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Table of Contents Articles 3 Up Front:  Rewarding success The Fraser Institute celebrated its 35th anniversary and honoured the achievements of Tony Fell at a recent gala dinner in Toronto. 7 Canadians celebrate Tax Freedom Day on June 6 Milagros Palacios & Niels Veldhuis Tax Freedom Day arrived three days earlier this year, but it’s not because the federal or provincial governments have been reducing taxes. 16 Key Concepts:  Unintended consequences Christopher J. Coyne Even regulations motivated by the best of intentions can have negative secondary effects that generate significant costs. 18 Poverty in Canada Kristin Fryer For almost 20 years, Chris Sarlo has been providing Canadians with an alternate measure of poverty. 20 Canada’s problem with interprovincial trade barriers Robert Knox & Amela Karabegović Free trade negotiations between Canada and the EU have hit their first roadblock. 25 Time to trim spending Niels Veldhuis & Charles Lammam Reducing spending would give the BC government the resources to implement tax relief aimed at improving incentives for investment and entrepreneurship. 27 Protection against profligate government Niels Veldhuis, Milagros Palacios, & Amela Karabegović Tax and expenditure limitation laws would lay the foundation for reasonable levels of government spending in Canada.

Focus 5 The grocery bag dilemma Diane Katz Each type of bag has its merits and drawbacks. 10 The state of the environment in Canada Diane Katz Though eco-alarmists may claim otherwise, environmental conditions in Canada today are better than they have been in decades. 14 Cap and (don’t) trade Diane Katz The American Clean Energy and Security Act has evolved into a vehicle for protectionism that could cause real harm to the Canadian economy. 22 The missing link between vaccines and autism Diane Katz The view that vaccines cause autism is not supported by scientific evidence.

29 A tax proposal that should not fall flat Niels Veldhuis A flat tax would give Canadians greater incentives to work hard, save, and invest. 31 Measuring Parliament’s attitude towards Canada-US cooperation Alexander Moens & Nachum Gabler Many MPs decry closer ties with the United States. 35 In Closing:  Is free trade with the European Union on the horizon? Canadian Ambassador to the European Union Ross Hornby talks to Fraser Forum about Canada’s prospects for a free trade agreement with the EU.

Further Reading Report Card on Secondary Schools in British Columbia and Yukon 2009 by Peter Cowley and Stephen Easton. Studies in Education Policy. Download free at www.fraserinstitute.org. Fraser Institute Global Petroleum Survey, 2009 by Gerry Angevine, Matthew Brown, and Miguel Cervantes. Petroleum survey: $40. Report Card on Alberta’s High Schools 2009 by Peter Cowley and Stephen Easton. Studies in Education Policy. Download free at www.fraserinstitute.org.

Hospital Report Card Alberta 2009 by Nadeem Esmail and Maureen Hazel. Download free at www.fraserinstitute.org. The Economic Well-Being of Canadians: Is there a Growing Gap? by Chris Sarlo. Studies in Social Policy. $7.50. To order: E-mail sales@fraserinstitute.org or call our toll-free order line: 1-800-665-3558, ext. 580. There are extra charges for taxes, shipping, and handling. These publications are also available through our website at www.fraserinstitute.org.


Fraser Forum

From the Editor

Publisher Fraser Institute

Junk science, junk policy

Chief Editor Mark Mullins Managing Editor/Layout and Design Kristin McCahon and Kristin Fryer Coordinating Editor Diane Katz Contributing Editors Nadeem Esmail, Amela Karabegović, Niels Veldhuis

Last month, the Financial Post “celebrated” its 11th annual Junk Science Week. I write “celebrated” because, in truth, there’s not a whole lot to celebrate when one looks at the issues covered. Topics included flawed financial risk models, the Bisphenol A (BPA) scare, and Ottawa’s new Chemicals Management Plan. Our own Diane Katz, director of risk, environment, and energy policy studies, contributed a piece on the deadly consequences of banning DDT for malaria prevention. With so much junk science being spread by various media outlets, it’s refreshing to see one outlet take a week out of every year to show how pervasive bad science is and how it is affecting public policy. From many other media outlets, however, it seems that we face a steady stream of stories about supposed new threats to our health, to the environment, to the world as we know it. All too often these stories are repeated to the point that they become widely believed “facts.” As each new scare gains momentum, the government is pressured to take immediate action—to ban some chemical or give funding to some new initiative—resulting in a kind of “shoot first, ask questions later” policy making. But when the government’s actions are based on junk science, we end up with junk policy. This issue of Fraser Forum looks at a number of areas where bad science has invaded the public sphere, leading governments and individuals to make misinformed decisions. One such example is the recent vilification of plastic grocery bags. The common view is that regular plastic bags are bad for the environment, and that paper or reusable plastic bags are much better. Indeed, this view has become so popular that the City of Toronto recently passed a bylaw requiring stores to charge five cents for every new plastic bag in which groceries are packed (“The grocery bag dilemma,” pg. 5). But as Diane Katz reports, each type of bag has merits and drawbacks, and it’s not up to governments to dictate the choice for consumers and retailers. Another article in this issue looks at the supposed link between vaccines and autism (“The missing link between vaccines and autism,” pg. 22). The view that vaccines cause autism is gaining popularity among parents, leading to a decline in immunization rates. But the science simply doesn’t support this view. Many studies have been done, but none have established any connection between vaccines and autism. It’s unfortunate, but the fact is that junk science is everywhere. That’s why it’s so important for policy makers and individuals to insist on facts when making decisions. As this issue of Forum shows, when science is disregarded, the consequences can be costly and deadly. — Kristin Fryer (kristin.fryer@fraserinstitute.org)

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Cover Design Bill Ray Copyediting Mirja van Herk Media Relations Dean Pelkey Advertising Sales Advertising In Print Tel: (604) 681-1811 E-mail: info@advertisinginprint.com Fraser Forum is published 10 times a year by the Fraser Institute. The Fraser Institute’s vision is a free and prosperous world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent research and educational organization with locations throughout North America, and international partners in over 70 countries. Our work is financed by taxdeductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research. For additional copies, or to become a supporter and receive Fraser Forum, write or call Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539 Toll-free order line: 1-800-665-3558 (ext. 580—book orders; ext. 586—development) Copyright © 2009 Fraser Institute ISSN 0827-7893 (print version)  |  ISSN 1480-3690 (online version) Printed and bound in Canada. Return undeliverable Canadian addresses to Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 The contributors to this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters, trustees, or other staff of the Fraser Institute. This publication in no way implies that the Fraser Institute, its trustees, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Fraser Institute Board of Trustees Hassan Khosrowshahi (Chairman), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Gwyn Morgan (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon E. Arnell, Charles B. Barlow, Everett E. Berg, T. Patrick Boyle, Peter Brown, Joseph C. Canavan, Alex A. Chafuen, Elizabeth Chaplin, Derwood Chase, Jr., James W. Davidson, John Dielwart, Stuart Elman, Greg C. Fleck, Shaun Francis, Ned Goodman, Arthur N. Grunder, John A. Hagg, Paul Hill, Stephen A. Hynes, David H. Laidley, Robert H. Lee, Brandt Louie, David MacKenzie, Hubert Marleau, James McGovern, Mark Mullins, Eleanor Nicholls, Roger Phillips, Herb C. Pinder, Jr., R. Jack Pirie, Con S. Riley, Gavin Semple, Rod Senft, Anthony Sessions, William W. Siebens, Anna Stylianides, Arni C. Thorsteinson, Michael A. Walker, Catherine Windels, Michael Perri (Secretary-Treasurer)

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Up Front

Rewarding success The Institute commemorates 35th anniversary, awards top honour to Tony Fell On May 27, the Fraser Institute hosted a gala dinner at the Fairmont Royal York in Toronto to celebrate its 35th anniversary and to present the Institute’s top honour, the T. Patrick Boyle Founder’s Award. This year’s award went to Mr. Tony Fell, former Chairman of RBC Capital Markets. The T. Patrick Boyle Founder’s Award is presented to an individual who exemplifies the mission and philosophy of the Fraser Institute to an outstanding degree. The award has been presented annually since the Institute’s 25th anniversary in 1999. Past recipients include former Prime Minister Brian Mulroney, the Honourable Anson Chan, Gwyn Morgan, former Czech Republic President Vaclav Klaus, Dr. Fan Gang, and Milton and Rose Friedman. Fell began his career with the Royal Bank of Canada in 1959 when he joined the research department of Dominion Securities at the age of 20. In 1980, he was appointed chief executive officer, a position he held for 19 years. During this period, he led Dominion Securities through a number of important mergers. Fell was appointed a vice-chairman of RBC in 1996 and a deputy chairman in 1998, before taking on the role of chairman

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of RBC Capital Markets in 1999, a position he has held for the past eight years. Fell was given top honours at the event because he has done so much to promote values and outcomes that are consistent with the Fraser Institute’s work. The sold-out event was hosted by former Ontario Premier Mike Harris, who highlighted some of the Institute’s notable work in Ontario, including Tax Freedom Day, school report cards, and the Ontario hospital report card. Through its research and various other initiatives, Harris noted, the Institute has been able to create and contribute to public policy discussions in Ontario and the rest of Canada. Following Harris’ introductory remarks, Fell spoke about the importance of public policy and leadership and how they are linked. Fell said that with some bold thinking, it would be possible to solve the ongoing productivity problems in Canada today; to properly fund our universities and community colleges; to eliminate interprovincial trade barriers; to have the best health care in the world; to reform our patchwork quilt pension system; and to return to a balanced budget. 

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About the Authors Contributors

Christopher C. Coyne is an Associate Professor of Economics at West Virginia University. He has a Ph.D. in economics from George Mason University

Nachum Gabler is a research assistant in the Centre for Canadian-American Relations at the Fraser Institute. He has an M.A. in economics from Boston University.

Amela Karabegović (amela. karabegovic@fraserinsti​tute.org) is a Senior Economist in the Fiscal Studies department at the Fraser Institute. She has an M.A. in economics from Simon Fraser University.

Diane S. Katz (diane.katz@fra​ serinstitute.org) is the Director of Risk, Environment, and Energy Policy Studies at the Fraser Institute. She has an M.A. from the University of Michigan.

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Robert Knox is the principal of R.H. Knox & Associates. He provides advice on domestic trade to private sector clients and commentary on internal trade issues and the Agreement on Internal Trade.

Charles Lammam (charles.lam​ mam@fraserinstitute.org����������� ) is a Policy Analyst in the Fiscal Studies Department at the Fraser Institute. He has a B.A. in economics and is completing an M.A. in public policy from Simon Fraser University.

Alexander Moens is a professor of political science at Simon Fraser University in Vancouver and a Senior Fellow at the Fraser Institute in the Centre for CanadianAmerican Relations.

Milagros Palacios (milagros. palacios@fraserinstitute.org) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She has an M.Sc. in economics from the University of Concepcion in Chile.

Niels Veldhuis (niels.veldhuis@ fraserinstitute.org��������������� ) is the Director of Fiscal Studies and a Senior Economist at the Fraser Institute. He has an M.A. in economics from Simon Fraser University.

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The grocery bag dilemma Which bag is better for the environment? Diane Katz With the arrival of reusable grocery bags, there appeared to be, at long last, a definitive “eco-friendly” answer to that question posed to consumers every day: “Paper or plastic?” But, alas, it was not to be. Researchers recently discovered that the supposedly green alternative actually harbours bacteria, mold, and other unappetizing and unhealthy organisms (EPIC, 2009).1 That we still lack a neat resolution to the checkout line dilemma exposes a fundamental truth about all environmental issues. For every choice related to resource use, trade-offs are inevitable. In some cases, the upsides clearly offset the downsides, or vice versa. But in many matters, as with the grocery bag quandary, the calculations can get dizzyingly complex.

Regulating bags Some governments certainly have not considered the issue in any depth before issuing regulatory edicts in the name of environmental protection. Toronto, for example, recently passed a bylaw requiring stores to charge five cents for every new plastic bag in which groceries are packed (City of Toronto, 2009). The mandated fee does not apply to paper bags even though, as described below, these carry environmental impacts equal to or even greater than those of plastic. Similarly, Leaf Rapids, Manitoba, imposed a three-cent tax on “single use” plastic grocery bags in 2006, before banning them outright in 2007 (Leaf Rapids, n.d.). The Liquor Control Board of Ontario has

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also banned plastic bags in its stores, but it does allow paper bags (LCBO, 2008). Even China’s State Council has weighed in on the issue by forbidding shops from offering free plastic bags and “encouraging” the masses to tote their groceries in baskets instead (People’s Daily, 2008, Jan. 9). And just last month, Achim Steiner, executive director of the UN Environment Program, called for a global ban on plastic bags (Daou, 2009). Retailers are instituting bag policies, as well. Metro Inc., Canada’s third-largest supermarket chain, recently announced plans to charge customers five cents per bag (King, 2009, May 18), just as grocery giant Loblaw’s already does in its Ontario stores. On Earth Day (April 22) last year, Whole Foods announced its plans to discontinue the use of conventional plastic bags, although the store will sell upscale ones for 99 cents apiece (or canvas ones for $6.99 to $35). It will continue to offer paper bags free of charge.

Pros and cons The effective endorsement of paper over plastic by Whole Foods and others has offended some green groups who (justifiably) argue that such moves lack an objective scientific basis. Steve Hamilton, president of the California-based Environmental Affairs Council, charges that Whole Foods and the like are engaging in “feel-good environmentalism at its worst” (Plastics in Canada, 2008). “This paper vs. plastics debate is a serious, complicated, and unsettled scientific issue,” he notes. Indeed. Myriad factors must be considered when calculating the pros and

cons, benefits and costs, of each bag type, including all the environmental and economic impacts of various energy and chemical “inputs” and “outputs” involved in production, distribution, and reclamation (or recycling). Conventional wisdom holds that plastic bags—being synthetic—are environmentally destructive, while paper bags—the spawn of trees—are the greener option. But various “life cycle” analyses of both products indicate that bags made from paper actually require more energy to produce, create more pollutants, and take up considerably more landfill space than plastic. According to the Progressive Bag Affiliates, a division of the American Chemistry Council, paper bags generate 70% more emissions and 50% more water pollutants than plastic, which requires 40% less energy to produce and generates 80% less solid waste (American Chemistry Council, 2009). Using plastic bags involves trade-offs, too. Earth Day Canada (2009) reports that production of plastic bags involves five of the top six chemicals responsible for the greatest proportion of hazardous waste generation. Moreover, most plastic bags are made from fossil fuels. In their favour, paper bags are recycled at a higher rate than plastic ones, and require less energy to be recycled. They are also biodegradable, although neither type of bag breaks down all that well in the dark, dry, and oxygendeprived confines of modern landfills (Rathje and Murphy, 2001). When exposed to ultraviolet light from the sun, the plastics will, over time, degrade into smaller particles. But they

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The grocery bag dilemma will not reduce to organic matter, as is the case with paper (Boustead Consulting and Associates Ltd., 2007). And not all reusable bags are created equal, either. For example, those made from polypropylene (plastic) are cheap to manufacture but wear out quickly, thereby limiting their reusability quotient. Canvas types are more durable, but cotton production is water intensive and typically involves large quantities of pesticides. Bags made from jute are strong, but most of the fibre used to create the bags is imported and requires considerable fuel consumption to get to market. Perhaps most troubling for consumers is the recent discovery that reusables pose a potential health risk, according to testing by two independent laboratories (and an evaluation of the results by a third) (EPIC, 2009). Researchers obtained the bags for testing from shoppers leaving major grocery stores. Each shopper was offered a new reusable bag as replacement for their existing bag, and the participants were asked a series of questions about their bag, including its age, how often it was used, and whether it was ever washed. Four new bags also were tested as controls. All the bags were tested on a “blinded” basis. More than 30% of the used bags had unsafe levels of bacterial contamination, 40% had yeast or mold, and there was fecal bacteria embedded in the surface of some (EPIC, 2009). In contrast, conventional plastic bags showed no evidence of bacteria, mold, yeast, or coliforms. According to the researchers, “The moist, dark, warm interior of a folded reusable bag that has acquired a small amount of water and a trace of food contamination is an ideal incubator for bacteria” (EPIC, 2009).

therefore, that environmentalists would single out this particular “waste stream” as being ripe for corrective action. Some are even capitalizing on the crackdown. Vincent Cobb, founder of Reusablebags. com, describes plastic bags as “a powerful symbol of consumerism gone wild” (Cobb, n.d.). His website, Reusablebags. com, markets reusable alternatives that range in price from $4.95 to $18.95. Opinions vary widely about the “proper” choice of grocery bag, and each has merits and drawbacks. That’s all the more reason for governments to avoid dictating the choice for consumers and retailers, particularly when the elected officials doing the choosing are more intent on scoring green political points than actually improving the environment. The fact that we are now able to commit so much attention to the issue reflects the dramatic progress that has been made on more pressing environmental problems. But even if a consensus were achieved tomorrow, sound policy could only be crafted if the tradeoffs inherent in this and every other use of natural resources were acknowledged.

