By Fred McMahon
and Ben Eisen
The Fraser Institute
Canada ranks a remarkable fifth in the world in economic freedom, just behind Hong Kong, Singapore, New Zealand and Switzerland.
The “land of the maple leaf” is far ahead of our southern neighbour, supposedly the “land of the free.” The United States ranks 16th out of the 159 countries and territories measured, in the most recently available data from 2014, just released by the Fraser Institute.
Economic freedom is a core “Canadian value.” Canada has been in the top 10 since 1970, when the first measurements became possible. Canada’s success is deeply non-partisan and engrained in our character. We remained in the top 10 under Pierre Trudeau, the level of economic freedom increased under Prime Ministers Brian Mulroney and Jean Chretien. It declined slightly under Stephen Harper but never enough to threaten Canada’s position in the top 10.
Economic freedom is simply the ability of individuals and families to make their own economic decisions free of interference from overly ambitious government or crony capitalists – it’s arguably the best measure of the extent to which markets shape the economy.
Hundreds of fact-based research articles have used the Fraser measure to explore the effects of economic freedom. It has been found to promote growth and prosperity and other positive outcomes such as higher levels of tolerance and democracy – try to think of a prosperous economy (not based on oil wealth) or a stable democracy in a country without free markets.
Economic freedom remains a key ingredient to Canada’s long-term prosperity and success, and helped us rise quickly out of the financial crisis of 2008.
Typically, countries with high levels of economic freedom either suffered relatively little from the crisis, like Canada, or have made a strong recovery, like Ireland. Countries troubled by low levels of economic freedom such as Greece, Italy and Spain, suffered deep recessions and struggle to recover.
The mechanics of economic freedom are easy to understand. Any transaction must freely benefit all parties; transactions that do not benefit all parties are rejected by the party that believes it will come up short. This has consequences throughout the economy.
Consumers who are free to choose will only be attracted by superior quality and price. Producers must constantly improve price and quality to meet customer demands. Many billions of mutually beneficial transactions occur around the world every day, powering the dynamic that spurs increased growth, productivity and prosperity.
However, recent policy developments at the federal level as well as in Ontario and Alberta likely threaten Canada’s high level of economic freedom.
The federal government’s March budget projected that federal spending is growing quickly. In fact, between 2014/15 and 2017/18, spending is projected to increase by approximately 20 percent. That’s much faster than the expected rate of economic growth. That means more economic decisions made by politicians and public servants, and fewer freely made by consumers and businesses in private transactions.
Government spending has also been on the rise in Ontario for some time, with implications for economic freedom in that province. From 2003/04 to 2015/16, provincial program spending grew at an average annual rate of 4.7 percent. Compare that to the average annual rate of economic growth—3.2 percent.
In Alberta economic freedom is on the most rapid retreat. In addition to spending increases implemented by successive provincial governments, Alberta has dramatically increased the tax burden on residents and businesses over the past 18 months, taking money and economic decision-making power out of the private economy. The general corporate tax rate has increased by 20 percent, and the top personal marginal income tax rate has gone up by 50 percent. These increases come on top of a suite of other tax hikes (including excise taxes) and the planned increase to the province’s carbon tax.
Over the long-term, these developments may threaten a true Canadian value—the economic freedom of Canadian citizens.
Fred McMahon and Ben Eisen are analysts at the Fraser Institute.