America.
It clearly suggested the relationship between the federal government and the provinces with regard to the national government in the United States and the individual states.
Let us now examine three elements of this economic freedom. They are subsidies and transfers that happen to individuals and provinces; the level of government employment; and occupational licensing. On transfers and subsidies:
When the government taxes one person in order to give money to another, it separates individuals from the full benefits of their labour and reduces the real returns of such activity. These transfers represent the removal of property without providing a compensating benefit and are, thus, an infringement on economic freedom. Put another way, when governments take from one group in order to give to another, they are violating the same property rights they are supposed to protect.
Is that not interesting. That is exactly what happens when this sort of thing is done.
Some form of government funding is necessary to support the functions of government but, as the tax burden grows, the restrictions on private choice increase and thus economic freedom declines. Taxes that have a discriminatory impact and bear little reference to services received infringe on economic freedom even more. High marginal tax rates discriminate against productive citizens and deny them the fruits of their labour.
That is part of the problem. That is why we on this side of the House have advocated and will continue to advocate the need to reduce taxes so productive individuals can become increasingly productive because they will have the incentive to do so. Take the example I mentioned earlier. Is it any wonder that people are attracted to moving to another country where they would have greater disposable income than if they stayed here. That is the issue.
We need to recognize what happens when money is taken from one group and given to another group. We are taking away the freedom from one group in order to exercise that. When we give money to someone freely, is that an incentive to continue to be productive or not or does that become a disincentive? There is a lot of evidence to indicate that it creates a disincentive rather than an incentive. I could talk for another couple of hours on that particular issue.
I want to move to the second point: government employment as a percentage of total state and provincial employment. Economic freedom decreases for several reasons as government employment increases beyond what is necessary for governments' protective and productive functions. This is the whole business of bureaucratic entrepreneurship and the business of hiring people to the point where it is unnecessary to have that many people in government employment in order to carry out the services.
There has to be a bureaucracy. There have to be employees of government, whether it is civic, provincial or federal. That is not the issue. The issue is, what proportion of the total employment group, the worker component, is in government service and what proportion is outside of government service? I do not have those numbers exactly before me, but I have looked at various statistics. There is an increasing proportion of the total labour force that is employed in government offices as compared with non-government offices. That is the issue we are talking about here.
This business of having an increase of that sort restricts the ability of individuals and organizations to contract freely for labour services, since potential employers have to bid against their own tax dollars in attempting to obtain labour. That is the issue.
High levels of government employment may also indicate that government is attempting to supply goods and services that individuals contracting freely with each other could provide on their own.
Government should not be providing goods and services that can be provided equally well or better in the private sector or by individuals. Government should not be doing those kinds of things. That is what we are talking about here.
It may also be that the government is attempting to provide goods and services that individuals would not care to obtain if they were able to contract freely. Maybe there are some services or goods provided that individuals would not buy or would not want if they had to provide them, because they are unnecessary and they are not a priority. Sometimes these kinds of things are invented for political advantage or for certain other advantages which have nothing to do with the improvement of the economic position in Canada.
We also indicate that government is engaging in regulatory and other activities that restrict the freedom of citizens. Let us talk to a small entrepreneur. Let us talk to a small business person. What is the number one issue they will tell us about? Number one is the tax level. The second one is regulatory infringement on their ability to do what they feel they want to do freely. These are very serious issues and I think they need to be addressed.
I know there was some indication that there is going to be a reduction of some of the regulatory functions. That is a good thing, but there are other areas where the regulatory function has increased rather than decreased. The issue here is that if we want to increase the economic freedom of Canadians we need to reduce regulatory intrusion into their activities.
Finally, high levels of government employment suggest government is directly undertaking work that could be contracted privately. When government, instead of funding private providers, decides to provide directly a good or service, it reduces economic freedom by limiting choice and by typically creating a government quasi-monopoly in the provision of services. For instance, the creation of school vouchers may not decrease government expenditures, but it will reduce government employment, eroding government's monopoly on the provision of publicly funded educational services while creating more choice for parents and students and thus enhancing economic freedom.
