This article was posted to a Canadian politics mailing list on May 29, 1997.
I hadn't paid much attention to Canada's economic numbers the past couple of years, so I made up for it by spending a few hours recently updating my spreadsheet and looking at what has happened. To summarize, it appears that Canada was experiencing the anticipated low-inflation recovery until uncertainty over the Quebec referendum kept interest rates up and hurt growth. However, interest rates have been dramatically cut since the referendum and the economy appears to be picking up steam.
Canada's GDP/capita was $26,625 in 1996, the second-best year ever (tops was $26,719 in 1989 (converted to 1996 dollars)).
GDP (Gross Domestic Product) is the sum of all goods and services produced in Canada in a given period. The recent history in GDP/capita is
1958-1981: up 3.0%/year
1981-1982: down 4.4%/year
1982-1989: up 2.9%/year
1989-1992: down 1.8%/year
1992-1996: up 1.3%/year
last 4 years: 1993: +0.8%, 1994: +3.0%, 1995: +1.1%, 1996: +0.3%
1996: Q1: +0.3%, Q2: +0.8%, Q3: +2.0%, Q4: +1.7%
(quarterly changes are annualized to be on same scale)
Growth slowed in '95 and '96, probably because of interest rates propped up by uncertainty over the Quebec referendum (more on that below). After the referendum, interest rates dropped below U.S. levels and the economy appeared to be picking up in the second-half of '96.
The number employed in Canada in 1996 was 13.676 million, the highest ever. The number employed full-time in 1996 was 11.087 million, the highest ever. (Yes, the population in 1996 was 29.964 million, also the highest ever, but I want to look at the absolute employment numbers first because some people think no new jobs are ever created.)
The recent history of full-time employment is
1976-1981: added 624 full-time jobs per day 1981-1983: lost 634 full-time jobs per day 1983-1990: added 661 full-time jobs per day 1990-1992: lost 629 full-time jobs per day 1992-1996: added 423 full-time jobs per day last 4 years (avg of year vs avg of previous year, divided by 365): full-time: 1993: +184/day, 1994: +715/day, 1995: +545/day, 1996: +245/day part-time: 1993: +293/day, 1994: + 41/day, 1995: + 44/day, 1996: +219/day
The last time part-time employment jumped (1993), the following year full-time employment jumped. Hopefully this will happen again.
Obviously it is not a jobless recovery, though job growth has been slower than in the past. Some people jump to conclude that the modern "high-tech" economic growth does not create as many jobs. It's important to notice that GDP growth itself has been slower than in the past (in part because of interest rates), so there's no evidence that the usual GDP-jobs link has been broken.
In the past 20 years, Canada's unemployment rate (averaged over a year) has never fallen below 7.5%. Low GDP growth led to it edging back up in 1996:
Unemployment Rates 1967-1976: 3.8 4.5 4.4 5.7 6.2 6.2 5.5 5.3 6.9 7.2 1977-1986: 8.1 8.4 7.5 7.5 7.6 11.0 11.9 11.3 10.5 9.6 1987-1996: 8.9 7.8 7.5 8.1 10.4 11.3 11.2 10.4 9.5 9.7
Canada's inflation rates are down to the levels of 1951-1965, when GDP/capita grew 2.5%/year and the unemployment rate averaged 4.8%:
Consumer Price Index 1951-1965: up 1.4%/year (high 3.2% in 1957, low -0.9% in 1953) 1965-1972: up 3.8%/year (high 4.7% in 1972, low 2.9% in 1971) 1972-1982: up 9.6%/year (high 12.4% in 1981, low 7.5% in 1976) 1983-1991: up 4.5%/year (high 5.7% in 1983, low 3.9% in 1985) 1991-1996: up 1.4%/year (high 2.1% in 1995, low 0.2% in 1994) last 5 years: 1992: 1.5, 1993: 1.8, 1994: 0.2, 1995: 2.1, 1996: 1.6
Official inflation rates are typically 1 to 2 points above the true inflation rate because such things as quality improvements and consumer shifts to lower-priced products are not completely taken into account. Canada has essentially "zero inflation" today.
In a zero inflation environment, market signals are not masked by frequent price changes, so it's harder for companies to put off making uncomfortable but important adjustments to changing realities. This makes it less likely catch-up periods (damaging recessions) will be needed later. Studies suggest that there is a correlation between the inflation rate and how severe the subsequent recession is (though it's not a perfect correlation because it is not the only factor).
