Fraser Institute: Crown analysis “lacks credibility”; Estey’s TILMA concerns ignored; case for more tax cuts and labour reform weak

Cheap labour and the Fraser Institute’s Niels Veldhuis

‘More needs to be done.’

When you think about it that’s all you ever really hear from right-wing think tanks like The Fraser Institute. No matter how much a government gives in to their demands it’ll never be enough. The goal posts will always get moved out a little bit further.

Niels Veldhuis, the Fraser’s director of fiscal studies, was in Saskatoon on Feb. 19 to flog the institute’s latest study Saskatchewan Prosperity: Building on Success.

Velduis’s presentation at the Sheraton Cavalier Hotel was sponsored by another right-wing think tank: the Saskatoon-based Prairie Policy Centre. For $40.00 you could sit and listen to Veldhuis, the primary author of the report, rail against unions, Crown corporations, taxes and phantom interprovincial trade barriers.

In a nutshell the report says Saskatchewan has suffered from “a lack of economic opportunities” and “a dearth of investment and business development.”

“This dearth of opportunities is largely premised on the lack of investment in the province and the accordant economic implications of a lack of investment,” the report notes.

The “two key measures of investment that best highlight” this is: “net business investment per worker, and net business investment in machinery and equipment per worker.”

According to the institute “the province ranks 9th in accumulated total net business investment and last in accumulated net business investment in machinery and equipment.”

“In other words, Saskatchewan attracted the least amount of net business investment broadly defined and, more narrowly defined, in terms of machinery and equipment between 1978 and 2007 amongst all the provinces. It is this dearth of investment that formed the basis for a lackluster opportunities economy in the province.”

The “main reasons” for this lack of investment are the province’s tax policies, labour market regulations, Crown corporations, and barriers to interprovincial trade.

The Fraser’s solution is to cut taxes, slash labour laws, privatize the Crowns and sign the BC-Alberta Trade, Investment and Labour Mobility Agreement (TILMA). Where things start to get a little fuzzy, though, is how will doing some of these things result in companies buying more machinery and equipment. In several instances the institute offers no proof or examples to support its recommendations.

It’s important to know what The Fraser Institute is and where it gets its money from in order to operate. The organization was founded in 1974 and is non-profit. Its vision, according to its website, “is a free and prosperous world where individuals benefit from greater choice, competitive markets, and personal responsibility.” Its mission “is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals.”

The institute’s reach is considerable. Its “list of researchers has grown to include more than 350 authors in 22 countries… comprising more than 600 Institute publications and thousands of articles.”

The Fraser states that it depends “entirely on donations from people who understand the importance of impartial research and who support greater choice, less government intervention, and more personal responsibility.”

The organization’s financial records show that in 1998 it brought in $3,425,771 through donations, sales of publications, interest and other income. In 2007, the figure had risen to $12,730,493.

The Fraser’s 2007 annual report shows the following breakdown for the dollar contributions it received: 34% Organizations and Corporations; 53% Foundations; 13% Individuals.

So just who are these contributors? Who knows, the Fraser won’t disclose the names.

The institute says it is “Beholden to no one, our conclusions and recommendations may be different from reports produced by organizations who receive government funding. We also do not accept any contracts for research.”

They may not be beholden to government, but they certainly are beholden to their donors. You can bet those contributions would dry up if the organization began straying from its deeply held conservative vision and mission.

The Fraser’s Saskatchewan report blames tax policies, labour laws, Crown corporations and interprovincial trade for the “dearth of investment” in machinery and equipment.

However, reports published in 2007 by the Bank of Canada and TD Bank Financial Group that examines the lack of capital investment in Canada appears to have reached different conclusions. In their reports, the Bank of Canada’s Richard Dion and TD Bank economists Don Drummond and Ritu Sapra concur that higher taxes are a problem but don’t mention interprovincial trade barriers, labour laws or government competition (i.e. Crown corporations) as reasons for Canada’s low numbers. The authors have at least two reasons in common, though: size and aversion to risk.