Notes 1 Testing for this report was conducted by Guelph Chemical Laboratories (GCL) and Bodycote Testing Group of Montreal. The results were interpreted by Dr. Richard Summerbell, director of research for Torontobased Sporometrics, and the former Chief of Medical Mycology for Ontario Ministry of Health, Laboratory Services Branch. 2 And just to ensure compliance, official notice of the new bylaw has been issued in Arabic, Chinese, Farsi, French, Greek, Gujarati, Hindi, Italian, Korean, Polish, Portuguese, Punjabi, Russian, Spanish, Tagalog, Tamil, Urdu, and Vietnamese.

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Boustead Consulting and Associates Ltd. (2007). Life Cycle Assessment for Three Types of Grocery Bags - Recyclable Plastic; Compostable, Biodegradable Plastic; and Recycled, Recyclable Paper. American Chemistry Council. <http://www. americanchemistry.com/s_plastics/doc. asp?CID=1106&DID=7212>. City of Toronto (2009). Plastic Shopping Bags Cost a Minimum of 5 cents as of June 1, 2009. <http://tinyurl.com/Tor2009>. Cobb, Vincent (no date). Our Vision. Reusablebags.com. <http://www.reusable bags.com/vision.php>. Daou, Peter (2009). A Global Ban on Plastic Bags. Blog (June 9). UN Dispatch: Posts on the UN. <http://www.undispatch. com/node/8384>. Earth Day Canada (2009). Paper vs. Plastic: Which is Better for the Environment? <http://pub.earthday.ca/pub/index.php>. Environment and Plastics Industry Council [EPIC] (2009). Grocery Carry Bag Sanitation: A Microbiological Study of Reusable Bags and ‘First or Single-Use’ Plastic Bags. Canadian Plastics Industry Association. <http://tinyurl.com/l3xt9c>. King, Tamara (2009, May 18). Metro Grocery Stores to Charge for Plastic Bags. Toronto Star. <http://www.thestar.com/ news/canada/article/635931>. Leaf Rapids (no date). Why Should You Consider Coming to Leaf Rapids? Town of Leaf Rapids. <http://www.townofleaf rapids.ca/aboutus.htm>. Liquor Control Board of Ontario [LCBO] (2008). Bring Your Own Bag to the LCBO. News release (May 27). <http:// www.lcbo.com/lcbo-ear/media_relea ses/content?content_id=933>. People’s Daily (2008, January 9). China to Limit Use of Plastic Bags from June  1: Central Gov’t. <http://tinyurl.com/PD0 10908>.

References

Plastics in Canada (2008). News. Rogers Media Publishing. <http://tinyurl.com/ Plastics2008>.

American Chemistry Council (2009). Chemistry is essential2living. <http://

Rathje, William, and Cullen Murphy (2001). Rubbish!: The Archaeology of Garbage. University of Arizona Press. 

Conclusion Billions of grocery bags, both paper and plastic, are used and discarded annually worldwide. It should come as no surprise,

www.americanchemistry.com/s_acc/in dex.asp>, as of June 5, 2009.

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Canadians celebrate Tax Freedom Day on June 6 Milagros Palacios & Niels Veldhuis It is nearly impossible for an ordinary Canadian to have a clear idea of how much tax they really pay. For example, while Canadians are painfully aware of sales taxes, calculating the total amount paid would require people to track all of their purchases over the course of a year. There are also many taxes of which Canadians are largely unaware as they are built into the price of goods and services. Such taxes include import duties, excise taxes on tobacco and alcohol, amusement taxes, and gas taxes. Most Canadians are unaware that they pay the employers’ portion of payroll taxes such as Employment Insurance and Canada Pension Plans premiums and other taxes levied on businesses. The Fraser Institute annually calculates Tax Freedom Day in order to provide a comprehensive and easily understood indicator of the overall tax burden faced by the average Canadian family. This article summarizes our 2009 Tax Freedom Day report (Palacios and Veldhuis, 2009).

Tax Freedom Day 2009 Tax Freedom Day is the day in the year on which the average Canadian family has earned enough money to pay the taxes imposed on them by the three levels of Canadian government: federal, provincial, and local. Taxes used to compute Tax Freedom Day include income taxes, property taxes, sales taxes, profit

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taxes, health, social security and employment taxes, import duties, license fees, taxes on the consumption of alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes, and a host of other levies. In 2009, Canadians start working for themselves on June 6 (table 1). That

over a month later than it was nearly 50 years ago. In 1961, the earliest year for which the calculation has been made, Tax Freedom Day fell on May 3. There are a number of reasons for the earlier Tax Freedom Day in 2009. First, some minor tax relief at the federal level contributed to the decline in Canadians’

Tax Freedom Day has come earlier this year largely because of factors that have nothing to do with the federal or any provincial government’s actions in terms of reducing taxes. is, Canadians worked until June 5 to pay the total tax bill imposed on them by all levels of government. From June 6 to the end of the year, taxpayers can keep all the income they earn. Canadians can calculate their personal Tax Freedom Day using the Fraser Institute’s Personal Tax Freedom Day Calculator at www.fraserinstitute.org.

An earlier Tax Freedom Day This year, Tax Freedom Day arrives three days earlier than in 2008 (June 9).1 The latest Tax Freedom Day in Canadian history occurred in 2000, when it fell on June 24. Since 2005, Tax Freedom Day for the average Canadian family has been earlier each year. While recent Tax Freedom Days show a slight reduction in the tax burden, Tax Freedom Day this year is still

tax burden: an increase in the basic personal exemption (the amount of money Canadians can earn free of income tax), increases in the thresholds at which the bottom two personal income tax rates apply, and various new or expanded tax credits (i.e., the Home Renovation Tax Credit and a First-Time Home Buyers’ Tax Credit). In addition, some provinces decreased taxes in 2009. For example, Saskatchewan reduced its property taxes while New Brunswick decreased its general corporate income tax rate, small business tax rate, and all four of its personal income tax rates.2 However, Tax Freedom Day has come earlier this year (and last year) largely because of factors that have nothing to do with the federal or any provincial government’s actions in terms of reducing taxes. Tax Freedom Day is a com-

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Tax Freedom Day Table 1:  Tax Freedom Days* 1981

1985

1995re

2000re

2005re

2008re

2009pe

Newfoundland and Labrador

18-May

9-May

24-May

8-Jun

25-Jun

3-Jul

16-Jun

Prince Edward Island

6-May

7-Jun

26-May

8-Jun

15-Jun

4-Jun

3-Jun

Nova Scotia

11-May

17-May

31-May

12-Jun

19-Jun

12-Jun

11-Jun

New Brunswick

6-May

2-Jun

1-Jun

10-Jun

12-Jun

3-Jun

31-May

Quebec

7-Jun

17-Jun

9-Jun

3-Jul

30-Jun

16-Jun

12-Jun

Ontario

29-May

26-May

8-Jun

15-Jun

15-Jun

2-Jun

1-Jun

Manitoba

17-May

5-May

14-Jun

22-Jun

22-Jun

10-Jun

7-Jun

Saskatchewan

24-May

17-May

18-Jun

29-Jun

6-Jul

29-Jun

20-Jun

Alberta

30-May

22-May

2-Jun

20-Jun

14-Jun

24-May

16-May

British Columbia

9-Jun

16-Jun

13-Jun

25-Jun

24-Jun

9-Jun

8-Jun

Canada

30-May

6-Jun

11-Jun

24-Jun

23-Jun

9-Jun

6-Jun

Without natural resources Newfoundland and Labrador

17-May

8-May

23-May

7-Jun

17-Jun

30-May

29-May

Saskatchewan

15-May

9-May

11-Jun

17-Jun

23-Jun

6-Jun

4-Jun

Alberta

6-May

3-May

25-May

27-May

24-May

12-May

10-May

British Columbia

6-Jun

12-Jun

8-Jun

17-Jun

17-Jun

5-Jun

4-Jun

Canada

27-May

4-Jun

9-Jun

19-Jun

19-Jun

6-Jun

4-Jun

re = revised estimate; pe = preliminary estimate *Based on total taxes as a percentage of cash income for families with two or more individuals Source:  The Fraser Institute’s Canadian Tax Simulator, 2009.

parison of income and total taxes for the average Canadian family. When the economy slows and incomes either stagnate or decline, the tax burden of those families tends to be reduced to a greater extent than income. The reason for the accelerated decrease in the tax burden relative to income is the progressive nature of the Canadian tax system. Progressivity means that as an individual earns more income, he or she pays more proportionately in taxes. The reverse is also true. It is this reverse phenomenon that is driving some of the improvement in Tax Freedom Day.

Tax Freedom Day by province While all Canadians face more or less the same federal tax bill, Tax Freedom Day for each province varies according

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to the extent of the provincially levied tax burden (table 1). This year, the earliest provincial Tax Freedom Day fell on May 16 in Alberta, while the latest date fell on June 20 in Saskatchewan. This year, all of the Canadian provinces experienced an earlier Tax Freedom Day than last year, which means that most citizens are working less for the government and more for themselves and their families this year. Because there is some debate as to whether natural resource royalties are actually a tax, we provide two sets of Tax Freedom Days for provinces with significant extraction of natural resources. If natural resource revenues are excluded, Tax Freedom Day arrives 18 days earlier in Newfoundland and Labrador, 16 days earlier in Saskatchewan, six days earlier in Alberta, and four days earlier in British Columbia (table 1).

Balanced Budget Tax Freedom Day Right now, Canadians may rightly be thinking about the economic and tax implications of the recent return to budget deficits. Indeed, most Canadian governments (federal and provincial) are forecasting budget deficits for 2009. The federal government has budgeted for a $33.7 billion deficit in 2009/2010, while the provinces are cumulatively forecasting deficits amounting to $24.3 billion (Palacios and Veldhuis, 2009).3 But the fact is that today’s deficits must one day be paid for by taxes. Deficits should therefore be considered as deferred taxation. For this reason, this year we have calculated a Balanced Budget Tax Freedom Day—the day on which average Canadians would start working for themselves if governments were

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Tax Freedom Day Table 2:  Tax Freedom Days including government deficits, 2009, preliminary estimates Tax Freedom Day

Balanced Budget Tax Freedom Day

Newfoundland and Labrador

16-Jun

12-Jul

Prince Edward Island

3-Jun

23-Jun

Nova Scotia

11-Jun

22-Jun

New Brunswick

31-May

Quebec Ontario

Total increase (days)

Federal

Provincial

26

8

18

19

11

8

12

12

0

24-Jun

24

11

13

12-Jun

27-Jun

15

9

6

1-Jun

23-Jun

22

11

11

Manitoba

7-Jun

18-Jun

11

11

-1

Saskatchewan

20-Jun

25-Jun

6

10

-4

Alberta

16-May

5-Jun

21

11

10

British Columbia

8-Jun

21-Jun

13

12

1

Canada

6-Jun

25-Jun

19

11

8

Note:  Numbers may not add up due to rounding. Source:  The Fraser Institute’s Canadian Tax Simulator, 2009; 2009 Provincial Budgets.

obliged to cover current expenditures with current taxation and were not able to defer any of the tax burden by running a deficit. Table 2 presents Balanced Budget Tax Freedom Days for Canada and the provinces. Balanced Budget Tax Freedom Day arrives on June 25, which means that the average Canadian family would have to work until June 24 to pay their tax bill if, instead of financing their expenditures through deficits, Canadian governments had to increase tax rates to balance their budgets. The Balanced Budget Tax Freedom Day arrives 19 days later than Tax Freedom Day. Eleven of the 19 days are due to the federal deficit and the remainder is due to provincial deficits. The latest Balanced Budget Tax Freedom Day will fall on July 12 in Newfoundland and Labrador, almost a month later than that province’s Tax Freedom Day.

Conclusion The Canadian tax system is complex and there is no single number that can

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give us a complete idea of who pays how much. That said, Tax Freedom Day is the most comprehensive and easily understood indicator of the overall tax bill paid by the average Canadian family. In 2009, Canadians celebrate Tax Freedom Day on June 6, three days earlier than in 2008.

Notes 1 As is the case every year, Tax Freedom Day calculations are based on forecasts of personal income and federal and provincial tax revenue. When final revenue numbers become available at the end of each fiscal year and personal income data are updated by Statistics Canada, we revise our Tax Freedom Day calculations for previous years. If federal and provincial revenue or personal income end up lower than currently projected, then Tax Freedom Day could change once the preliminary Tax Freedom Day estimates are revised. 2 Ontario’s 2009 budget represents a U-turn on tax policy as it includes a number of tax reductions. Unfortunately, the reductions will be implemented in 2010 rather than

this year, which means that they have had no influence on Tax Freedom Day this year. In addition, several other provinces decreased some taxes while increasing others. For example, British Columbia increased the thresholds at which its bottom two personal income tax rates apply and reduced its small business tax rate while increasing tobacco and carbon taxes. Similarly, Alberta reduced small business taxes while increasing tobacco taxes (Palacios and Veldhuis, 2009). 3 Nova Scotia, Manitoba, and Saskatchewan are the only Canadian provinces predicting a surplus for the fiscal year 2009/2010. In addition, recent reports estimate that the federal deficit will be greater than $50 billion in 2009/2010.

References Palacios, Milagros, and Niels Veldhuis (2008). Canadians Celebrate Tax Freedom Day on June 14. Fraser Alert. Fraser Institute. <www.fraserinstitute.org>. Palacios, Milagros, and Niels Veldhuis (2009). Canadians Celebrate Tax Freedom Day on June 6. Fraser Alert. Fraser Institute. <www.fraserinstitute.org>. 

