Monday, June 13, 2016

The 2016 Morneau Budget

Over the past years, federal government transfers to households as a share of taxes it raises on income has fallen. This, in part, is due to the fall in unemployment. Compared to the earlier 1980s or the mid-1990s, a higher proportion of the labor force is earning income, paying taxes, and consequently receiving less transfers from the federal government [here]. But at the same time, income inequality is rising.

Federal Government Current Transfer to Households and Income Tax, Gross domestic product (GDP), Canada, 1981:Q1-2015:Q4
Federal Government Current Transfer to Households and Income Tax, Gross domestic product (GDP), Canada, 1981:Q1-2015:Q4

Ways of reducing income inequality is to ease the fiscal burden on the middle class and increase transfers to low-income households. That is what the government of Justin Trudeau has done in its 2016 budget. 
Among other things, the federal government
  • reduced the second personal income tax rate from 22 to 20.5 percent,
  • Improved the child benefits and employment insurance programs
These budget measures have impacts on growth. Everything else held constant, 
  • cutting income tax by one percentage point boosts growth by .05 percentage point and 
  • increasing transfers to households by one percentage point raises growth by .37 percentage point. 

The impact on growth of raising transfers is greater than that of cutting income tax because a larger number of households benefits from it whether they have a paid job or not.

Thanks to these budget measures, growth in Canada could be, this year, higher than expected. But my big worry is the CA$ 29.4 billion deficit occasioned without any plan of returning to a balanced budget in the near future. 


Friday, April 1, 2016

Unemployment in the Prairie Provinces

The collapse in the price of oil has caused an economic downturn in many provinces in Canada especially in the Prairies (Manitoba, Saskatchewan, and Alberta). Many businesses in the oil and related industries closed, people lost their jobs, and unemployment has risen.

The Prairie provinces used to have the lowest unemployment rates in Canada but this year unemployment rate in Alberta has gone above the national average. This has not been observed since December 1988. 

Unemployment Rates, Canada and the Provinces of the Prairies, 1981:M1-2016:M2

Unemployment in Alberta rose, in January this year, by 60.9% compared to January last year. In February, the year-to-year growth rate was 46.3%. 

Saskatchewan also experienced extremely high year-to-year growth in unemployment in the second half of last year. In July, last year, unemployment year-to-growth rate was 62.5%. 

But unemployment rate in Saskatchewan and Manitoba are still below the national average. A reason for that is in the importance of the oil and gas extraction industry in these economies. The average share of this industry is respectively 1.2%, 17.7%, and 27.8% in the economies of Manitoba, Saskatchewan, and Alberta. 

A way of reducing the vulnerability of the economy of Alberta is diversification.