“Companies are smaller, on average, in Canada than the United States,” Drummond and Sapra said.

“Small firms conduct less research and development than their big business peers. This lower [research and development] expertise may reduce the willingness and/ or ability of some firms to implement new technologies developed outside the firm. They often lack knowledge about using the latest [machinery and equipment] to optimize business. Second, smaller-scale firms could be less inclined to acquire new [machinery and equipment] due to differences in the cost of capital. Cost of fixed investment is, generally, higher for smaller firms. In particular, the level of investment risk that might be acceptable to a larger firm because it has substantial resource reserves might not be acceptable to a smaller one. Moreover, small firms tend to be disadvantaged relative to their larger counterparts in terms of access to finance. The third factor that causes differences in fixed investment and use might be the differing benefits by firm size. Smaller firms are less likely to benefit from economies of scale and the cost savings to be had from larger production runs facilitated by greater use of [machinery and equipment]. A word of caution though – the smaller-scale of firms in Canada in all probability has a greater impact on investment levels rather than growth rates.”

Dion says in his report that one reason “for the more sluggish demand for innovation in Canada” may be that there are “fewer rewards and more aversion to risk taking. For Canadian firms, the smaller size of local markets in non-tradable product sectors would limit the returns to innovation and inhibit innovative activity. It could explain in part why [research and development] intensity in the services sector is lower in Canada than in the United States, which in turn contributes to the weaker aggregate [research and development] intensity in Canada. Fewer rewards for the relatively high risks associated with innovation might also result from higher marginal tax rates on personal income, lower compensation for high-level managers, and larger bankruptcy costs or stigma facing Canadian entrepreneurs.”

The Fraser’s report doesn’t appear to discuss these subjects at all. Its report also seems to stop at 2007, which means it does not take into account the incredible gains made in the last 14 months under the policies it despises. Examples of this can be found in provincial news releases over that time:

February 27, 2008 – A Statistics Canada survey estimates that Saskatchewan will top the $12 billion mark in capital investment for the first time ever. The report pegs capital spending intentions at $12.3 billion in 2008, an 18 per cent increase from that of 2007. That’s the second highest percentage increase among the provinces, just slightly behind Manitoba at 18.8 per cent, and more than three times the national average of 5.2 per cent.

May 6, 2008 – The value of building permits in Saskatchewan for March 2008 recorded the second highest percentage increase in the nation according to Statistics Canada. The March 2008 building permit values totalled $146 million, up 32 per cent from the $110 million recorded last March (seasonally adjusted). Newfoundland and Labrador had a slightly higher increase than Saskatchewan, up 34.9 per cent over last March.

January 9, 2009 – Saskatchewan building permits show an 8.8 per cent increase totalling $150 million for November 2008 up from October 2008 on a seasonally adjusted basis. When compared to November 2007, the November 2008 seasonally adjusted figure is a 26.6 per cent increase, the highest among the provinces. Meanwhile, non-residential permits in Saskatchewan increased by 59.9 per cent for a total of $80 million seasonally adjusted, which was the highest among the provinces. Compared to other western provinces Saskatchewan’s overall increase of 26.6 per cent was far ahead of decreases in Manitoba (-5.9 per cent), Alberta (-14.5 per cent) and BC (-32.6 per cent).

January 20, 2009 – Saskatoon led the nation in GDP growth among Canadian cities in 2008 with a 5.4 per cent increase according to the Conference Board of Canada metropolitan outlook report. Regina had the second highest increase at 4.9 per cent. In 2009, the Conference Board predicts both Saskatoon and Regina will continue to see momentum with projected population increases and major economic activity.

February 5, 2009 – Building permits in the province totalled $2.2 billion in 2008, up 32.8 per cent when compared with the totals for 2007 (seasonally unadjusted). This beats the former record of $1.6 billion set in 2007. Saskatchewan had the largest percentage increase amongst the provinces in 2008, well ahead of the 5.3 per cent decline on the national front for the same period.