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The state of the environment in Canada Diane Katz Canadians hold decidedly mixed opinions about the state of their environment. For example, the defeat of the Liberal Party in last October’s federal election suggests that the green agenda of former Liberal leader Stéphane Dion was not a priority among voters. However, it is also common for the environment to rank high on the lists of the most pressing issues, according to public opinion polls. But as this article will demonstrate, the data are unequivocal on the matter of environmental quality: in Canada, as in most developed countries, dramatic improvements have been achieved in several areas.

cantly reduced in recent years.1 The rates of the reduction are all the more impressive considering that Canada’s GDP increased by 58.6% between 1991 and 2006 (Statistics Canada, 2008b). In the few instances where emissions have increased, these increases were largely the result of natural forces. For example, the largest increase in emissions of volatile organic compounds was the result of “biogenics,” or vegetation. Similarly, increases in particulate matter were largely the result of forest fires, vegetation, and agriculture, as well as dust from unpaved roads. There has also been a significant decline in emissions of heavy metals (table 2).

Air

Land

Tables 1a and 1b reveal that emissions of major air pollutants have been signifi-

Between 1990 and 2005, Canada experienced no net deforestation (World

Bank, 2009). As of 2001, towns and cities occupied only 3% of all dependable agricultural land in Canada (Statistics Canada, 2005). Furthermore, since 1990 more Canadian farmers have adopted no-till seeding (figure 1), which retains moisture in the soil and decreases erosion.

Species No species has been declared extinct in Canada since 1999, when the Benthic Hadley Lake stickleback fish was listed. Endemic only to one lake, the loss of this particular species of stickleback resulted from nest predation by the unauthorized introduction of brown bullhead (catfish) (Statistics Canada, 2008b). Ten of the 13 extinctions recorded in Canada occurred prior to 1965, and of those, seven occurred prior to 1929 (Statistics Canada, 2008b).

Table 1a:  Emissions in Canada (tonnes), 1985 and 2006 Particulates

% change

Sulphur oxide

% change

1985

2006

1985

2006

908,944

515,433

- 43.3

2,670,956

1,354,880

- 50.6

550,377

765,473

39.1

Non-Industrial

395,196

151,322

- 61.7

879,113

506,308

- 42.4

330,652

302,740

- 8.4

96,894

73,702

- 23.9

172,873

107,537

- 37.8

1,598,624

1,230,790

-23.0

Incineration

2006

Nitrogen oxide

Industrial Mobile

1985

% change

2,724

913

- 66.5

2,779

1,918

- 31.0

2,465

1,448

- 41.2

Misc.

10,044

8,984

- 10.5

99

0

-100

184

37

- 79.9

Open

11,470,317

17,325,626

51.0

4,503

1,221

-72.9

19,712

6,496

- 67.0

117,011

301,729

157.9

200

178

- 11.0

156,956

243,742

55.3

13,001,130

18,377,709

41.4

3,730,523

1,972,042

- 47.1

2,658,970

2,550,726

- 40.7

Natural Total

Source:  Environment Canada, 2008a.

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The state of the environment in Canada Table 1b:  Emissions in Canada (tonnes), 1985 and 2006 Volatile organics 1985

2006

Industrial

630,247

751,641

Non-Industrial

152,700

165,736

1,089,245 6,647

Misc. Open

% change

Carbon monoxide 1985

2006

19.3

1,868,167

1,475,045

8.5

756,651

572,216

- 47.5

1,310

- 80.3

493,334

410,802

324,125

308,467

Natural

11,130,752

29,575,078

165.7

Total

13,827,050

31,785,250

129.9

Mobile Incineration

% change

Ammonia

% change

1985

2006

- 21.0

38,655

20,968

- 45.7

779,640

3.0

2,403

2,144

- 10.8

12,546,102

6,964,415

- 44.5

3,608

20,963

481.0

10,999

4,498

- 59.1

395

75

- 81.0

-16.7

6,950

3,975

- 42.8

2,116

1,614

- 23.7

- 4.8

921,843

19,806

- 97.8

361,192

504,386

39.6

760,394

2,484,823

226.8

1,395

5,325

281.7

16,871,106

11,732,203

- 30.4

409,764

555,475

35.5

Source:  Environment Canada, 2008a.

Table 2:  Emissions of heavy metals in Canada, 1990 and 2006 (kilograms) 1990

2006

% change

1,298,265

308,956

- 76.2

Cadmium

91,444

40,561

- 55.6

Mercury

35,140

5,705

- 83.8

Lead

Source:  Environment Canada, 2008a.

Figure 1:  Area of no-till seeding in Canada, 1991 to 2006 15

Millions of hectares

12

9

6

3

0

1991

Source:  Statistics Canada, 2007.

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1996

2001

2006

Water The quality of water in Canada can vary significantly depending upon location, flow, depth, and type of discharge (e.g., sewerage or agricultural runoff). Between 2004 and 2006, 48% of the water monitored in 11 lake sites and 368 river sites in southern Canada earned a rating of “excellent” or “good” for the protection of aquatic life; 30% were “fair” and 4% were “poor” (Environment Canada, 2008b). Only minor changes have been noted between 2006 and the present. Concentrations of most organic contaminants in the Great Lakes are “low and declining,” and sediment cores reveal significant declines over the past three decades in concentrations of polychlorinated biphenyls (PCBs), DDT, lead, and mercury, according to Environment Canada and the US Environmental Protection Agency (2007). And so abundant is water in Canada that the rate of withdrawal (i.e., the amount of water taken out of lakes, streams, rivers, etc.) for all uses is a mere 1.6% of “internal” resources (World Bank, 2009). The volume of fish taken from Canadian waters has declined significantly in the past decade (figure 2) as the seafood industry has shifted to greater aquacul-

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The state of the environment in Canada

The cost of improvement All of this progress has come with a price, of course. Businesses in Canada spent $8.6 billion in 2006 for both operating expenses and capital investment related to environmental protection (Statistics Canada, 2008a). Industry also spent nearly  $2  billion in  2006  to improve energy efficiency or to reduce their use of fossil fuels (Statistics Canada, 2008a). Of the $3.8 billion spent on capital expenditures, the largest proportion (40%) was spent on pollution prevention, as indicated in table 3 (Statistics Canada, 2008a). Operating expenditures in 2006 were concentrated on waste management and sewerage services ($1 billion) and pollution abatement and control ($1 billion) (Statistics Canada, 2008a). Environmental taxes in Canada increased from $7.8 billion in 1995 to $12.5 billion in 2004, while publicly financed research and development (R&D) relating to the control and care of the environment increased from $37 million in 1981 to nearly $255 million in 2005 (figure 5) (OECD, 2008).

Summary Canada is blessed with abundant natural resources, and nature has proven

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‘000s of tonnes (live weight)

Energy efficiency in Canada has increased significantly since 1980, as indicated by the decline in the amount of energy consumed per dollar of GDP (figure 4). For every dollar of economic output, less energy was required.

800 800 800 700 700 700 600 600 600 500 500 500 400 400 400 300 300 300 200 200 200

Groundfish Pelagic

1990 1990 1990

1994 1994 1994

1998 1998 1998

Source: Statistics Canada, 2008b. Source:  Statistics Canada, 2008b. Source: Statistics Canada, 2008b. Source: Statistics Canada, 2008b.

2002 2002 2002

2006 2006 2006

Figure 2: Landed catch in Canada (tonnes), 19901994 to 2006 Figure 3:  Aquaculture production in Canada (tonnes), to 2006 Figure 2: Landed catch in Canada (tonnes), 1990 to 2006 Figure 2: Landed catch in Canada (tonnes), 1990 to 2006 150

‘000s of tonnes

Energy

Figure 2: 2:Landed catch inin Canada Figure Landed catch Canada(tonnes), (tonnes),1990 1990to to2006 2006 Figure 2: Landed catch in Canada (tonnes), 1990 to 2006 Figure 2: Landed catch in Canada (tonnes), 1990 to 2006

150 150 120 120 120 90 90 90 60 60 60 30 30 30 0 0 0

Salmon Salmon Trout Salmon Trout Oysters Trout Oysters Mussels Oysters Mussels Mussels

1994 1994 1994

1998 1998 1998

2002 2002 2002

2006 2006 2006

Source: Statistics Canada, 2008b. Source: Statistics Canada, 2008b. Source:  Statistics Canada, 2008b. Source: Statistics Canada, 2008b.

Figure 4: Canada's Public R&D Budgets for Control and Care of Figure Canada's Public and Care of theR&D Environment Figure 4:  4: Energy consumption inBudgets Canadafor perControl dollar of real GDP, Figure 4: Canada's Public R&D Budgets for Control and Care of the Environment 1980 to 2006 the Environment 15 15 15

Megajoule per dollar

tural production (figure 3). Research is underway to determine more precisely the effects of aquaculture on Canadian waters, but the reduction in the landed catch will help to replenish stocks of wild fish.

12 12 12 9 9 9 6 6 6

1980 1980 1980

1985 1985 1985

1990 1990 1990

1995 1995 1995

2000 2000 2000

2006 2006 2006

Source: Statistics Canada, 2008b. Source:  Statistics Canada, 2008b. Source: Statistics Canada, 2008b. Source: Statistics Canada, 2008b. www.fraserinstitute.org


The state of the environment in Canada Table 3:  Capital expenditures by Canadian businesses for environmental improvement, 2006 Environmental monitoring

$171,900,000

Environmental assessments/audits

$87,900,000

Reclamation/Decommissioning

$433,800,000

Wildlife/Habitat protection

$153,700,000

Waste management/Sewerage

$519,300,000

Pollution abatement/Control processes (end of pipe)

$908,700,000

Pollution prevention processes

$1,561,100,000

Total

$3,836,400,000

Source:  Environment Canada, 2008a.

Figure 5: Canada’s public research and development budget for control and care of the environment, in millions of US dollars*, 1981 to 2005 300

Millions of US dollars

References Environment Canada (2008a). Air Pollutant Emission Summaries and Trends, Emission Trends (1985 to 2006). <http://www. ec.gc.ca/inrp-npri/default.asp?lang=en​ &n=F2B66EB1-1#n2>. Environment Canada (2008b). Canadian Environmental Sustainability Indicators 2008: Water Quality. <http://www.​ ec.gc.ca/indicateurs-indicators/default.​ asp?lang=en&n=2E13B97A-1#WATER​ chart1Edetails>. Environment Canada and the US Environmental Protection Agency (2007). State of the Great Lakes 2007. Environmental Protection Agency. <http://www.epa. gov/solec/sogl2007/SOGL2007_TOC_ preface.pdf>. Organisation for Economic Co-operation and Development [OECD] (2008). OECD Environmental Data Compendium. <http://www.oecd.org/documen t/49/0,3343,en_2649_34441_39011377_1_​ 1_1_1,00.html>.

250 200 150

Statistics Canada (2005). Study: Urban Consumption of Prime Agricultural Land. The Daily (January 31). <http://www. statcan.gc.ca/daily-quotidien/050131/ dq050131c-eng.htm>.

100 50 0

ing the toxicity of a particular compound, the actual “dose,” and the route and timing of contact.

1981

1985

1990

1995

2000

2005

Statistics Canada (2008a). Environmental Protection Expenditures in the Business Sector 2006. Catalogue No. 16F0006XWE. <http://www.statcan.gc. ca/pub/16f0006x/16f0006x2006000eng.pdf>.

*2000 price levels at purchasing power parity. Source: OECD, 2008.

to be resilient. As the data provided here demonstrate—and contrary to the claims of alarmists—environmental conditions today are better than they have been in decades.

www.fraserinstitute.org

Statistics Canada (2007). 2006 Census of Agriculture. <http://www.statcan.gc.ca/ ca-ra2006/index-eng.htm>.

Note 1 It is important to note that the volume of emissions is not a proxy for the level of risk associated with exposure. The health consequences, if any, of exposure to chemicals are determined by a variety of factors, includ-

Statistics Canada (2008b). Human Activity and the Environment: Annual Statistics: 2007 and 2008. Catalogue No. 16-201-X. <http://www.statcan.gc.ca/pub/16-201x/16-201-x2007000-eng.pdf>. World Bank (2009). The Little Green Data Book 2009. World Bank. <http://tinyurl. com/09greendb>. 

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13


Cap and (don’t) trade How US emissions rules could hurt Canada Diane Katz The possibility of a costly crackdown on carbon emissions in the United States should make government officials across Canada reconsider their unbridled enthusiasm for global warming regulations. The legislation now pending in Congress has evolved into a vehicle for trade protectionism that could cause real harm to the Canadian economy. As currently drafted, the American Clean Energy and Security Act would, if enacted, establish a “cap-and-trade” scheme in the United States that could make Canada’s goods more costly there. That the legislation effectively grants government control over the entire energy sector does not bode well for the US economy or for Canada’s, by extension, as the latter relies heavily on a vibrant American market—its biggest export market1—for its own economic growth. The act is intended to reduce emissions of so-called greenhouse gases, principally carbon dioxide, by 20% below 2005 levels by 2020, and by 83% below 2005 levels by 2050. Under the proposed cap-and-trade program, the federal government would set an overall limit (cap) on emissions. Based on that cap, quotas would be imposed on individual sources of emissions, such as utilities and factories. The government would allocate “allowances” to each facility, representing the volume of their quota. A facility would either have to reduce emissions to meet the quota or purchase allowances from others who have exceeded their required reductions and thus can trade their allowances with others.

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Even proponents of cap and trade acknowledge that the proposed regulations would dramatically increase energy costs for goods manufactured in the United States.2 That prospect has prompted US industries and labour unions to demand protections against imports from countries where regulations are either not as strict or not in force (Drajemm and Dodge, 2009, Feb. 20). Consequently, the bill that cleared the House Energy and Commerce Committee on May 21 directs the president to institute a “border adjustment” program that would effectively impose tariffs on imports to neutralize the disadvantages cap and trade would create for US firms (US House of Representatives, 2009). Even if some countries did institute new emissions controls, the bureaucratic and political machinations involved in determining the equivalency of regulatory approaches around the globe would still increase import costs and likely prompt retaliatory actions from America’s trading partners. Canada’s Environment Minister Jim Prentice has characterized the US legislation as a “prescription for disaster” for both the global economy and the global environment (Alberts, 2009, May 14). “Border carbon adjustments would be a thinly disguised restriction on trade and an impediment both to wealth creation and to the attainment of our collective objective, which is to address greenhouse gas emissions and to reduce them,” said Prentice. “They would constitute arbitrary discrimination. They won’t work and they threaten constructive negotiations.”