Zero inflation was the intentional policy of the Bank of Canada, which raised interest rates a lot in the late 80's to slow down the economy before inflation spiralled like the late 70's. If it's true that an even more severe recession would have taken place later if the Bank had not acted in the late 80's, and if it's true that we will be spared severe recessions in the future, then this was the right policy.
Canada's recovery was faster than the USA's (in both GDP growth and fall in unemployment rate) until 1996. The USA is now back to its unemployment rate of 1989, while Canada's is 2 points higher than 1989. This suggests Canada has a lot of room to lower interest rates to boost growth (without triggering an inflationary spiral), and has done so dramatically. As of February '97, Canada's Bank Rate was 3.25%, 1.75 points below the corresponding U.S. rate. Normally interest rate reductions show up in GDP growth 12-18 months later:
Real GDP Growth:
Canada: 1993: 2.2, 1994: 4.1, 1995: 2.3, 1996: 1.5
USA: 1993: 2.2, 1994: 3.5, 1995: 2.0, 1996: 2.4
Unemployment Rate:
Canada: 1993: 11.2, 1994: 10.4, 1995: 9.5, 1996: 9.7
USA: 1993: 6.7, 1994: 6.0, 1995: 5.6, 1996: 5.4
Diff: 4.5 4.4 3.9 4.3
Central Bank Discount Rate:
Canada: 1992: 6.8, 1993: 5.1, 1994: 5.8, 1995: 7.3, 1996: 4.6
USA: 1992: 3.3, 1993: 3.0, 1994: 3.7, 1995: 5.3, 1996: 5.0
Diff: 3.5 2.1 2.1 2.0 -0.4
(Canada's interest rate spike in 1995 was partly related to the U.S. spike (the U.S. spike was mainly due to the U.S. approaching its perceived full employment rate). But given that since the referendum Canada has been able to lower interest rates below U.S. rates, Canada presumably would have lowered interest rates earlier if not for the uncertainty caused by the Quebec referendum.)
Canada's debt burden started falling in 1990, a couple of years before debt scare stories took over the media, though it hit a new high in 1995 with the interest rate spike. It fell quickly in 1996, but is still quite high:
Interest Payments on Public Debt (All Gov't), % of GNP
1967-1976: 3.1 3.2 3.4 3.7 3.8 3.9 3.8 3.6 3.9 4.2
1977-1986: 4.3 4.9 5.1 5.6 6.5 7.5 7.5 8.1 8.7 8.7
1987-1996: 8.6 8.6 9.2 9.9 9.8 9.7 9.5 9.5 10.2 9.7
1996: Q1: 10.1, Q2: 9.8, Q3: 9.6, Q4: 9.4
Federal Interest Payments on Public Debt, % of GNP
1967-1976: 1.8 1.9 1.9 2.1 2.1 2.1 2.0 2.0 2.2 2.3
1977-1986: 2.4 2.7 3.0 3.3 4.0 4.6 4.4 4.8 5.3 5.3
1987-1996: 5.2 5.4 5.9 6.5 6.3 5.9 5.7 5.6 6.2 5.9
1996: Q1: 6.2, Q2: 5.9, Q3: 5.8, Q4: 5.7
Governments may be returning to the times of 30 years ago when surpluses were more common than deficits. The deficits you calculate from StatCan's numbers are normally smaller than the ones you get from adding federal and provincial budgets (different methodology), but in practice they correlate well. If the trend of 1996 has continued, the government as a whole is running a surplus right now:
Total Government Deficit (Spending Minus Revenue), % of GNP
1967-1976: -3.1 -3.2 -4.6 -3.0 -2.5 -2.3 -2.9 -4.1 0.3 0.0
1977-1986: 0.9 1.7 0.8 1.6 0.4 4.8 6.1 5.6 5.8 4.5
1987-1996: 2.9 1.6 2.0 3.1 5.8 6.7 6.7 4.6 3.3 1.1
1996: Q1: 2.3, Q2: 1.5, Q3: 0.6, Q4: 0.1 (annualized)
Federal Deficit (Federal Spending Minus Federal Revenue), % of GNP
1967-1976: -0.2 -0.4 -1.5 -0.5 -0.1 0.2 -0.6 -1.2 1.9 1.4
1977-1986: 3.2 4.4 3.4 3.5 2.1 5.5 6.2 6.6 6.6 4.7
1987-1996: 3.8 3.1 3.2 3.9 4.5 4.2 4.9 3.8 3.4 2.0
1996: Q1: 2.9, Q2: 2.4, Q3: 1.4, Q4: 1.3 (annualized)
The government is shrinking! Yes, really. Well, relative to GNP. And I'm not counting interest payments. Program spending peaked in 1992 and has already fallen more than it did after the early 80's recession despite unemployment not dropping as much yet. Since 1992, the biggest cutters have been the provinces (18% relative to GNP), followed by hospitals (15%), the feds (14%) and municipalities (13%). Only pension plan spending has risen (12%).