That is only one way of doing this sort of thing. We have had all kinds of other indications where parents should be given the choice. I will give one other example. I believe that it was the hon. parliamentary secretary who recently indicated that there was going to be a $3,200 child benefit so that parents could use that money, but it is going to be paid not to the parent but to these various institutions. Our position would be to reduce the taxes so that parents will have the freedom to choose where they are going to send their kids and how they are going to have them looked after, or to give the money directly to the parent to do that. To have government do this and dictate where they should go and how they should be treated there I think is an infringement on the economic freedom of individuals.
The third point is occupational licensing. I am sure, Mr. Speaker, that you know only too well what this is all about. It has to do with architects, engineers, doctors, nurses and teachers, a whole host of professions and special occupational categories. They are licensed on a provincial basis.
What is happening is that a person who is licensed in one province is unable to practice, in many instances, in another province. In order for a medical doctor licensed and practising in Ontario to take that Ontario licence to British Columbia, he or she would have to be licensed in British Columbia. They would be told, “Sorry about that. You have to be licensed in British Columbia and guess what? We're not going to give you a licence, because your licence is from Ontario, unless you take certain courses or re-write the examination or whatever. We're going to put a barrier in there”.
Not only does that exist for medical practitioners, it exists through the host of professions that I have listed and many more. That is a serious problem, because if a situation arises, and it has, where there is a real shortage of certain kinds of practitioners, and whether it could perhaps be a transfer of persons, they are unable to practise simply because of this barrier.
This is in effect a provincial barrier that exists in Canada and which in my opinion is absolutely atrocious, because if a medical doctor can perform laser surgery in Ontario, for example, why can he not do it in Victoria or Vancouver? He knows how to do that with that laser surgery equipment. This is absolute nonsense. It defies logic. These are the kinds of problems that exist. When these kinds of licensing practices exist, they interfere with the economic freedom of both the practising professional and the individual who wants to have the service performed.
These laws often protect the interests of “insiders” from potential competition. Is that really what we want to do? Do we really want to make sure that governments interfere in the opportunity for these people to compete with one another so they build artificial walls called licensing walls? Surely that is not what we want to do and yet that exists in Canada. I know it exists and I am sure, Mr. Speaker, you do too.
In Canada through the 1980s, economic freedom remained fairly constant at the sub-national level while it increased somewhat in the all-government level, perhaps as a result of a change of federal government and the resulting change in policy in 1984. In both indexes, economic freedom fell in Canada in the early 1980s and then began to rise in early 1990s. Federal, provincial and municipal governments began to address their debts and deficits, but typically more through increased taxation than through lower spending. However, as debts and deficits were brought under control, governments began to reduce some tax rates through the mid-1990s and particularly the late 1990s. Also in this period, fiscally conservative governments were elected in Canada's two richest provinces, Alberta and Ontario.
Without a summary statement on that particular part of it, it should be pretty clear that the fundamental talked about by the parliamentary secretary to not have a deficit is indeed a fundamental pillar and principle that is important, but what he did not say was that debt has to be planned to be reduced. We had all kinds of claims that the government has reduced debt over the last number of years, and it has. That is good. It has brought the deficit under control and it has paid back some debt, but there is no plan to repay the debt. Oh yes, indeed, there is a contingency fund of $3 billion this year, and if we do not need it for something else, then we will pay that into reducing the debt.
A great point was made about the proportion of the debt vis-à-vis the GDP, but as the GDP rises and the debt remains more or less constant or rises only slightly, small wonder. As a proportion of GDP, the debt takes a smaller portion. But the banks do not care about that; they care about the interest that they applied to the debt. Our interest charges on $536 billion of debt are exactly the same whether it is 50%, 10% or 60% of GDP. If we compare the interest payments being made by the Government of Canada today on our debt, they run around roughly the $40 billion to $42 billion mark. That is more than the government contributes to the health care program.