The Obama administration has been quite candid about its intent to use trade restrictions as a club. For example, in March US Energy Secretary Stephen Chu told a House subcommittee that if other countries fail to restrict carbon emissions in tandem with the United States, then tariffs will be imposed “in order to protect American industries” (Talley and Barkley, 2009, Mar. 18). The bill also mandates utilities to generate quotas of electricity from “renewable” sources, including wind, solar, geothermal, marine and hydrokinetic energy, biogas and biomass, landfill gas, wastewater-treatment gas, coal-mine methane, select hydropower facilities, and some waste-to-energy projects (US House of Representatives, 2009). But members of Congress would do well to recognize that shutting off the Canadian oil spigot would also undercut the US economy. According to the US Department of Commerce, Canada is the leading export market for 36 of the 50 US states, and it ranks in the top three for another 10 states. In fact, Canada is a larger market for US goods than all 27 countries of the European Union combined (US Commercial Service, n.d.). To the extent that the Canadian oil industry is weakened, the nearly 500,000 workers whose jobs are related to energy activities will not be able to buy as many US goods. Meanwhile, the United States, which is in the late throes of recession, is in no position to absorb a substantial hike in energy prices. Advocates claim that the legislation would create millions of “green” jobs. But a number of analyses indicate that

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Cap and (don’t) trade the higher costs of energy would actually force massive layoffs in energy-intensive industries, thereby offsetting any of the purported employment benefits that experience elsewhere has shown to be temporary, at best (Alvarez, 2009). There are also indications that the protectionist bent of the cap-and-trade legislation reflects a broader shift in policy across the border. Organized labour has flexed its political muscle with the Obama administration, winning a “Buy American” clause in the $787 billion “stimulus” package that requires all iron, steel, and manufactured goods purchased for public works projects to be made in the United States. That has sparked anger among local officials in Canada. At their recent annual meeting, the Federation of Canadian Municipalities approved a prohibition on procurement bids from companies whose countries impose trade restrictions on Canada unless the “Buy American” clause is lifted within 120 days (CP, 2009, June 7). As federal Liberal Party leader Michael Ignatieff has said, “If they [the United States] start shutting down their procurement markets in state and local government, there are bound to be consequences” (CP, 2009, June 7). Meanwhile, California recently instituted a “low-carbon fuel standard” that regulates the “carbon intensity” of transportation fuels. All fuels sold in the state will be required to undergo a life cycle analysis to determine the amount of energy and associated emissions required to bring the fuel to market, i.e., from retrieving the oil from the ground to trucking it to the pump (California Energy Commission, 2009). This elicited immediate protest from Lisa Raitt, Canada’s Minister of Natural Resources, who complained to Governor Arnold Schwarzenegger that the new rule would “discriminate” against petroleum excavated from the oil sands. Evidently California regulators are unaware that oil sands excavation and

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processing generates less than one tenth of 1% of total global emissions of socalled greenhouse gases (CAPP, 2008). And it is undoubtedly more eco-friendly to pipe oil across the Canada-US border than to transport 13,000 barrels a day via tanker from the Middle East. Many government officials appear to be uninterested in or ignorant of the economic disruption that will result from these various climate-related regulatory initiatives. What’s worse is the fact that none of these regulations will have a meaningful impact on climate change. Initiatives to limit the use of fossil fuels are based on the premise that global warming is caused by human-made emissions of carbon dioxide. In fact, there exists considerable uncertainty about the interplay between CO2 and global temperatures, and there is no scientific consensus about the causes or consequences of climate change. Mixing climate change regulations with protectionism will result in a bona fide policy fiasco. It is well worth remembering that the increase of tariffs under the 1930 Smoot-Hawley Act led to the collapse of world trade and was a major factor in deepening and prolonging the Great Depression.

Notes 1 The total value of Canadian exports to the United States was $335.6 billion in 2008. 2 For example, during an interview with the San Francisco Chronicle, then candidate Barack Obama acknowledged that “electricity rates would necessarily skyrocket” under a cap-and-trade regime (San Francisco Chronicle, 2008).

References Alberts, Sheldon (2009, May 14). US Climate Bill would be ‘Disaster.’ Calgary Herald. <http://tinyurl.com/CH051409>. Alvarez, Gabriel Calzada (2009). Study of the Effects on Employment of Public Aid

to Renewable Energy Sources. Universidad Rey Juan Carlos. <http://tinyurl. com/GCA2009>. Bandyk, Matt (2009). Cap and Trade Protectionism. Blog (March 18). US News and World Report. <http://tinyurl.com/ Bandyk031809>. California Energy Commission (2009). Low Carbon Fuel Standard. Government of California. <http://www.energy.ca.gov/ low_carbon_fuel_standard/>. Canadian Association of Petroleum Producers [CAPP] (2008). Greenhouse Gas Emissions. CAPP. <http://www.canadas​ oilsands.ca/en/issues/greenhouse_gas_ emissions.aspx>. Canadian Press [CP] (2009, June 7). Ignatieff Warns Trade War over Buy American Policy would Hurt Canada and US. Google News. <http://tinyurl.com/ CP060709>. Drajemm, Mark, and Catherine Dodge (2009, February 20). Obama Climate Plan May Spur Trade Row Over Company Protections. Bloomberg. <http:// tinyurl.com/Bloom022009>. Humphries, Marc (2008). North American Oil Sands: History of Development, Prospects for the Future. Congressional Research Service. <http://www.fas.org/ sgp/crs/misc/RL34258.pdf>. San Francisco Chronicle (2008). Obama: My Plan Makes Electricity Rates Skyrocket. Online video clip. YouTube. <http:// www.youtube.com/watch?v=HlTxGH​ n4sH4>. Talley, Ian, and Tom Barkley (2009, March 18). Energy Chief Says US Is Open to Carbon Tariff. Wall Street Journal. <http://tinyurl.com/WSJ031809>. US Commercial Service (no date). CanadaUS Trade Relationship. United States, Department of Commerce. <http://www. buyusa.gov/canada/en/traderelations​ usacanada.html>. US House of Representatives (2009). The American Clean Energy and Security Act of 2009. Discussion Draft Summary. <http://energ ycommerce.house.gov/ Press_111/20090331/acesa_summary. pdf>. 

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15


UNINTENDED CONSEQUENCES How regulation changes behaviour by Christopher J. Coyne

U

nintended consequences are the results of an action that differ from the expected outcome. As the name implies, these consequences are not the intended outcome of the action taken. Unintended consequences can be either positive or negative.

A positive unintended consequence is an unanticipated benefit that emerges from an action. Adam Smith’s notion of the “invisible hand” is one example of a positive unintended consequence. Smith famously argued that each individual pursuing his own ends generates widespread benefits beyond that individual. For example, the butcher does not provide beef out of benevolence, but in order to make profit. However, in pursuing his own self-interest, the butcher generates unintended benefits for numerous consumers who now have access to his product.

“Fuel efficiency standards result in between 2,000 to 4,000 …

social interaction. Because of their simplicity, regulations often change the incentives individuals face, resulting in unforeseen consequences. Seat belt laws provide one example of unintended consequences arising from regulation. Economist Sam Peltzman analyzed the effects of mandatory seat belt laws in the United States. Regulators believed that requiring drivers to wear seat belts would reduce the number of automobile related fatalities. Surprisingly, Peltzman found that there was no change in auto-related deaths. The reason was that seat belt laws changed the incentives drivers faced. The perceived safety provided by the seat belt reduced the cost of driving recklessly, so more drivers operated their vehicles in a dangerous manner. The increase in reckless driving not only increased the danger for other drivers, but also for pedestrians and cyclists. Indeed, there was an increase in pedestrian and cyclist deaths after seat belt laws were passed. Overall, Peltzman found that while seat belts might have saved lives in a given accident, the total number of automobile-related fatalities did not change.

KEY CONCEPTS

Given that positive unintended consequences often emerge from individuals’ actions, emphasis should be placed on allowing individuals the freedom to act and interact. As individuals discover and pursue opportunities to better their own situation, they will also inadvertently contribute to improving the well-being of others. This process can only take place within an environment characterized by private property and individual freedom, where individuals have an incentive to experiment and act entrepreneurially. Unintended consequences can also be negative. Negative unintended consequences often emerge when a simple regulation is imposed on a complex system. Regulations are relatively simple because regulators cannot possess all of the relevant knowledge regarding the workings of the complex institutions that underpin economic and

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This finding is known as the “Peltzman Effect”—the tendency of individuals to respond to safety regulations by engaging in more dangerous behaviour. An explanation for this tendency is that people have a desired level of risk when it comes to driving (and other activities) and will change their behaviour as regulations change. The Peltzman Effect was confirmed in a recent study by economists Russell Sobel and Todd Nesbit, who found that increased safety regulations by the National Association for Stock Car Auto Racing (NASCAR) led to more accidents due to riskier driving.

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… additional car occupant deaths each year.” Fuel efficiency regulations provide another example of negative unintended consequences. At first look, increased fuel efficiency appears desirable because of the associated reductions in fuel consumption. However, in order to increase fuel efficiency, automobile manufacturers tend to reduce the size and weight of automobiles. While accomplishing the goal of increasing fuel efficiency, smaller and lighter vehicles also offer drivers and passengers less protection. The result has been an increase in the number of automobile-related deaths. A study by economists Robert Crandall and John Graham found that fuel efficiency standards result in between 2,000 to 4,000 additional car occupant deaths each year. Another unintended consequence of increased fuel efficiency is that the cost of driving has fallen because drivers can now get more miles per gallon of gasoline. As such, these regulations may actually result in more driving, leading to more congestion and accidents. Negative unintended consequences can arise from all types of policy and regulation, domestic and international. For example, government efforts to manipulate international trade through tariffs, quotas, and other controls can generate perverse outcomes. While trade restrictions may protect members of a specific industry, they also raise the price of goods for consumers and “downstream” producers who use those goods as inputs in their products. The US sugar industry provides an example of such consequences. The US government has put a variety of controls (i.e., price supports, tariffs, and quotas) on international sugar trade to protect the US sugar industry. As a result, the domestic price of sugar is artificially high,

and this has harmed other US industries. For example, a 2006 report by the US Department of Commerce found that the high price of sugar was driving US food and candy manufacturers to reduce their workforces and, in some cases, relocate abroad. Because sugar was a significant input for these producers, the artificially high price of sugar increased the costs of production. In the end, the regulations that were intended to protect members of the US sugar industry actually harmed producers and those employed in other industries. Recognizing the possibility of negative unintended consequences, regulators must appreciate the role that incentives play in directing individuals’ actions. Even regulations motivated by the best of intentions can have perverse secondary effects that generate significant costs. The possibility of negative unintended consequences does not, by itself, mean that regulators should never intervene. However, it does mean that regulators should be extremely humble in both their decision to intervene and in the design of their regulations. Given the complexity of our social and economic systems, negative unintended consequences are likely to emerge and to be significant.

Suggestions for further reading Bastiat, Frederic (1850). What is Seen and What is Not Seen. Library of Economics and Liberty. <http://www.econlib. org/library/Bastiat/BasEss1.html>. Crandall, Robert, and John Graham (1989). The Effect of Fuel Economy Standards on Automobile Safety. Journal of Law and Economics 32, 1: 97–118. Merton, Robert K (1936). The Unanticipated Consequences of Purposive Social Action. American Sociological Review 1, 6: 894–904. Peltzman, Sam (1975). The Effects of Automobile Safety Regulation. Journal of Political Economy 83, 4: 677–725. Sobel, Russell S., and Todd M. Nesbit (2007). Automobile Safety and the Incentive to Drive Recklessly: Evidence from NASCAR. Southern Economic Journal 74, 1: 71–84. US Department of Commerce (2006). Employment Changes in US Food Manufacturing: The Impact of Sugar Prices. <http://www.ita.doc.gov/media/Publications/pdf/sug​ ar06.pdf>. 

*Key Concepts is a series of essays on the fundamentals of economics and markets. In addition to appearing in Fraser Forum, these essays will form the basis of a live Ask the Professor discussion, held at www.fraserinstitute.org each month. Please join us on July 23 at 11:00 am PDT for an online discussion of this essay with Prof. Christopher J. Coyne.

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Fras e r Forum   07/0 9

17


POVERTY IN CANADA This year, the Fraser Institute celebrates 35 years of studying market solutions to public policy problems. To commemorate the Institute’s many years of success, each issue of Fraser Forum in 2009 will look at a different milestone in the Institute’s history. This feature looks at the Institute’s ongoing work on the issue of poverty.

P

overty is a topic as politically charged as they come. Though there is little debate that poverty exists and is deplorable, there is much disagreement over how poverty should be defined and what should be done to eliminate it. Yet the two are inextricably linked: any plan to eliminate poverty must be based on a sound definition that makes it possible for us to track our progress. Chris Sarlo is a well-known expert on poverty in Canada who has been studying poverty for over 20 years. A professor in the School of Business at Nipissing University in Ontario, Sarlo has pioneered a new method of measuring poverty—a method that is as relevant and controversial now as it was when it was first proposed in the early 1990s.

Humble beginnings Sarlo became interested in poverty while he was in graduate school when he came across some Statistics Canada reports on poverty based on the low-income cut-off measure (LICO). The LICO measure is relative, meaning that it looks at poverty as a condition in which a person or family is less well off than most others in society. Reflecting on his own experience growing up in a relatively poor family, Sarlo says he was “struck” by the level at which the LICO was set. By that measure, Sarlo recalls, “my family would have been classified as poverty-stricken in those early years, even though it probably would not have been an accurate classification.” Sarlo began researching poverty soon after he began teaching at Nipissing University in the mid-1980s. At that time, poverty was not a prominent issue in Canada, as “the 1980s were a relatively prosperous time,” Sarlo remembers. “It wasn’t in the media that much, with a few exceptions, such as the Toronto Star.” Sarlo’s research led him to write a book on the topic, the first draft of which he finished in 1990. Sarlo sent the book to a number of publishers and to the Fraser Institute. Being familiar with some of the Institute’s work in other areas of public policy, he believed the book would be of interest to the Institute. Within about three or four days, Sarlo recalls, Michael Walker, who was Executive Director of the Institute at the time, responded with great interest. Sarlo dropped the other publish-

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ers and began working exclusively with the Institute. The book, Poverty in Canada, was published in 1992.

A revolutionary approach When Poverty in Canada hit the shelves in summer 1992, poverty became one of the hottest—and most hotly contested— topics in the country. The immediate reaction to the book, particularly among left-leaning media outlets and the social welfare community, was largely negative. “Many people hadn’t even read the work but were outraged that somebody—particularly somebody who had any connection with the Fraser Institute—would dare to write on a topic such as poverty because, according to them, the Fraser Institute was all about big business,” recalls Sarlo. When it became clear that work was indeed credible, Poverty in Canada began to receive some favourable reviews. Following the book’s release, Sarlo had many interviews with a variety of news outlets and was invited to attend both provincial and federal parliamentary meetings to discuss his work. Sarlo also spoke about poverty at a number of academic conferences and wrote several newspaper commentaries and articles for academic journals on the topic.

Sarlo’s first Fraser Institute study, Poverty in Canada (1992), and his most recent, The Economic Well-Being of Canadians: Is there a Growing Gap? (2009).

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“The work that I did was long overdue … There needed to be someone who would challenge the conventional wisdom of the time—that all that was of interest was relative poverty, that there was no other measure or approach of any use.” —Chris Sarlo, author of Poverty in Canada

“The work that I did was long overdue,” he says. “There needed to be someone who would challenge the conventional wisdom of the time—that all that was of interest was relative poverty, that there was no other measure or approach of any use.” Sarlo’s approach to measuring poverty was revolutionary. Rejecting the low-income cut-off as a poverty threshold, Sarlo developed a basic needs poverty line, which he defines as “the cost of a list of basic needs required for long-term physical wellbeing.” Those needs include food, shelter, clothing, health costs, and a host of other necessary items. Since 1992, Sarlo has written extensively on poverty, revising and refining his basic needs measure over time. In 2000, he conducted a thorough review of his previous work and rebuilt his measurement “from the ground up.” The outcome of this review was Sarlo’s 2001 publication, Measuring Poverty in Canada. “That [paper] I would regard as the one that I’m most proud of,” Sarlo says, “because it was the result of taking into account criticism I received, taking into account some of the latest research, and really questioning everything from start to finish.” This new method, Sarlo adds, is “much more rigorous” than his early attempts to measure poverty.