Total Gov't Program Spending (Total Spending Less Interest), % of GNP
1967-1976: 24.7 25.8 26.2 28.1 29.1 29.5 28.6 30.0 32.9 32.2
1977-1986: 33.2 33.2 31.9 33.1 33.5 37.6 38.2 37.2 36.8 36.3
1987-1996: 35.3 34.4 34.4 36.7 40.0 41.4 40.7 38.6 37.0 35.7
Federal Program Spending (Federal Spending Minus Interest and
Minus Transfers to Other Gov'ts), % of GNP
1967-1976: 10.8 10.8 10.6 10.9 11.1 11.8 11.4 12.4 13.7 12.7
1977-1986: 13.0 13.0 11.9 12.4 12.6 14.5 14.7 14.7 14.3 13.5
1987-1996: 12.9 12.2 11.9 12.7 14.1 14.2 14.1 13.2 12.5 12.2
Provincial Program Spending (Provincial Spending Minus Interest and
Minus Transfers to Local Gov't and Hospitals), % of GNP
1967-1976: 6.1 6.7 6.8 7.9 8.5 8.3 8.1 8.5 9.5 9.6
1977-1986: 10.0 10.1 10.2 10.7 10.8 12.0 12.4 11.7 11.7 11.9
1987-1996: 11.4 11.4 11.5 12.1 13.1 13.7 13.1 12.3 11.9 11.3
Local Gov't Program Spending (Local Spending Minus Interest and
Minus Transfers to Provinces and Hospitals), % of GNP
1967-1976: 5.8 6.1 6.3 6.7 6.8 6.6 6.4 6.2 6.5 6.7
1977-1986: 6.9 6.7 6.4 6.4 6.4 6.9 6.8 6.6 6.4 6.4
1987-1996: 6.2 6.1 6.1 6.6 7.2 7.5 7.5 7.1 6.8 6.5
Hospital Program Spending (Hospital Spending Minus Interest), % of GNP
1967-1976: 2.0 2.2 2.3 2.4 2.5 2.5 2.4 2.5 2.7 2.7
1977-1986: 2.6 2.6 2.5 2.6 2.7 3.0 3.0 3.0 2.9 3.0
1987-1996: 2.9 2.9 2.9 3.1 3.3 3.4 3.3 3.1 3.0 2.9
Canada+Quebec Pension Plan Spending, % of GNP
1967-1976: 0.0 0.0 0.1 0.2 0.2 0.3 0.3 0.4 0.5 0.6
1977-1986: 0.7 0.8 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.6
1987-1996: 1.8 1.9 2.0 2.1 2.3 2.6 2.7 2.8 2.8 2.9
(Note: my spreadsheet contains an integrity check that the latter five tables add up to the total table, but the listed percentages may not exactly add due to rounding).
