Niels Veldhuis President, Fraser Institute

Canada has outperformed on economic growth, Source: OECD, Economic Outlook (May 2014); Average Private Forecasters (BMO, RBC, CIBC, and TD Economics); Bank of Canada, Monetary Policy Report (October 2014); calculations by authors.

Looking Forward: Economic Growth, Source: OECD, Economic Outlook (November 2014); Average Private Forecasters (BMO, RBC, CIBC, and TD Economics); Bank of Canada, Monetary Policy Report (April 2015); calculations by authors.

We are unduly burdening the next generation 1 “The biggest challenge facing mature democracies is how to restore the social contract between the generations.” ~ Harvard Professor Naill Ferguson

Source: Statistics Canada, CANSIM Table $822B $1,291B Federal, Provincial and Local Government Net Debt

Federal-Provincial Government Net Debt, 2014/15 Sources: Federal and provincial budgets and updated; Statistics Canada; RBC Economics and TD Economics forecasts; calculations by authors.

Cost of Debt: Federal Interest costs compared to GST revenue Source: Speer et al. (2014).

Cost of Debt: Consolidated government interest costs compared to other expenditures Source: Speer et al. (2014).

Interest Rate Risks Source: Bank of Canada.

Surplus/Deficit as % of GDP, 2015/16 Sources: Federal and provincial budgets and updated; Statistics Canada; RBC Economics and TD Economics forecasts; calculations by authors.

How do we tackle the problem? We’ve been here before…. Canada ( ), a fiscal time- bomb in the making

Federal Revenues & Program Spending (1961 – 1993) 15.0% 23.5%

Federal Deficit / Surplus (1966 – 1993)

Federal Accumulated Debt (1966 – 1995) 18.4% 67.1%

Federal Interest Costs (1961 – 1994) 10.2% 34.6%

Canada in 1995… “Turn around and check out Canada, which has now become an honorary member of the Third World in the unmanageability of its debt problem… If dramatic action isn’t taken in next month’s federal budget, it’s not inconceivable that Canada could hit the debt wall....” ~ Wall Street Journal, January 12th, 1995

Federal Budget 1995: A New Direction for Canada "We are acting on a new vision of the role of government…smaller government... smarter government.” ~ Paul Martin Canada’s Finance Minister “The debt and deficit are not inventions of ideology. They are facts of arithmetic. The last thing Canada needs is another lecture on the dangers of the deficit. The only thing Canadians want is clear action.”

Federal Revenues & Spending (1990 – 2008) 23.5% 15.2%

Federal Deficit / Surplus ( )

Federal Accumulated Debt (1990 – 2009) 67.1% 28.2%

Federal Interest Costs (1990 – 2010) 35.2% 12.8%

And the world didn’t end… in fact quite the opposite Significant Tax Relief : Personal Income taxes Corporate Income taxes Capital Gains Taxes Sales Taxes Expansion of RRSP & TFSA Positive Economic Results

Canada is ageing and our working age pop. is shrinking 2 “Coming age war will displace the class warfare of the past.” ~ Harvard Professor Naill Ferguson

Sources: Statistics Canada, CANSIM Tables and Share of Total Population, 65 years old and over

Sources: Statistics Canada, CANSIM Tables and Share of Total Population, 16 to 64 years old

Unfavourable Demographics for Spending Source: Public Accounts of Ontario (2014).

Total Current and Future Revenues & Spending Source: Ragan (2011).

Future economic dynamism is at risk w/ start-ups plummeting 3 “It is the creation of new companies that serves as a natural engine for growth. New ideas, new products and new ways of producing them are often the seeds of new companies.” ~ Bank of Canada Governor Stephen Poloz

Number of New Entrants per 100 Incumbents, Small Size Firms, Sources: Statistics Canada, CANSIM Tables and to 20 employees

Number of New Entrants per 100 Incumbents, Medium Size Firms, Sources: Statistics Canada, CANSIM Tables and

Super-charging Entrepreneurship Reform capital gains taxes, a key tax for entrepreneurs and the financial backers of entrepreneurs Reduce the burden of regulations/red tape Remove barriers to entry in regulated industries Examine bankruptcy laws

We continue to penalize Canadians with uncompetitive personal income tax rates 4

Taxes on Income and Profits as % of Total Taxation Source: OECD.

On the need to reduce personal income taxes: "Lower personal taxes would also provide greater rewards and incentives for middle-and high-income Canadians to work, save and invest." ~ Prime Minister Paul Martin, 2005 "Canada's tax burden on highly skilled workers is too high relative to other countries... Canada needs lower personal income tax rates to encourage more Canadians to realize their full potential.“ ~ Prime Minister Stephen Harper, 2007

Ontario’s and Alberta’s investment climates will drag down Canadian growth 5

Ontario’s Investment Climate Ontario’s investment climate has taken a substantial hit over the past decade: rising energy costs unstable fiscal outlook higher taxes increased regulation bordering U.S. states have made their economies more attractive

A Slew of Tax Increases Increase in personal income taxes Introduction of the HST (major tax increase) Ontario Health Premium Increased taxes on aviation fuel, alcohol, tobacco products Ontario Pension Plan premiums coming Cap and Trade System coming

Ontario’s Power Prices Power prices up 52% since 2004 (inflation-adjusted) 50% increase in electricity prices results in a 28.7% decrease in rate of return to capital in manufacturing Highest commercial power rates in Canada Solar and wind systems provide just under 4% of Ontario’s power but account for about 20% of cost

Economic Performance Ontario vs. Rest of Canada, Ontario’s economic growth has lagged the national average in every year since 2003; Unemployment rate has been above the national average; Per person incomes in Ontario, which used to be 20% above the national average, are now lower than the Canada average; Over the past decade, Ontario has witnessed the largest and most sustained net out-migration to other provinces on record;

Which Direction for Alberta’s Future?

Alberta Surplus/Deficit

A Lack of Spending? $10.3 B

Alberta Debt and Assets Source: Finance Canada, Fiscal Reference Tables, 2014.

Spot Crude, $/barrel Source: IMF Commodity Price Forecasts, March 2015.

Ontario’s and Alberta’s investment climates We continue to penalize Canadians w/ uncompetitive personal income tax rates Canada is ageing and our working age pop. is shrinking Future economic dynamism is at risk w/ start-ups plummeting We are unduly burdening the next generation

The End………Phew!

Global Risks - China Economy continues to slow. Mounting bad debt in the banking system and ongoing problems with SOEs. Reaching limits of model? Indicates need for large-scale reform. Political corruption and instability.