Reaction and inaction By the mid-1990s, it looked as though Canada was making some progress on the problem of poverty. At an international social development conference held in 1995, Canada made a commitment to develop a measure of absolute poverty and to set a target for its elimination. Then in 1997, the federal, provincial, and territorial governments started a joint project, the purpose of which was to produce a poverty measure based on the consumption of a basket of goods and services—a “market basket measure” (MBM)—in contrast to relative measures. The project was headed up by Human Resources Development Canada (HRDC). This move towards a market-based measure was proof for Sarlo that “clearly my work, which is market-based, had an influence.” Sarlo was invited to participate in one of the initial meetings HRDC held to discuss the development of the MBM. When the HRDC’s final report on the MBM was released in 2004, he was part of small panel invited to discuss the report with Parliament. The results of their report were disappointing.

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Chris Sarlo discusses measuring poverty at a Fraser Institute policy briefing in Toronto in February 2006.

“It was clear from HRDC that this MBM was not going to be called a poverty line,” Sarlo recalls. “Right from its conception, they decided to move away from my idea—that we needed a measure of basic needs. Even though it was market-based in its construction, it had very generous estimates for the various components that made it well above any reasonable basic needs measure.”

Eliminating poverty Since the HRDC released its report, Sarlo has written papers criticizing the MBM and calling upon the Canadian government to honour the commitment it made in 1995. For Sarlo, developing an absolute measure of poverty is crucial because the first step to eliminating poverty is defining it. Once we can measure poverty, he says, we can look back and track our progress in relation to the policies that have been implemented, and decide what should be done going forward. Only then, Sarlo notes, can we can make a “real dent” in absolute poverty. —Kristin Fryer To learn more about Sarlo’s research, including his most recent publications, please visit www.fraserinstitute.org.

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Canada’s problem with interprovincial trade barriers Canada-EU free trade talks hit a roadblock Robert Knox & Amela Karabegović The free trade negotiations between Canada and the European Union that began in May hit their first roadblock early on when the issue of interprovincial barriers came up (McMullen, 2009, May 15). As one of the European diplomats pointed out, the European Union is not interested in trade agreements with individual provinces but with Canada as a whole. The European Union is concerned about the different regulations and standards that are in effect in each province and territory. In order to sell their products throughout Canada, companies and individuals in the European Union would have to meet the different standards and regulations of each Canadian jurisdiction.1 The problem of interprovincial barriers is nothing new to the Canadian negotiation team. Canada has been struggling with this issue for quite some time. The Agreement on Internal Trade (AIT), between all Canadian jurisdictions, which came into effect in 1995, was specifically aimed at reducing and eliminating barriers to the free movement of persons, goods, services, and investment within Canada. Unfortunately, the AIT failed on several fronts, leaving many interprovincial barriers still in place (Knox and Karabegović, 2009).2 Perhaps frustrated with the AIT, Alberta and British Columbia signed the Trade, Investment, and Labour Mobil-

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ity Agreement (TILMA) in 2006 with the goal of creating a seamless economic region between the two provinces by eliminating many of the existing interprovincial barriers. TILMA inspired the adoption of the TILMA-like labour mobility provision and enforcement mechanism in the AIT by the Canadian ministers, which came into effect this year

portunity for Canadian governments to finally remove the remaining interprovincial barriers. To do this, Canadian governments could consider reconciliation or mutual recognition of provincial regulations and standards relating to interprovincial trade, or some combination of the two approaches. The provinces could

Canada should not miss yet another chance to settle the issue of interprovincial barriers once and for all. (Knox and Karabegović, 2009). Despite these positive steps, there are numerous laws and regulations, regardless of how minor they might seem, that are reducing Canada’s productivity and making its businesses less competitive internationally (Knox and Karabegović, 2009). Interprovincial barriers are and will remain a major roadblock in the current negotiations with the EU as well. To be fair, however eager the Canadian team is in negotiating with the European Union, the issue of interprovincial barriers will not be easy to overcome. Creating a free single market within Canada has not been easy thus far, mainly because it requires agreement among all Canadian provinces and territories. It will also require a lot of hard work and genuine effort from all sides to deal with interprovincial barriers. The free trade agreement with the European Union is an op-

eliminate many of the interprovincial barriers by joining TILMA, which uses both mutual recognition and reconciliation to address differences in standards and regulations that restrict or impair trade, investment, and labour mobility. This has been considered by some provinces, such as Saskatchewan, but has been rejected in the end, due to concerns over Crown corporations and government investment. Even if TILMA were adopted by all provinces, the agreement would not eliminate all of the interprovincial barriers, due to a number of exceptions in the agreement, including the regulated marketing and supply management of poultry, dairy, and eggs (Knox and Karabegović, 2009). Another option might be to adopt something similar to a mutual recognition of regulations introduced in Australia in 1993. The aim of this regulatory

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Interprovincial trade barriers reform was to remove regulatory barriers in order to free the flow of goods and labour between Australian states and territories (Australia, Office of Regulation Review, 1997; Australia, Productivity Commission, 2003). Under the new mutual recognition regulations, each jurisdiction recognizes regulations created and administered by other jurisdictions, even if they vary from their own regulations. In effect, this means that goods that are allowed to be sold in one jurisdiction can be sold throughout the nation. Adopting something similar in Canada would solve the problem raised by the European Union since it would allow European companies and individuals to sell their goods throughout Canada if they comply with the laws and regulations of one of the provinces. If Australia’s experience is any indication, this type of mutual recognition would not result in an unacceptable reduction in standards as some might fear, but would instead increase trade within Canada (Australia, Office of Regulation Review, 1997; Australia, Productivity Commission, 2003). Mutual recognition is already occurring in the area of labour mobility. As mentioned above, Canada’s provincial governments essentially agreed on mutual recognition for labour mobility in Canada by adopting a TILMA-like provision on labour mobility in the AIT (Knox and Karabegović, 2009). Under this provision, anyone who is recognized as qualified for an occupation by a regulatory authority in one province will be recognized as qualified in the rest of Canada.3 Needless to say, Canada should consider what the provinces and other regions and countries have done to eliminate interprovincial or interregional barriers, and adopt what best fits its provinces and territories. Canada should not miss yet another chance to settle the issue of interprovincial barriers once and for all.

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The benefits of free trade are well known. Let’s hope that the Canadian governments use this trade negotiation as an opportunity to tackle the interprovincial barriers that have prevented Canada from achieving a single economic market within our own country.

Notes 1 Currently, the European Union is Canada’s second largest trade partner with about 7% of our exports going to the 27 nations in the Union (Foreign Affairs and International Trade Canada, 2009). 2 The ineffectiveness of the AIT has been most visible in three areas: labour mobility, agriculture, and dispute resolution mechanisms. Restrictions on labour mobility and, to a certain extent, the ineffectiveness of AIT’s dispute resolution mechanisms have been dealt with in recent changes to the agreement. The failure of the chapter on agriculture and food goods (chapter nine) has not been addressed yet; for example, the initial commitments of the Canadian governments to broaden the scope of this chapter and not to introduce new trade restrictions on agricultural and food products remain unfulfilled (Knox and Karabegović, 2009). 3 There are two standards associated with occupations: (a) the occupational standard that defines the occupation, and (b) the qualification or entry standards that establish the education, training, and experience that are necessary to be qualified for an occupation. Mutual recognition allows the entry standards to be different across Canadian jurisdictions as long as they produce the necessary competencies. On the other hand, occupational standards should be substantially similar across Canada; otherwise, they will result in effectively different occupations. The Canadian governments have agreed to reconcile differences in occupational standards in cases where there are significant differences. As for trades, the Red Seal program is the primary vehicle through which regulated trades are mutually recognized (Human Resources and Skills Development Canada, 2009a, 2009b; Industry Canada, 2009).

References Australia, Office of Regulation Review (1997). Impact of Mutual Recognition on Regulations in Australia: Office of Regulation Review Information Paper. Government of Australia. <http://www. pc.gov.au/orr/reports/information/mu tualrecognition>. Australia, Productivity Commission (2003). Evaluation of the Mutual Recognition Schemes: Research Report. Government of Australia. <http://www.pc.gov.au/ projects/study/mra/docs/finalreport>. Foreign Affairs and International Trade Canada, Office of the Chief Economist (2009). Monthly Trade Report – March 2009. <http://www.international.gc.ca/ economist-economiste/assets/pdfs/ PFACT_Annual_Merchandise_Trade_ by_Country-ENG.pdf>, as of June 3, 2009. Human Resources and Skills Development Canada [HRSDC] (2009a). Labour Mobility. HRSDC. <http://www.hrsdc.gc.ca /eng/workplaceskills/labour_mobility/ index.shtml>, as of June 1, 2009. Human Resources and Skills Development Canada [HRSDC] (2009b). Section IV - Recognition of Occupational Qualifications and Reconciliation of Occupational Standards. HRSDC. <http://www.hrsdc. gc.ca/eng/workplaceskills/publications/ labour_ mobi lit y/gmolmc/section4. shtml>, as of June 1, 2009. Industry Canada (2009). Agreement on Internal Trade. <http://www.ic.gc.ca/eic/ site/ait-aci.nsf/eng/h_il00034.html>, as of June 1, 2009. Knox, Robert, and Amela Karabegović (2009). Myths and Realities of TILMA. Studies in Trade Policy. Fraser Institute. <http://www.fraserinstitute.org>. McMullen, Alia (2009, May 15). EU Stumbles on Canada’s Internal Barriers. National Post. 

A version of this article appeared in the Financial Post.

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The missing link between vaccines and autism Diane Katz Jenny McCarthy is a most improbable medical militant. A Playboy model and former dating show hostess, McCarthy’s lack of medical credentials has not deterred her from leading the charge against childhood vaccines. But more surprising than her defiance of the public health establishment is the degree of deference granted to her claims that vaccines cause autism. That so many parents apparently find her notions to be the least bit plausible raises concerns about the public’s understanding of science. In addition to book sales in the millions and frequent TV appearances, McCarthy recently garnered the pop culture seal of approval—a multi-year development deal with Oprah Winfrey’s Harpo Productions. But one of McCarthy’s accomplishments strikes public health officials as nothing short of tragic: the decline in immunization rates due to parents’ believing her unsubstantiated claims. In the first US survey of public opinion about the purported vaccine-autism link, the Florida Institute of Technology found that nearly one in four adults (24%) believed that it was safer not to immunize children because vaccines may cause autism. Another 19% weren’t sure (Florida Institute of Technology, 2008). A small number of parents have long objected to vaccines on religious grounds. But McCarthy’s campaign has gained converts by playing on parental fears. As McCarthy has relayed to audiences numbering in the millions, her son Evan was diagnosed with autism after suffering seizures when he was two years

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old. McCarthy researched the disease on the Internet—or “Google University,” as she calls it—and consulted a doctor who maintained that Evan’s autism was the result of excess yeast. According to McCarthy, toxic levels of heavy metals in the atmosphere—and in vaccines—disturb the immune systems of toddlers (Generation Rescue, n.d.). Repeated doses of antibiotics prescribed by unsuspecting doctors supposedly create excess yeast that eats holes in the stomach lining, thereby allowing partially digested food, fungus, and other toxins to travel through the blood to the brain, resulting in autism. Evan was supposedly cured after McCarthy eliminated gluten, dairy products, and artificial additives from his diet.

The disease Autism was first described in medical literature in 1943 by child psychiatrist Leo Kanner, who observed similarities in the unusual behaviours among 11 patients at Johns Hopkins Hospital in Baltimore (Kanner, 1943). Hans Asperger,1 a Viennese physician, noted similar symptoms in four of his patients. Both doctors termed the condition autism, based on the Greek word autos (self), because of their young patients’ tendency toward withdrawal. Mainstream medical opinion firmly holds that there exists a genetic predisposition to autism. Research has established a very high probability that twins will both suffer autism and that a family with one autistic child faces a relatively high risk that a second child will also have the disease (National Autistic Society, 2001).

By many accounts, the prevalence of autism has reached epidemic proportions in recent years: one case for every 150 children (CDC, 2008). But there exists considerable debate about the accuracy of such numbers. For example, a widely circulated report by the California Department of Development Services claimed an increase of 273% in autism cases state-wide (California, 1999). Upon further investigation, independent researchers discovered that the reported rate actually represented the number of children receiving autism services from the state (Goode, 2004, Jan. 16). Dr. Paul Shattuck, an assistant professor at the George Warren Brown School of Social Work at Washington University in St. Louis, believes that “diagnostic substitution” has played a role in the higher rates of autism (Shattuck, 2006). According to Shattuck’s research, children who once would have been considered mentally challenged or learning disabled are being diagnosed as autistic. As he noted in a study published in the journal Pediatrics, “Higher autism prevalence was significantly associated with corresponding declines in the prevalence of mental retardation and learning disabilities.”

The missing vaccine-autism link The supposed link between vaccines and autism was first described in a 1998 study published by the British medical journal The Lancet (Wakefield et al., 1998), which claimed that the digestive tracts of nine autistic children (and three others with behavioural problems) became inflamed within days of their

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Vaccines and autism receiving a MMR (measles, mumps, and rubella) vaccine. According to gastroenterologist Andrew Wakefield and his co-authors, the intestinal inflammation loosed toxins in the bloodstream which, upon reaching the brain, wreaked havoc. However, many who proclaim a link exists between autism and MMR vaccines have failed to notice that the Wakefield study was later retracted by 10 of the 13 authors (Medical News Today, 2004, Mar. 4). Moreover, an investigation by the Sunday Times of London revealed that most of the children cited in the Wakefield study had exhibited symptoms of autism long before the vaccine was administered. The newspaper also reported that Wakefield had been retained as an expert witness by a lawyer intent on suing vaccine manufacturers, and that the parents of the children in Wakefield’s study consulted him after the launch of an ad campaign initiated by a lawyers’ group called “Jabs.” Unsubstantiated claims about dangerous levels of heavy metals in vaccines began circulating in the United States in 1999 after the federal government set fish consumption advisories to limit the ingestion of mercury. Thimerosal, the primary preservative used in vaccines since the 1930s, is 50% mercury by weight (PHAC, 2007). Consequently, concern was raised that the mercury in the vaccine preservative was causing neurological damage, including autism. However, the fish consumption advisories relate to methylmercury, and not the ethylmercury in thimerosal. The two chemical entities possess entirely different toxicological profiles. In fact, ethylmercury is cleared from the body much quicker than methylmercury. Nonetheless, in a misguided application of the precautionary principle2 that further fanned public fears, the US government ordered the removal of thimerosal from all vaccines administered to children under the age of six. Likewise, routine childhood vaccines3 in Canada do not

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contain thimerosal as a preservative (PHAC, 1999). Ironically, thimerosal was introduced as a safety measure; it prevents bacterial and fungal contamination during the integration of components in the production of multi-dose vaccines (PHAC, 2007). (Multi-dose vials are significantly less expensive and more convenient to administer.) The preservative was employed after 12 children died from staphylococcal contamination during a 1928 diphtheria immunization campaign (PHAC, 2007). The actual concentration of thimerosal in a vaccine is minute, measured in one-millionth of a gram. The ethylmercury in thimerosal is further reduced as the vaccine is metabolized by the body (PHAC, 2007).