Another big point was made about the great contribution that has been made to health care. Yes, there has been an increase. Yes, money has been put back into the health care system, that is quite correct, and it is now at the level where the Liberals took it away in 1993. They have just now increased it back to that level. If one adds the inflation that took place during that time and the population increase, they are still in a deficit position vis-à-vis where they were. It is all very well to talk about accountability and it is all very well to talk about transparency, but then they must tell the whole story: “We took the money away first and then we gave some back but, guess what, we did not give you back as much as we took away in the first place”.
There is another dimension here. The money is there now, but what about the delivery of the service? It is very good that the money is there, but we now need to recognize that delivery of health care is every bit as important as the ability to pay for it. If we are inefficient at the delivery of the system, the waiting lists will not go down and the technology that should be applied will not be applied. The onus is now upon every administrative unit in the health care system to be as efficient and as effective as it can possibly be. I certainly hope that some of the elements that will be brought in with this money will in fact encourage the more efficient and more effective application of those funds in the delivery of the health care system so that we all have a timely and quality system there when we need it.
We also need to understand the impact of Canada's fiscal system. For example, let us consider a province that reduces economic freedom by increasing taxes. This is a uniquely Canadian problem:
This will likely have a negative impact on the provincial economy, as both the following results and international testing show. However, the weaker provincial economy means the province will receive an increase in federal payouts (or a reduction in the fiscal outflow if the province in question is a “have” province). The greater the reduction in economic freedom, the greater the negative impact on the economy and the greater the amount of money the province will receive from the federal government.
On the one hand, we have the province increasing taxes and reducing economic freedom and then getting money from the federal government, in which case we have the two things working one against the other:
This inflow of funds will, at least in the short term, partly offset the negative impact on GDP and mute the impact of the economic freedom, or its loss, on the economy. (In the longer term, the inflow of funds will also weaken the economy but this impact is likely beyond the time horizon of the tests conducted--
So there is a caveat in this whole thing. Nevertheless, the principle has been established:
On the other hand, if a province increases economic freedom, for example by reducing taxes [which Ontario and Alberta did]...the result is an increased outflow of government revenues to other jurisdictions and a heavier tax burden, given the progressivity of Canadian taxes, which in turn suppresses increases in economic freedom and economic growth. In other words, fiscal federalism mutes the impact of economic freedom in Canada.
It has done that. We can ask the finance ministers of Ontario or Alberta and we will find that this is exactly what they have experienced:
Economic growth itself, because of Canada's fiscal structure, reduces a province's economic freedom and thus brakes further growth [in the economy]. Despite the problems created by Canada's fiscal structure, economic freedom still proves to be a powerful stimulant for increasing prosperity in Canada.
What this really means is that both the provinces and the federal government should be looking at economic freedom and giving their respective constituents and residents greater freedom. One of the best ways to do that is to reduce government spending and to reduce taxes and to do that in such a way that the individual is granted greater freedom to apply the funds that they want to apply in the endeavours that they have for the goods and services that Canadians want and need.
The end result of all of this is that Canada's fiscal federalism seems to harm both rich and poor provinces. The discussion we have just gone through shows that:
...fiscal federalism frustrates the ability of some provinces to improve their economic freedom and, thus, their prosperity. However, the effects are at least as unfortunate in the poorer provinces, where a rich menu of government spending pushes out other economic activity and politicizes the economy. As a result, the rate of convergence of Canada's poorer regions is about a third to a half the rate of convergence of poor regions in the United States, Europe and Japan.
The incentives created by fiscal federalism are also damaging. Because fiscal federalism mutes the ability of provinces to move towards economic freedom and thus weakens the positive impact of economic freedom, the incentive for provinces to increase the freedom of their economies weakens.
Even worse, the elites--
I want to make it absolutely clear that these are the words of the authors of the study. This is their conclusion, their observation. They go on:
--the elites in “have-not” provinces have incentives to limit economic freedom. Low levels of economic freedom reduce economic activity and increase the flow of federal transfers. These transfers are predominantly captured by the political and business elites, meaning they face incentives to keep economic growth low.
That is exact opposite of what we want to achieve. It goes on:
As well, Canada's Employment Insurance system alters the incentives facing many voters, since they can benefit from the structure of the EI system, which also weakens economic growth by removing large segments of the population from the year-round workforce so long as the economic activity remains weak.