Taxes have been up the past two years, after two years of decreases. In 1996, taxes were 44.3% of GNP, just slightly below the record of 44.4% in 1992:
Total Gov't Revenue (% of GNP) 1967-1976: 30.9 32.2 34.1 34.9 35.4 35.7 35.4 37.7 36.5 36.3 1977-1986: 36.7 36.4 36.2 37.0 39.6 40.2 39.5 39.7 39.7 40.5 1987-1996: 40.9 41.3 41.6 43.5 44.0 44.4 43.6 43.5 43.9 44.3
If you want to give the impression that taxes aren't that high, say "federal" tax revenue relative to the economy is below "1974" levels (some people even "blame" the federal debt on taxes dropping after 1974, a year which had a revenue spike (I think from taxes on oil); total gov't revenue is up 6.6 points since 1974):
Federal Gov't Revenue (% of GNP) 1967-1976: 15.8 16.2 17.5 17.4 17.8 18.0 17.9 19.8 18.6 18.0 1977-1986: 16.9 16.0 15.9 16.5 18.6 18.0 17.4 17.5 17.7 18.5 1987-1996: 18.6 18.6 18.7 19.5 20.0 20.4 19.5 19.3 19.5 19.7
Unlike the U.S., Canada does not have a trend of increasing income equality, once transfers and taxes are taken into account. Roughly speaking, the poor are hurt more by recessions, but gain more from expansions:
Average Family Income After Tax, by Quintile (Constant 1995 Dollars)
Lowest Quintile: 1980 $16,703, 1989 $17,837, 1995 $17,058
Second Quintile: 1980 $32,183, 1989 $31,791, 1995 $29,410
Middle Quintile: 1980 $43,417, 1989 $42,612, 1995 $39,903
Fourth Quintile: 1980 $55,276, 1989 $55,274, 1995 $52,405
Highest Quintile: 1980 $85,173, 1989 $86,627, 1995 $82,646
Low: 1980-84 down 6.3%, 1984-89 up 14.0%, 1989-93 down 6.3%, 1993-95 up 2.1%
2nd: 1980-84 down 9.2%, 1984-89 up 8.8%, 1989-93 down 9.1%, 1993-95 up 1.4%
Mid: 1980-84 down 7.2%, 1984-89 up 5.8%, 1989-93 down 6.8%, 1993-95 up 0.5%
4th: 1980-84 down 5.5%, 1984-89 up 5.8%, 1989-93 down 5.3%, 1993-95 up 0.1%
Hi: 1980-84 down 4.1%, 1984-89 up 6.0%, 1989-93 down 5.8%, 1993-95 up 1.2%
Source: "Income After Tax, Distributions by Size in Canada, 1995",
Statistics Canada, page 29. Published in May '97, so we
won't have the 1996 numbers until a year from now.
Note that there would be increasing inequality if not for transfers and taxes. The Gini Coefficient (a measure of inequality, in which 0 means perfect equality, and 1 means one family has all the money) on income before transfers increased from 0.374 in 1980 to 0.428 in 1995. Once transfer payments are added to incomes, the Gini Coefficient increases from 0.321 in 1980 to 0.341 in 1995. And when taxes are deducted from the total incomes the Gini Coefficient increases from just 0.294 in 1980 to 0.298 in 1995 (in between, it peaked at 0.303 in 1984 and bottomed out at 0.292 in 1990). Transfers appear to be about twice as important as taxes as an equalizer.
Sometimes you hear reports of increasing inequality in Canada, but listen carefully and they typically are reporting a pre-tax or pre-transfer-and-pre-tax measure. I think "wage inequality" would be an example of the latter.
After-tax income is not a good standard of living measure because taxes are sometimes spent in ways that benefit us and the average family size is declining (3.30 in 1980, 3.12 in 1989, 3.07 in 1995). More generally, inflation rates are believed to be 1 to 2 points higher than the true inflation rate, so the "real" numbers are probably adjusted too disfavorably.
According to Paul Krugman in "Peddling Prosperity", even the after-tax measures indicate the U.S. has increasing inequality.
Canada's economy is still very successful at providing goods and services and probably will set a new per capita record in 1997. The current expansion is a slower one, but it is the intention of policy-makers to end the damaging boom-bust cycles of the past 20 years. The biggest threat to the Canadian economy is the spectre of Quebec separation.
Most of the raw data was taken from StatCan's May 1997 Canadian Economic Observer and the 1995/96 Historical Statistical Supplement. The economic series in these two publications were normally consistent, i.e. the numbers for overlapping periods were normally the same. In many cases the numbers I presented were not any of StatCan's but ratios of them, such as all of the "percentage of GNP" numbers. I used GDP some places and GNP others -- GNP is the preferred measure for my purposes because it counts just what Canadians produce and not what foreigners are producing in Canada. However StatCan provides an inflation-adjusted GDP and GDP/capita series which I used for annual changes for convenience, and anyway GNP and GDP correlate very strongly. The income distribution numbers were taken from the annual "Income after tax" publication cited in that section, though the percentage changes calculated over four periods were calculated by me. If you have any trouble determining the source of a figure, just let me know and I will try to help.
-- Stephen Tomlinson Ottawa, Ontario mailto:comments@stephent.com http://www.stephent.com "What is the evidence, and what does it mean?" (Bill James)
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Last Updated: 1997 May 31
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