A dearth of evidence A variety of studies employing different epidemiologic methods have consistently failed to establish any association between thimerosal and autism. In 2004, for example, the US Institute of Medicine of the National Academies of Science conducted an extensive review of relevant epidemiological studies and concluded that “the body of epidemiological evidence favours rejection of a causal relationship between thimerosalcontaining vaccines and autism.” “In addition, the committee recommends that available funding for autism research be channelled to the most promising areas” (Institute of Medicine of the National Academies, 2004). Canadian researchers have also failed to find a correlation between ethylmercury exposure from immunization and the prevalence of “pervasive development disorders” (PDD), including autism (PHAC, 2007). In fact, the PDD prevalence was actually higher among children not exposed to thimerosal. According to Canada’s National Advisory Committee on Immunization,

“the weight of evidence to date clearly refutes an association between thimerosal and neurodevelopmental disorders” (PHAC, 2007). Perhaps most compelling is the fact that autism diagnoses have not declined since the use of thimerosal was discontinued. According to an investigation of post-thimerosal disease rates reported in the Archives of General Psychiatry, the “data do not support the hypothesis that exposure to thimerosal during childhood is a primary cause of autism” (Schechter and Grether, 2008). As public-health researcher Marie McCormick, chair of the Institute of Medicine vaccine-safety committee, told Discover magazine, “If you thought thimerosal was related to autism, then the incidence of autism should have gone down. And it hasn’t” (Mooney, 2009, May 6). Despite the dearth of evidence linking vaccines to autism, parents have filed more than 5,500 claims with the US government’s Vaccine Injury Compensation Program alleging such (US Department of Health and Human Services, 2009). But a panel of the US Court of Federal Claims ruled earlier this year that “petitioners’ theories of causation were speculative and unpersuasive,” and “the weight of scientific research and authority” was “simply more persuasive on nearly every point in contention.” According to the World Health Organization (2008), there were 197,000 measles deaths worldwide in 2007, or 22 deaths every hour. Conversely, WHO officials reported that vaccination programs reduced measles deaths by 74% between 2000 and 2007. Public health authorities in the United States declared measles eliminated in 2000. But declines in vaccination rates have resulted in major measles outbreaks, while cases of mumps and whooping cough also are increasing. Three Minnesota children whose parents failed to inoculate them against menin-

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Vaccines and autism gitis died last year after contracting the disease (ScienceDaily, 2009, May 27).

Fear, not facts Among the claims propagated by adherents to the vaccines-autism myth is the assertion that infant mortality rates are lower in countries that mandate fewer vaccines (Generation Rescue, n.d.). The obvious inference is that vaccines kill babies. But even a cursory review of the facts exposes the rhetorical sleight of hand. The United States, for example, does mandate more vaccines than most countries. However, during the same time period in which the number of vaccines has increased, the infant mortality rate has declined dramatically—50% between 1966 and 1981 (Singh and Yu, 1995). The extent to which the public actually distinguishes between correlation and causation is questionable. For example, researchers estimate that fewer than 20% of Canadian adults are “scientifically literate” (CCL, 2007). That deeply concerns anthropologist Sharon Kaufman, who is researching the endurance of the vaccine-autism myth. “What happens when the facts of bioscience are relayed to the public and there is disbelief, lack of trust?” she asks (ScienceDaily, 2009, May 27). This is not to say that citizens should accept without question any and all statements delivered by anyone with academic credentials. After all, skepticism is an essential part of sound science. Nor can science solve all political debates, some of which concern social values rather than research results. But disregarding science as an important organizing principle can lead to costly and deadly consequences. Indeed, there is no shortage of examples where public policy has proved deadly when divorced from cause and effect. Unfortunately, there is no simple remedy for a disregard for science. A

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confluence of factors is responsible for the problem. For example, what passes for science instruction in many schools today resembles indoctrination more than education. Politicians routinely focus on intentions, not results, in crafting laws and regulations. Some academics allow ideology to infect their work, leading them to sacrifice principle in pursuit of research funding. The media certainly play a major role, as well. Newspapers and television programs consistently confer legitimacy upon even the most crackpot notions of risk. Ultimately, voters, parents, policy makers, and regulators must insist upon facts in formulating action. Star power and propaganda are only as powerful as we collectively allow them to be. Jenny McCarthy and her followers should be free, of course, to espouse whatever twisted notions they can possibly formulate. But it is incumbent upon the rest of us to distinguish myth from reality.

Notes 1 Asperger’s Syndrome is a milder variant of autism. 2 The precautionary principle dictates that governments should act upon the mere suspicion of harm in the absence of proof of harm. 3 In Canada, vaccines to prevent the following diseases are considered routine and are given free of charge to children in all provinces and territories: diphtheria, tetanus, whooping cough, polio, rubella, measles, mumps, and hepatitis B.

References California, Department of Developmental Services (1999). Changes in the Population of Persons with Autism and Pervasive Developmental Disorders in California’s Developmental Services System: 1987 through 1998. <http://www.dds.ca.gov/ Autism/docs/autism_report_1999.pdf>.

Canadian Council on Learning [CCL] (2007). Informal Science Learning in Canada. <http://www.ccl-cca.ca/CCL/Reports/ LessonsInLearning/LinL20070418_In formal_science_learning.htm>. Centers for Disease Control and Prevention [CDC] (2008). Autism Information Center. <http://www.cdc.gov/ncbddd/ Autism/faq_prevalence.htm>. Deer, Brian (2009, February 8). MMR Doctor Andrew Wakefield Fixed Data on Autism. Sunday Times (London). <http://www.timesonline.co.uk/tol/life_ and_style/health/article5683671.ece>. Florida Institute of Technology (2008). Survey Confirms Parents’ Fears, Confusion Over Autism. News release (October 3). <http://www.fit.edu/newsroom/brief. html?id=2396>. Generation Rescue (no date). Generation Rescue. <http://www.generationrescue. org/index.html>. Goode, Erica (2004, January 16). Autism Cases Up; Causes is Unclear. New York Times. <http://www.nytimes.com/2004/ 01/26/us/autism-cases-up-cause-is-un clear.html>. Institute of Medicine of the National Academies (2004). Immunization Safety Review: Vaccines and Autism. National Academies. <http://www.iom.edu/CMS/ 3793/4705/20155.aspx>. Kanner, Leo (1943). Autistic Disturbances of Affective Contact. Nervous Child 2: 217–50. Kluger, Jeffrey (2009, April 1). Jenny McCarthy on Autism and Vaccines. Time. <http://www.time.com/time/health/ar ticle/0,8599,1888718,00.html>. Medical News Today (2004, March 3). MMR Autism Link 10 Doctors Retract. <http://www.medicalnewstoday.com/ articles/6308.php>. Mooney, Chris (2009, May 6). Why Does the Vaccine/Autism Controversy Live On? Discover. <http://discovermagazine. com/2009/jun/06-why-does-vaccineautism-controversy-live-on/article_ view?b_start:int=1&-C=>. National Autistic Society (2001). Genetics and Autism: A Briefing. <http://www.nas.

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org.uk/nas/jsp/polopoly.jsp?d=115&a​ =3578>. Public Health Agency of Canada [PHAC] (1999). Thimerosal in Vaccines. Canada Communicable Disease Report. <http:// w w w.phac-aspc.gc.ca/publicat/ccdrrmtc/99vol25/25sup/acs7.html>. Public Health Agency of Canada [PHAC] (2007). Thimerosal: Updated Statement. Canada Communicable Disease Report. <http://www.phac-aspc.gc.ca/publicat/ ccdr-rmtc/07vol33/acs-06/index-eng. php>. Schechter, Robert, and Judith K. Grether (2008). Continuing Increases in Autism Reported to California’s Development Services System. Archives of General Psychiatry 65, 1: 19–24. <http://archpsyc. ama-assn.org/cgi/content/full/65/1/19>. ScienceDaily (2009, May 27). Lessons from the Vaccine-Autism Wars. <http://www. sciencedaily.com/releases/2009/05/ 090526202720.htm>. Shattuck, Paul T. (2006). The Contribution of Diagnostic Substitution to the Growing Administrative Prevalence of Autism in US Special Education. Pediatrics 117, 4 (April). <http://pediatrics. aappublications.org/cgi/content/abstr act/117/4/1028>. Singh, G.K., and S.M. Yu (1995). Infant Mortality in the United States: Trends, Differentials, and Projections, 1950 through 2010. American Journal of Public Health 85, 7 (July). <http://www. pubmedcentral.nih.gov/articlerender. fcgi?artid=1615523>. US Department of Health and Human Services (2009). Court Says Vaccine Not the Cause of Autism. HealthDay News. <http://tinyurl.com/DHHS2009>. Wakefield, A.J. et al. (1998). Ileal-lymphoidnodular Hyperplasia, Non-specific Colitis, and Pervasive Developmental Disorder in Children. The Lancet 351, 9103: 637–41. World Health Organization (2008). Measles: Key Facts. <http://www.who.int/ mediacentre/factsheets/fs286/en/index. html>. 

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Time to trim spending Restraint would allow BC to implement tax relief Niels Veldhuis & Charles Lammam Fresh off winning an election, the BC Liberals are now facing their first major political and economic challenge. The BC deficit is quickly heading in the same direction as the federal government’s: significantly upward. Estimates from respected private sector economists are now putting BC’s deficit at between $1.5 and $2.0 billion, up from the $495 million originally forecasted (Karp and Fowlie, 2009, May 26). The Liberals must now take action to address the growing deficit. A fiscally prudent course would be to trim government spending. Of course, some will simply blame the government for being too optimistic in its budget projections. This is certainly the case with price projections for commodities such as natural gas, oil, and forest products, which affect government revenues from natural resources. Natural resource revenues alone are estimated to account for 9.5% of total revenues this year (2009/2010) (BC, Ministry of Finance, 2009). Even a slight change in commodity prices can have a big impact on government revenues. For example, the government estimates that a $1.00 per MMBtu decrease in the price of natural gas could reduce revenues—and thus increase the deficit—by $275 to $325 million (British Columbia, Ministry of Finance, 2009). While the government projected that the price of natural gas

would be $5.96 per MMBtu in 2009, the average price since the budget was delivered in February has been $3.37 (Terasen Gas, 2009).1 With respect to economic growth forecasts, the government was rather conservative. In February, the average real economic growth rate estimated by the government’s Economic Forecast Council (12 private sector forecasters consisting of large Canadian banks and research firms) was 0.0% (no economic growth) in 2009 (British Columbia, Ministry of Finance, 2009). The government, however, actually used a more conservative estimate when formulating the budget: –0.9% growth for 2009 (British Columbia, Ministry of Finance, 2009). BC’s economy is now expected to perform even worse than the government expected. Updated forecasts by major Canadian banks and research firms predict an average economic contraction of 1.6% this year—nearly twice the contraction the government predicted.2 This larger than expected contraction will result in reduced revenues and a larger fiscal hole. Naturally, many are wary of returning to deficit budgets after a long battle to wean politicians off them. British Columbians, and indeed all Canadians, have benefited greatly from fiscal prudence through balanced budgets and reductions in government spending (as a percentage of GDP) over the years. However, the notion that balanced budgets are the be-all and end-all should

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Time to trim spending be dispelled. Temporary (cyclical) deficits are acceptable as long as spending is restrained or pared down. If spending is restrained, then the budget will eventually return to balance or surplus when the economic slump passes. Most Canadian governments, however, are increasing rather restraining spending, mostly in the name of “temporary” economic stimulus. Unfortu-

entrepreneurship, which would help the economy recover sooner and grow more later. Despite the rhetoric of activists and media pundits, spending can be reduced without adversely affecting British Columbians. The experience of other countries demonstrates that health care, education, and other government services could be vastly im-

Estimates from respected private sector economists are now putting BC’s deficit at between $1.5 and $2.0 billion, up from the $495 million originally forecasted. nately, a great deal of this “temporary” spending will likely become the baseline for future budgets and result in a permanent increase in future government spending. While the expected 2.4% increase in 2009/2010 program spending in British Columbia pales in comparison to the increases planned by many other Canadian governments (federal and provincial), the spending growth will make it more difficult for BC to return to balanced budgets. BC should follow the lead of the provinces that are scaling back their spending. For example, Alberta plans to decrease program spending by 1.8% in 2009/2010, while Saskatchewan plans a 0.7% reduction (Alberta, Ministry of Finance and Enterprise, 2009; Saskatchewan, Ministry of Finance, 2009). By reducing spending, the BC government would ensure that the budget returns to balance. In addition, spending reductions would provide the resources necessary for the government to implement tax relief aimed at improving incentives for investment and

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proved through program reform despite spending reductions (for example, see Esmail and Walker, 2008, on health care reforms). Difficult economic times require difficult decisions. Let’s hope the provincial government follows the lead of BC families and businesses and trims its spending.

Notes 1 This average includes the most recent data available on natural gas prices from Terasen Gas’ daily price index archive, which was current to May 31, 2009 at the time of writing. 2 –1.6% is an average of private sector forecasts for real GDP growth in 2009 by Scotia Economics (2009), BMO Capital Markets (2009), RBC Economics Research (2009), TD Economics (2009), and CIBC World Markets (2009). These forecasts are –1.9%, –2.5%, –1.5%, –1.7%, and –0.6%, respectively.

References Alberta, Ministry of Finance and Enterprise (2009). Budget 2009: Building

on Our Strengths: Fiscal Plan Tables. Government of Alberta. <http://www. finance.alberta.ca/publications/budget/ budget2009/fiscal_tables_charts.pdf>. BMO Capital Markets (2009). Provincial Economic Outlook: May 15, 2009. <http:// www.bmonesbittburns.com/economics/ forecast/prov/ProvincialOutlook.pdf>, as of May 20, 2009. British Columbia, Ministry of Finance (2009). Budget and Fiscal Plan 2009/10 – 2011/12. Government of British Columbia. <http://www.bcbudget.gov.bc.ca/2009/ bfp/2009_Budget_Fiscal_Plan.pdf>. CIBC World Markets (2009). Provincial Forecast Update (February 17, 2009). <http://research.cibcwm.com/economic​ _public/download/provl_gdp_fore​c ast_ feb09.pdf>. Esmail, Nadeem, and Michael Walker (2008). How Good is Canadian Health Care? 2008 Report. Fraser Institute. Karp, David, and Jonathan Fowlie (2009, May 26). BC Deficit could Reach $2 billion. Vancouver Sun. <http://www.van​ couversun.com/Business/deficit+could+ reach+billion/1633127/story.html>. RBC Economics Research (2009). Provincial Outlook: March 12, 2009. Royal Bank of Canada. <http://www.rbc.com/ economics/quicklink/pdf/provtbl.pdf>. Saskatchewan, Ministry of Finance (2009). Saskatchewan Provincial Budget 09-10: Saskatchewan Strong and Steady: Estimates. <http://www.finance.gov.sk.ca/ budget2009-10/Budget200910Estimates. pdf>. Scotia Economics (2009). Provincial Trends: March 17, 2009. Scotiabank Group. <http://www.scotiacapital.com/English/ bns_econ/ptrends.pdf>. TD Economics (2009). Provincial Economic Forecast: March 17, 2009. TD Bank Financial Group. <http://www.td.com/ economics/qef/prov0309.pdf>. Terasen Gas (2009). Daily Price Index Archive. <http://www.terasengas.com/Business/​ PriceAndMarketInformation/PriceInfo​ rmation/DailyPriceIndexArch​ive.htm>, as of June 16, 2009. 