We have had all kind of debates on that particular one in the last little while. It goes on:
While all segments of the population would deny being influenced by such incentives, there has been no significant economic reform movement in Atlantic Canada, even though there is much evidence from around the world that the region's policy mix damages growth.
Those are harsh realities.
In review, “The Importance of Economic Freedom” is:
...why economic freedom is so clearly related to growth and prosperity, a finding not just of this paper but also many other empirical explorations of economic freedom.
In many ways, this debate goes back to the beginnings of modern economics when Adam Smith famously argued that each of us, freely pursuing our own ends, create the wealth of nations and of the individual citizens. However, the twentieth century was much consumed by a debate about whether planned or free economies produce the best outcomes. The results of the experiments of the twentieth century should be clear. Free economies produced the greatest prosperity in human history for their citizens. Even poverty in these economically free nations would have been considered luxury in unfree economies. This lesson was reinforced by the collapse of centrally planned states and, following this, the consistent refusal of their citizens to return to central planning, regardless of the hardships on the road to freedom.
I do not think I have to detail the names of the countries that we are talking about here. It goes on:
Among developing nations, those that adopted the centrally planned model have only produced lives of misery for their citizens. Those that adopted the economics of competitive markets have begun to share with their citizens the prosperity of advanced market economies.
That is their observation and I am sure that the observation of many members in the House. It goes on:
While these comparisons are extreme examples, from opposite ends of the economic freedom spectrum, a considerable body of research shows the relationship between prosperity and economic freedom holds in narrow ranges of the spectrum. While sophisticated econometric testing backs up this relationship, examples are also interesting. So, for example taking two peripheral European nations, the relatively free Ireland does much better than the relatively unfree Greece. In the United States, the relatively free Georgia does much better than the relatively unfree West Virginia. In Canada, an unfree Quebec does much worse than its free neighbour, Ontario. As with anything in the real world, exceptions can be found, but overall the strength of the statistical fit of this relationship is remarkable.
While this is hardly the place to review several centuries of economic debate, the mechanics of economic freedom are easy to understand. Any transaction freely entered into must benefit both parties. Any transaction, which does not benefit both parties, would be rejected by the party that would come up short. This has consequences throughout the economy. Consumers who are free to choose will only be attracted by superior quality and price. A producer must constantly improve its price and quality to meet customer demands or customers will not freely enter into transactions with the producer. Many billions of mutually beneficial transactions occur every day, powering the dynamic that spurs increased productivity and wealth throughout the economy.
Restrictions on freedom prevent people from making mutually beneficial transactions. Such free transactions are replaced by government action. This is marked by coercion, in collecting taxes, and lack of choice, in accepting services. Instead of gains for both parties arising from each transaction, citizens must pay whatever bill is demanded in taxes and accept whatever service is offered in return. Moreover, while the incentives of producers in a free market revolve around providing superior goods and services in order to attract consumers, the public sector faces no such incentives.
Members know this is the case. It goes on:
Instead, as public-choice theory reveals, incentives in the public sector often focus on rewarding interest groups, seeking political advantage, or even penalizing unpopular groups. This is far different from mutually beneficial exchange although, as noted earlier, government does have essential protective and productive functions.
In some ways it is surprising the debate still rages because the evidence and theory favouring economic freedom match intuition. Intuitively it makes sense that the drive and ingenuity of all citizens, harnessed to better outcomes through the mechanism of mutually beneficial exchange, will surely do better for themselves than will a small coterie of government planners, who hardly have knowledge of everyone's values and who, being human, are likely to consider their own well-being and the constituencies they must please when making decisions for all of us.
That is the problem of central planning in many ways. It should be left largely to the individual. They should be given the freedom to apply their funds, to make their decisions, to buy those goods and services that they want.
In conclusion:
The worldwide evidence on economic freedom suggests that Canadian provinces are poorly positioned to take advantage of economic opportunity. The provinces are clustered near the bottom of the ranking in all three areas, indicating that their governments have consumed and transferred more resources, imposed higher tax rates, and created more rigid labour markets than the governments of the US states.