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Protection against profligate government Canadians should look to tax and expenditure limitation laws Niels Veldhuis, Milagros Palacios, & Amela Karabegović In an effort to ward off Liberal leader Michael Ignatieff ’s push for more “stimulus” spending via the employment insurance system, Finance Minister Jim Flaherty recently warned that the 2009 federal deficit will be significantly larger than originally thought (Vieira, 2009, May 27). It would seem that a deficit approaching the psychological barrier of $50 billion may finally help the Conservatives avoid new spending initiatives (Canada, Department of Finance, 2008). But has it really come to this? The Conservative government that came into office committed to limiting the growth of government spending has decided to hit the spending brakes only because it is facing the possibility of a “record” deficit. Unfortunately, the federal Conservatives are not alone. Federal and provincial governments of all political stripes have had a difficult time controlling spending. When the economy was booming and revenues were flowing into government coffers, nearly all Canadian governments went on a spending spree (table 1, figure 1). Indeed, the primary reason why most governments are now facing deficits is that they failed to restrain spending during the economic boom; these deficits are not the result of a revenue problem. The growth in federal and provincial government spending in recent years is startling. Over the past five years (2003-

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2008), average annual increases in government program spending have ranged from a low of 3.6% in Prince Edward Island to an astounding 11.4% in Alberta. The federal government averaged 6.2%. Over this period, every Canadian government—federal and provincial— increased spending at a substantially higher rate than what was needed to compensate for inflation and population growth. Even more worrying, most governments increased program spending faster than the rate of economic growth (GDP). In fact, only four Canadian provinces—British Columbia, Saskatchewan, Prince Edward Island, and Newfoundland and Labrador—have managed to limit program spending to less than the rate of growth in the economy. All of the above examples make it abundantly clear that Canadians need constitutional protection from profligate governments. That protection would best be provided by tax and expenditure limitation laws (TELs). Tax and expenditure limitation laws are spending rules that constrain the spending and revenues of governments. Such rules would ensure that government revenue and spending do not increase faster than a predetermined rate (i.e., inflation plus population growth), unless specifically approved by referendum. Tax and expenditure limitation laws have been successfully implemented in many US states. And while the ultimate effect the laws have depends heavily on

their design and implementation, research shows that, in general, they are effective at restraining growth in the size of government and ensuring fiscal discipline (Clemens et al., 2003). TELs in the United States have increased government accountability and have forced governments to prioritize spending. Furthermore, TELs effectively tie the hands of future governments when dealing with special interest groups looking for government funding. To be truly effective, TELs must be constitutional in status. Statutory laws, such as Ontario’s Taxpayer Protection Act, can simply be changed or eliminated at the whim of a subsequent government. In fact, this is precisely what the Ontario government did back in 2003 (Clemens et al., 2003). More recently, the BC Liberals amended BC’s balanced budget law, the Balanced Budget and Ministerial Accountability Act, in order to run budget deficits. Constitutionally entrenched TELs are more difficult to change than statutory laws and do not afford governments the chance to opportunistically alter laws when circumstances change. While Canadian provinces do not have independent, stand-alone constitutions as the US states do, there are options available to the provinces to amend the national constitution in such a way as to affect only a single province (i.e., bilateral amendments under section 43 of the Constitution Act). Without tax and expenditure limitation laws, we will continue to have governments that have grown so accus-

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Tax and expenditure limitation laws Table 1:  Government program spending, 2003/2004 to 2008/2009 Average annual population plus inflation growth

Average annual GDP growth

Average annual program spending growth

NL

1.7%

11.8%

4.6%

PEI

3.0%

4.4%

3.6%

NS

2.3%

3.5%

7.7%

NB

1.7%

4.1%

5.7%

QC

2.6%

3.8%

4.8%

ON

3.0%

3.6%

6.6%

MB

3.0%

6.3%

6.7%

SK

2.9%

12.1%

9.9%

AB

5.7%

11.4%

11.4%

BC

3.0%

6.5%

5.3%

Federal

3.1%

5.7%

6.2%

Sources:  Provincial Public Accounts (2003 to 2008); Provincial Budgets (2003 to 2008); calculations by the authors.

Figure 1:  Government program spending, 2003/2004 to 2008/2009 Average annual population plus inflation growth

NL

Average annual program spending growth

PEI NS NB QC ON MB

References

SK

Alberta (2009). Budget 2009: Building Our Strength. Government of Alberta <http://budget2009.alberta.ca/>.

AB BC Federal 0%

2%

4%

6%

8%

10%

12%

Sources:  Provincial Public Accounts (2003 to 2008); Provincial Budgets (2003 to 2008); calculations by the authors.

28

tomed to spending increases that they are unwilling to constrain spending even in the face of plummeting revenues. Only Alberta (-1.8%) and Saskatchewan (-0.7%) are planning small reductions in program spending this year (Alberta, 2009; Saskatchewan, Ministry of Finance, 2009). Most Canadian governments are ratcheting up spending to even higher levels. Newfoundland and Labrador is leading the charge (a 12.8% increase in 2009/2010), followed by Ontario (12.6%), and the federal government (10.8%) (Newfoundland and Labrador, 2009; Ontario, Ministry of Finance, 2009; Canada, Department of Finance, 2009). And despite the “stimulus” rhetoric, the increased spending will do little, if anything, to increase economic growth. What past and planned spending increases will do is significantly increase the debt burden and the accompanying interest payments, likely resulting in higher taxes in the future. The lesson for Canadians is that fiscal prudence should not be left to the discretion of spendthrift politicians. After years of significant spending increases, Canada’s federal and provincial governments need to restrain spending. To that end, Canadians should look to tax and expenditure limitation laws. TELs would lay the foundation for reasonable levels of government spending and protect Canadians against future profligacy.

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Balanced Budget and Ministerial Accountability Act, S.B.C. 2001, c. 28. <http:// tinyurl.com/BBMAact>. British Columbia, Ministry of Finance (2009a). Budget and Fiscal Plan 2009/10 – 2011/12. Government of British Columbia. <http://www.bcbudget.gov.

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bc.ca/2009/bfp/2009_Budget_Fiscal_ Plan.pdf>. Canada, Department of Finance (2008). Fiscal Reference Tables: September 2008. Government of Canada. <http://www. fin.gc.ca/toc/2008/frt08_-eng.asp>. Canada, Department of Finance (2009). Canada’s Economic Action Plan: Budget 2009. <http://www.budget.gc.ca/2009/ home-accueil-eng.asp>. Clemens, Jason, Todd Fox, Amela Karabegović, Sylvia LeRoy, and Niels Veldhuis (2003). Tax and Expenditure Limitations: The Next Step in Fiscal Discipline. Fraser Institute. Manitoba (2009). Manitoba Budget 2009. Government of Manitoba. <http://www. gov.mb.ca/f inance/budget09/index. html>. New Brunswick, Department of Finance (2009). 2009-2010 Budget. <http://www. gnb.ca/0024/index-e.asp>. Newfoundland and Labrador (2009). Budget 2009: Building on Our Strong Foundation. Government of Newfoundland and Labrador. <http://www.budget.gov.nl.ca/bu dget2009/>. Nova Scotia, Ministry of Finance (2009). Nova Scotia Budget 2009-2010. Government of Nova Scotia. <http://www.gov. ns.ca/finance/en/home/budget/default. aspx>. Ontario, Ministry of Finance (2009). 2009 Ontario Budget. Government of Ontario. <http://www.fin.gov.on.ca/english/bud get/ontariobudgets/2009/>. Prince Edward Island (2009). 2009 Provincial Budget. Government of Prince Edward Island. <http://www.gov.pe.ca/ budget/2009/index.php>. Quebec, Ministry of Finance (2009). 2009 Budget. Government of Quebec. <http:// www.budget.finances.gouv.qc.ca/Bud get/2009-2010/index_en.asp>. Saskatchewan, Ministry of Finance (2009). Budget 2009-10. Government of Saskatchewan. <http://www.finance.gov.sk. ca/budgetday>. Vieira, Paul (2009, May 27). Flaherty Sees Deficit Rising to $50-billion. National Post. 

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A tax proposal that should not fall flat Niels Veldhuis Canadian governments looking for ways to improve the economy would do well to consider Ontario Progressive Conservative (PC) leadership candidate Christine Elliott’s bold plan to implement an 8% flat tax should she be elected premier (Elliott, 2009). Ironically, Elliott’s husband is federal finance minister Jim Flaherty, whose government has favoured reductions in the GST over personal income tax cuts. Indeed, Minister Flaherty should take a page from Elliott’s policy playbook. By removing the current tax penalty on success, a flat tax would revolutionize Canada’s tax system and unleash the efforts of hardworking and entrepreneurial Canadians. It is important to understand that replacing multiple personal income tax rates with a single rate, as Elliott proposes, is only one step towards an integrated flat tax. A true flat tax is an integrated approach to taxation that applies a uniform tax rate to all sources of income, personal and business. In addition, an integrated flat tax would dramatically simplify the tax system by eliminating nearly all deductions, exemptions, and credits that complicate the existing system. The flat tax discussed here relates to a single rate income tax. Currently, all of Canada’s governments, federal and provincial (with the

Further Reading:

exception of Alberta), maintain graduated or “progressive” personal income tax rates. For example, Ontario has five income tax brackets starting at 6.05% for incomes up to $36,848 and increasing to 17.4% for incomes over $76,442. The federal government maintains four income tax brackets, starting at 15% for incomes up to $38,832 and increasing to 29% for incomes over $126,264 (CRA, 2009). Graduated income tax rates create strong disincentives for people to work hard, save, invest, and engage in entrepreneurial activities. To understand how progressive tax rates act as a disincentive for Canadians to become more successful, it is useful to think of how progressive fines are used to curb fast driving. Speeding tickets are more costly depending on how high above the posted limit we drive, and are meant to discourage excessive speeding. While that is certainly not the intention, progressive income tax rates have the same effect in that they discourage hard work and success. When individuals make decisions to increase their incomes through working harder or longer, increasing their savings and investments, or starting their own business, their marginal tax rate (the tax rate they pay on the next dollar they earn) influences their behaviour. The more governments take of every additional dollar that someone earns, the

The Impact and Cost of Taxation in Canada: The Case for Flat Tax Reform edited by Jason Clemens Available at www.fraserinstitute.org.

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A flat tax proposal less likely people are to engage in efforts to earn more. Academic research overwhelmingly shows that when tax rates increase as individuals earn more money through hard work and success, they act as a disincentive for those activities (Palacios and Harischandra, 2008). Interestingly, the destructive impact of Canada’s graduated personal income tax rates has not been lost on consecu-

means that the share of income one pays in taxes increases as one earns more income. To achieve progressivity, it is not necessary to have increasing personal income tax rates. Consider Elliott’s plan, which would result in a single tax rate of 8%, applicable to all income over $18,000, her proposed personal basic exemption (the amount of income one can earn taxfree). An individual earning $30,000 in

When tax rates increase as individuals earn more money through hard work and success, they act as a disincentive for those activities. tive federal governments, both Liberal and Conservative. In 2005, then Prime Minister Paul Martin’s economic plan, A Plan for Growth and Prosperity, proclaimed that “Lower personal taxes would also provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest” (Canada, Department of Finance, 2005). Similarly, current Prime Minister Stephen Harper’s economic plan, Advantage Canada, stressed that “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” (Canada, Department of Finance, 2006). Unfortunately, despite their lofty rhetoric, neither the Martin-led Liberals nor Harper-led Conservatives have moved to reduce middle and upper personal income tax rates. This may be the result of pressure from social activists who oppose flat taxes on the grounds that it is only fair that the tax system be progressive. Unfortunately, these activists confuse increasing personal income tax rates with progressivity. Progressivity simply

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Ontario would only be taxed on $12,000 ($30,000 minus the $18,000 exemption) and pay $960 in income tax for an average rate of 3.2%. An individual who makes $100,000 would be taxed on $82,000 and pay $6,560 in tax for an average rate of 6.6%. Because the personal exemption constitutes a much higher portion of income for the individual making $30,000, a much smaller portion of their total income is subject to tax. As a result, introducing a single rate income tax would remove a significant barrier to success and keep the tax system progressive. Thankfully, some provinces are making progress to reduce middle and upper personal income tax rates. Alberta has benefited greatly from its 10% single rate personal income tax. Most recently, New Brunswick introduced a plan to replace its four tax brackets with just two rates of 9% on income less than $37,893 and 12% on income above that amount (Veldhuis et al., 2009). Ontario, however, is a different story. Shortly after coming to power in 2003, the McGuinty government increased personal income taxes by introducing the Ontario Health Premium and can-

celled the planned elimination of the personal income surtax. While the 2009 Ontario budget demonstrated that the McGuinty government has finally realized the harmful effects of high and increasing taxes, the budget failed to reduce middle and upper personal income tax rates (Lammam and Veldhuis, 2009). Regardless of the outcome of the Ontario PC leadership race, Ontario—and indeed the federal government—should implement a single rate personal income tax. Doing so would provide true stimulus for wealth creation now and in the future.

References Canada, Department of Finance (2005). A Plan for Growth and Prosperity. Government of Canada. Canada, Department of Finance (2006). Advantage Canada: Building a Strong Economy for Canadians. <http://www. fin.gc.ca/ec2006/plan/pltoce.html>. Canada Revenue Agency [CRA] (2009). What Are the Income Tax Rates in Canada for 2009? Government of Canada. Last updated February 13, 2009. <http:// www.cra-arc.gc.ca/tx/ndvdls/fq/txrtseng.html>. Elliott, Christine (2009). The Elliott Flat Tax: Simply Better. News release (May  7). <http://www.votechristine.ca/ site/2009/05/07/the-elliott-flat-tax-sim ply-better/>. Lammam, Charles, and Niels Veldhuis (2009). Ontario’s U-turn on Tax Policy. Fraser Forum (May): 26–28. Palacios, Milagros, and Kumi Harischandra (2008). The Impact of Taxes on Economic Behavior. In Jason Clemens (ed.), The Impact and Cost of Taxation in Canada: The Case for Flat Tax Reform (Fraser Institute): 3–31. Veldhuis, Niels, John Williamson, and Milagros Palacios (2009). New Brunswick’s Pro-growth Plan. Fraser Forum (May): 11–13. 

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Measuring Parliament’s attitude towards Canada-US cooperation Many MPs decry closer relations Alexander Moens & Nachum Gabler

cooperate on homeland security measures and border controls.

Many observers of Canada’s relationship with the United States consider the post-9/11 era a period of divergence between the Canadian and American governments (Rempel, 2006; Haglund, 2004). Though their disagreements were numerous, the more prominent disputes between two governments included softwood lumber exports, missile defence, and the American-led effort in Iraq (Reed, 2001; Rudd, 2005). The rhetoric coming from many public officials during this period, which could be characterized as blatantly hostile, did nothing to improve matters (Richter, 2005). This state of affairs should trouble Canadians as our country derives a large part of its prosperity from a constructive trade relationship with the United States. In 2007, 40% of Canada’s GDP was generated through bilateral trade with the United States (Canada, DFAIT, 2008). During the past eight years, roughly 80% of Canadian exports went to the American market (Statistics Canada, 2009). This trade was dispersed among several important industries including energy, minerals, and manufactured goods (US Department of Energy, 2007). The United States is also Canada’s key partner in defence and security. A central aspect of this partnership is their joint effort through NATO to bring stability to Afghanistan. The two countries also

Assessing the attitudes of MPs

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Given the importance of this bilateral relationship, we believe it is essential to analyze the attitudes expressed by Ca-

to the theme of relations or cooperation between Canada and the United States. We found 918 such mentions or references in the years 2002 to 2008. We then prepared coding criteria for evaluating expressed sentiment that utilized a three-point scale. A comment that expressed support for increased coopera-

The Liberal Party tended to be predominantly positive in its attitude towards cooperation with the United States from 2002 until 2005. However, in 2006, there was a major change … nadian politicians—particularly those at the federal level—towards cooperation with the United States. In a recent study published by the Fraser Institute, we developed a method to gauge the extent to which parliamentarians condone or condemn increased cooperation with the United States (Moens and Gabler, 2009). This study made use of a methodology known as content analysis. Content analysis is a collection of tools used in the study of communication that objectify, systematize, and quantify content in its appropriate context (Berelson, 1952). We began by reviewing the Hansard transcripts (the official record of parliamentary debate) and recording all passages that contained a material reference

tion with the United States was scored as positive while a comment that opposed increased cooperation received a negative score. Ambiguous or marginal comments were scored as neutral. This criteria was used to score all 918 debate references. Following this, an assessment of a random sample of references (265) was undertaken by a panel of four independent judges made up of political science students at Simon Fraser University. The purpose of having independent judges was to ensure objective scoring of the debates and to determine whether the scoring criteria was free from bias and subjectivity. Using the results of the judges’ evaluation, we were able to compute the degree of agreement among the

Fras e r Forum   07/0 9

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Canada-US cooperation

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Fras e r Forum   07/0 9

negative score jumped from approximately 15% to over 70%. However, by 2008, much of this antagonism subsided and the negative scores fell to nearly the same levels as in 2003.

The attitudes of parties The Liberal Party tended to be predominantly positive in its attitude towards cooperation with the United States from 2002 until 2005 (figure 2). However, in 2006, there was a major change in Liberal attitudes as demonstrated by a sharp rise in negative scores that reached 50% in 2006 and peaked at 59% in 2007. By 2006, the attitude of Liberal parliamentarians towards cooperation with the United States on all policy issues appears to have been resoundingly negative. The most important trend that we observed in the Liberal comments was the nearly inverse rela-

tionship between positive and negative comments. It appears that the support for Canada-US cooperation observed in the pre-2006 period of the study gave way to a more critical attitude in the post-2006 period. The Conservative Party of Canada (CPC), on the other hand, rarely showed any negativity towards cooperation with the United States. The CPC registered an overall positive score of 75% in 2003, appearing to indicate overwhelming support for cooperation (figure 3). Thereafter, the high overall positive scores dropped somewhat, falling to 45% in 2006. The CPC’s ongoing support for cooperation was also evidenced by its consistently low negative scores, which never rose above 11%. In contrast to the Liberals, the CPC offset its decline in positive comments with a corresponding increase in neutral comments.

Figure 1:  All comments made in Parliament, on all categories, by ranking, 2002/2003 to 2008 80

Positive Neutral Negative

70 Percentage of all comments

scores and the level of confidence in the results. The sample data showed that the master copy did produce an objective and replicable scoring of the parliamentary debates. To help organize the results, we divided the segments of debate into three issue categories: trade and economy, borders and security, and political relations. We also analyzed the data by political party. We found that the greatest show of support for more or better cooperation between Canada and the United States occurred between 2002 and 2005 (figure 1). It appears that the decline in parliamentary attitudes towards Canada’s relationship with the United States did not actually take place until 2006. We observed a marked deterioration in 2006 and high negative scores in 2007, with a slight recovery in 2008. 2006 was the year in which the most antagonism towards cooperation was expressed. It appears as though the views of the relationship were most strained in 2006 and not in 2003, as the conventional wisdom suggests. 2008 appears to be an outlier, though we will only be certain about this in the course of time. Neutral scores among all parties were abnormally high. We suspect that the economic turbulence has taken Parliament’s focus off the Canada-US relationship. Our analysis of parliamentarians’ attitudes in terms of important issues— border and security, trade and economy, and political relations—showed that negative attitudes were most pronounced when matters concerning border and security and trade and economy were discussed. The positive scores associated with border and security issues began to decline in 2005, while the positive scores associated with trade and economy issues gave way to negative scores in 2006. One startling observation was the spike in negative comments concerning general political relations in 2006. The

60 50 40 30 20 10 0

2002/03

2004

2005

2006

2007

2008

Source:  Moens and Gabler, 2009.

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Canada-US cooperation Figure 2:  Comments made by Liberal MPs, on all categories, by ranking, 2002/2003 to 2008 80

Positive Neutral Negative

Percentage of all comments

70 60 50 40 30 20 10 0

2002/03

2004

2005

2006

2007

2008

Source:  Moens and Gabler, 2009.

Figure 3:  Comments made by Conservative MPs, on all categories, by ranking, 2002/2003 to 2008 80

Positive Neutral Negative

Percentage of all comments

70 60 50 40 30 20 10 0

The final observable trend pertains to the New Democratic Party (NDP) and the Bloc Québécois. Those two parties displayed consistent views against more or better cooperation with Canada’s southern neighbour. The NDP’s unwaveringly negative sentiment never fell below 74% between 2002 and 2007. Likewise, the Bloc’s negative scores varied between 60% and 75%. Both the NDP and the Bloc rejected more cooperation with the United States, regardless of the issue being discussed or which party was in government. Without the responsibilities of governing or holding the official opposition, the NDP and the Bloc could both afford to be less cautious when discussing cooperation with the United States.

Hot button issues We did a final check of our results by counting the frequency of “hot button” words. We found that, apart from 2008, the most frequently mentioned words were “border” and “softwood lumber.” The consistency with which these words remained at the forefront of debate suggests that the variation in sentiment that we observed over the period of our study—and in 2006, in particular— could not have been driven by a change of issues. Rather, we can infer that there could only have been a change within these issues or a change in a party’s attitude towards these issues. We also ruled out the Liberal Party’s change in leadership from Jean Chrétien to Paul Martin as a cause of the party’s negative scores, as that change took place in 2004. Stéphane Dion became leader in December 2006, but the scoring changed earlier in 2006.

Conclusion 2002/03

2004

Source:  Moens and Gabler, 2009.

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2005

2006

2007

2008

Overall, our study revealed parallel trends across all three major issues of discussion and “hot button” topics. The

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33


Canada-US cooperation overall positive scores consistently declined as criticism of Canada’s relationship with the United States increased. The results showed that the Liberal Party was actually quite supportive of cooperation until 2005, with positive scores above 50%. The study also revealed that both the NDP and the Bloc consistently pushed for a different approach to Canada-US relations. Finally, the Tories appeared most inclined towards cooperation with the United States. The best interpretation of the results is that the Liberals changed their attitude towards the United States as a result of their becoming the Official Opposition. Their changed score coincides

directly with the Conservative Party coming to power in early 2006. Unlike the Tories or the smaller parties, the Liberals appear to be the only party willing to use Canada-US relations as a tactical issue to advance their political status. Of course, these conclusions are tentative and would benefit from more testing with data other than content analysis. Besides measuring an important area of Canada-US relations, our study offers Canadians tangible data by which to hold their representatives accountable for how they define Canada’s approach to the United States. We found that many parliamentarians either decried more and better cooperation with the

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United States or were prepared to use Canada’s relationship with the US as a strategic political tool. These sentiments should be of concern to Canadians.

References Berelson, B. (1952). Content Analysis in Communications Research. Free Press. Canada, Department of Foreign Affairs and International Trade [C-DFAIT] (2008). Trade and Economic Analysis. <http:// www.international.gc.ca/eet/merchan dise-trade-en.asp>, as of October 24, 2008. Haglund, David G. (2004). Whose Divergence? Canada-US Relations in a Period of Jacksonian Ascendency. Policy Options 25, 9 (October): 34–40. Moens, Alexander, and Nachum Gabler (2009). Measuring Parliament’s Attitude Towards Canada-US Cooperation. Fraser Institute. Reed, Les (2001). Two Centuries of Softwood Lumber War Between Canada and the United States. The Free Trade Lumber Council. Rempel, Roy (2006). Dream Land: How Canada’s Pretend Foreign Policy Has Undermined Sovereignty. McGill-Queen’s University Press. Richter, Andrew (2005). From Trusted Ally to Suspicious Neighbors: Canada-US Relations in a Changing Global Environment. The American Review of Canadian Studies (Autumn): 471–502. Rudd, David (2005). Muddling Through on Missile Defense: The Politics of Indecision. Policy Options 26, 4 (May): 30–34. Statistics Canada (2009). Imports, Exports and Trade Balance of Goods on a Balance-of-Payments Basis, by Country or Country Grouping. <http://www40.stat can.gc.ca/l01/cst01/gblec02a-eng.htm>, as of April 9, 2009. US Department of Energy (2007). Annual Energy Outlook 2008 (Early Release). <http://www.eia.doe.gov/oiaf/archive/ earlyrelease08/production.html>, as of April 27, 2009. 

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In Closing

Is free trade with the European Union on the horizon? This June, Canadian Ambassador to the European Union Ross Hornby spoke at a Fraser Institute event in Vancouver. Following his speech, he sat down with Fraser Forum editor Kristin Fryer to talk about Canada’s prospects for a free trade agreement with the European Union.

Fraser Forum: This May, Canada and the European Union launched formal free trade negotiations. What impact would a free trade agreement with the EU have on Canada? Ross Hornby: First of all, it will give Canadians and Canadian businesses greater opportunities to diversify their markets. There should be growth in our trade and greater flows of investment. And this applies to both goods and services. FF: In addition to increased trade, do you think a free trade agreement would lead to increased labour mobility? RH: We would like the agreement that we hope to negotiate to deal with issues around labour market mobility and, in particular, to look at the very complicated issue of recognition of credentials so that qualified workers from Europe can work in Canada without having to re-qualify and vice versa. We think this will help facilitate both temporary business travel and also recruitment by Canadian companies who are facing skilled [worker] shortages. FF: Obviously, the EU offers Canada a significant economic opportunity. What does Canada have to offer the EU? RH: The European Union is interested in increasing their exports to Canada, both in terms of goods and services. They are particularly interested in getting bigger access to procurement markets by public authorities in Canada, both at the federal and the provincial level. They have a number of issues that they are looking for with respect to intellectual property enforcement. And they, like Canada, are interested in showing the world that even in a time of economic crisis, two major trading blocks can move forward on liberalizing trade and eliminating barriers.

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FF: Canada’s vast energy reserves make us an attractive trading partner for the United States. Do you think that this is a major attraction for the EU as well? RH: The EU is interested in Canada’s energy reserves. European companies are big investors in Canada, both in conventional and non-conventional resources like the oil sands. They are interested in continuing that investment. We don’t export oil or gas directly to the European Union at the current time, and they’re tied in to markets in Eastern Europe—most notably, to Russia. But they do have common interests with Canada in ensuring transparency in international energy markets and making sure that market principles apply to this business. FF: What barriers stand in the way of establishing a free trade agreement with the EU? RH: The EU has a very complex regulatory structure and it establishes standards that frequently become the world standard. There’s a transactional cost for companies to change their production or their practices to meet those standards. We’re

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FF: During your talk today, you spoke about the issue of interprovincial trade barriers. Do you think these barriers are a concern for the EU? RH: Yes. Some of the interests of the European Union relate to matters falling under provincial jurisdiction, and so the European side is interested in making sure that the provinces are engaged in the process and willing to accept a reduction of certain barriers. In order to achieve this, the federal government has taken unprecedented steps to engage the provinces in this negotiation; to make sure that they are partners with the federal government in establishing and negotiating an agenda with the Europeans, and in dealing with the issues that fall under their jurisdiction directly. FF: In order to come to an agreement, what changes or concessions will Canada have to make? What changes or concessions will Europe have to make? RH: We both have tariff barriers that we will have to eliminate or reduce. At the same time, we have tough issues that we’ll have to make progress on. There’s going to be a very intense period of negotiation. FF: You mentioned in your speech today that Jean Charest, premier of Quebec, has been a strong, vocal supporter of a free trade agreement with the EU. How will Quebec, in particular, benefit from a free trade agreement with the EU? RH: I have spoken about this with Premier Charest and I know that he has been in touch with the prime minister [Stephen Harper] and the minister of international trade, Mr. Day. I think Quebec likes to see itself as the doorway to North America for Europe. Quebec has a very strong relationship with various European markets and it sees this free trade agreement as being a way to strengthen these relationships and make the Quebec economy more dynamic. FF: Canada and the EU hope to have an agreement in place in two years. Do you think this timeline is realistic? RH: Two years is an ambitious timeline for a negotiation of this complexity. But at the same time, we believe that if we work

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The European Union is Canada’s #2 trade partner

Canada-EU trade facts, 2008

hoping that our agreement, which will include a chapter on regulatory cooperation, will be able to diminish some of the regulatory burden that exists between our businesses trading into the European Union and vice versa. This should help liberalize the whole relationship.

Exports to EU worth $36.1 billion Services receipts worth $13 billion Direct investment stocks in the EU worth $136.6 billion

Canada is the European Union’s #11 trade partner Exports to Canada worth $54.0 billion Services receipts worth $15.6 billion Direct investment stocks in Canada worth $133.3 billion

GDP of the EU

US$18.85 trillion (est.)

GDP of Canada US$1.56 trillion (est.)

hard, it’s realistic. We know what the issues are and we know what the possible solutions are, too. Having a two-year timeframe keeps pressure on our negotiators to deliver a deal to our political leaders so that if there are outstanding issues that need resolving then those can be resolved at that level. FF: In his latest book, Termites in the Trading System: How Preferential Agreements Undermine Free Trade, leading scholar on international trade and a major advocate of free-trade, Jagdish Bhagwati, gives a critical light on Preferential Trade Agreements (PTAs). Could the potential agreement between Canada and the EU be considered a PTA? RH: Trade academics usually prefer that major trading countries, like Canada and the EU, negotiate through the WTO, through the multilateral trading system [so that] the benefits are available to all parties to the WTO treaty. But the reality is, what we’re trying to do here is move beyond the disciplines of the WTO and actually move towards closer economic integration with the EU. And that means that—if these negotiations are successful—we will be taking on obligations that go beyond the requirements of the WTO. These [free trade] agreements, as we have seen in the case of NAFTA, can lead to a significant expansion of trade in goods and services and greater wealth creation for both parties. That’s what this is all about. It’s about creating opportunities for Canadians. 

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Fraser Forum - July/August 2009