We had witness on that here not long ago. In fact it is now currently upon us. I believe there is a province in Canada that is thinking of threatening to take the government to court. In Newfoundland and Labrador there is a very major issue, and this is exactly what the issue is about. It goes on:
The regression analyses [that is done by this particular study] indicate that growth in economic freedom and the level of economic freedom have a significant impact on the growth in per-capita GDP and the level of per-capita GDP. Since Canadian provinces have relatively low levels of economic freedom, Canadians likely are to continue to experience lower standards of living relative to the American states. Only two provinces, Alberta and Ontario, have high levels of economic freedom in the Canadian context, and the residents have seen the benefits of this.
That goes into the real basic fundamental of how to build a budget in Canada: provide economic freedom for the provinces, provide economic freedom for Canada as a nation and, in particular, to individuals to be free to choose.
There are a couple of things we really have to look at in some detail. I want to look at the air tax which the government has imposed upon Canadians.
A big point was made about the fantastic reduction from $12 to $7, a 44% reduction. That is true, that is a reduction and it is 44%, but it is still $7 per flight and $14 for a return flight. The research behind all this suggests that before the $12 tax was introduced, which is now $7, it cost the airlines $1.10 each way to screen a passenger. If it cost the airlines $1.10 to screen a passenger, why is the government imposing a $7 tax?
I will now go to the gasoline tax. The federal government collects 10¢ on a litre of gasoline and 4¢ on a litre of diesel fuel. The federal gasoline tax cost motorists $4.3 billion in 2000-01. On last year's average of, say, 64¢ per litre of gasoline, the government collected roughly $1.9 billion in GST. This went up when the price of gasoline went up, a windfall for the federal government.
In the United States the money that is collected for gasoline tax is contributed to the infrastructure of highways. In Canada a pittance is devoted to that particular expenditure.
While this is a great and wonderful announcement with regard to the infrastructure program, and a major part of it is for highways, a small proportion of those tax dollars collected on gasoline and diesel fuel go to that. The time has come for us to recognize that this tax, which is collected on a designated basis, perhaps should be spent on a designated basis.
In principle, for years in some of the positions of management I have held, I have never been a supporter of a designated tax. However the time has come to ask ourselves if we collect the tax on a designated basis, should it not be spent on a designated basis. It is a very real question. There are very sound reasons for putting it into general revenues but there are also some very sound reasons to recognize this and say that we have to be practical.
Right now, highway No. 1, the Trans-Canada Highway, in many areas is in a serious state of disrepair. It needs major improvement and yet the money that has been designated to do that is a pittance compared to what is necessary. That is a very serious indictment on the government. It goes directly to the whole idea of the economic freedom I talked about just a moment ago.
I want to go one step further on the point that the EI premiums have been reduced. That is true, they have been reduced. However I want to put this in the context of payroll taxes. It is very interesting what has happened. I want to compare only two years, 1993 and 2003. In 1993 the EI rate per $100 was 3%. Now it has dropped down below $2.10. The total spent in 2003 for EI premiums $819 for every $100. In 1993 it was $1,100. One might say that it is a big reduction, and it is.
Now let us look what happened to the CPP, which is the other payroll tax. The CPP tax was $752.50 in 1993 and in 2003 it was $1,810. Therefore, the total payroll tax has moved $817.20 higher than it was in 1993. It is all very well for the government to talk about what is has done with EI premiums and to say that it has reduced and slashed them but it then increases the CPP tax. Therefore the individual who is buying into this is paying more than in 1993. Such is the legacy of the budget making process across the way.
These are very serious issues and I think we have to come to grips with them in a very real way. There are good things about this budget but there are also some very serious shortfalls.
I would like to really endorse the fact that the government get serious about a plan to pay down the debt. It is time the government have a serious plan to reduce the capital tax totally. I know there is a plan to do that over five years but that is too slow. It is too little too late.
There are expenditures in goods and services areas, subsidies and things of that sort which have increased the expenditures of government well beyond the increase in population and well in excess of the increase in the inflation rate in Canada.
There are some serious shortcomings in the budget and we should change those shortcomings into positives before we approve Bill C-28.