February 6, 2009 – There were 16,600 more people working in Saskatchewan in January compared to the same month a year ago - an increase of 3.3 per cent. That’s by far the strongest rate of employment growth in the country and a sharp contrast to the rest of Canada, which lost more than 126,000 jobs during that same period.

In Saskatoon, according to the city’s development services branch, there were 8,455 licensed businesses in Saskatoon in 2008. The city issued 1,172 new business licenses last year. In 2007, there were 7,930 licensed businesses in the city and 961 new business licenses were issued. It would seem that current policies aren’t hindering investment in the province’s largest city.

Despite the good news the Fraser says ‘more needs to be done.’ This always seems to be the organization’s justification to demand more tax cuts, attack labour laws and cut back social programs.

Tax Policy

The Fraser examined four areas of tax policy: personal income tax, sales tax, corporate income tax, and corporate capital tax.

The institute acknowledges that since 2000 the provincial government has “made major strides in improving the province’s personal income taxes by implementing most of the main recommendations offered by the Personal Income Tax Review Committee.” (The Vicq report.)

“However, more needs to be done not only to retain the province’s best and brightest but also to attract back those who have left. Saskatchewan still maintains a far too high top marginal personal income tax rate (15.0%) when compared to Alberta (10.0%).”

Saskatchewan’s rate is lower than Ontario, New Brunswick, Nova Scotia, Manitoba, Prince Edward Island, Newfound & Labrador and Quebec. To suggest it’s “far too high” seems a little over the top.

The Fraser says “Saskatchewan should initiate a three-to-five-year plan to eliminate the middle- (13.0%) and upper-income (15.0%) personal income tax rates in their entirety. This would result in Saskatchewan being the only province other than Alberta to maintain a single tax rate for personal income taxes. Saskatchewan must also reduce the remaining personal income tax rate to at least 9.0% over the period in order to gain an advantage over Alberta’s single rate tax.” The institute doesn’t explain how this will result in more machinery and equipment being purchased.

At 12% Saskatchewan’s corporate income tax (CIT) is lower than New Brunswick, Manitoba, Newfoundland & Labrador, Ontario, Prince Edward Island and Nova Scotia, but the Fraser wants it slashed to 9% to make it the lowest in the country.

The institute notes that the corporate capital tax was set to be eliminated on July 1, 2008, but “there is still room for improvement.” The organization wants the Saskatchewan government to eliminate the capital tax to financial institutions as well.

“The long-term advantages of the tax include more economic activity, more investment, and more employment opportunities,” the report states. How this will result in more machinery and equipment being purchased isn’t explained.

Lastly, the Fraser wants the province to harmonize the provincial sales tax (PST) with the federal goods and services tax (GST) in a revenue-neutral manner.

And how does the Fraser Institute intend the province to pay for these tax cuts? Well, page 30 has this to say: “Such a plan will require restraint and, if necessary, reductions in provincial spending.”

“At a minimum, greater restraint by the provincial government is required for the tax plan outlined previously to be implemented over the next three to five years. In addition, much of the burden of spending restraint or reductions could be mitigated by reforming the way in which services are delivered,” the report states on page 34. The footnote for this item adds the telling statement: “For discussions on reforming service delivery in sectors such as health care, education, and welfare, please see Irvine et al. (2002), Coulson (2001), and Richards (1997).”

The 2002 book in question is called Better Medicine: Reforming Canadian Health Care edited by Toronto’s Dr. David Gratzer. According to the Amazon.ca write-up the book is a “collection of twelve essays on health care reform in Canada, advocating an open-minded approach to such concepts as privatization, two-tier health care, and user fees.”

The second book, entitled Toward Market Education: Are Vouchers or Tax Credits the Better Path? by Andrew J. Coulson, was published in 2001 by the American libertarian think tank Cato Institute. It compares education tax credits and vouchers.

The third book is Retooling the Welfare State: What’s Right, What’s Wrong, What’s to be Done by John Richards and published by the C.D. Howe Institute in 1997. According to a review of the book in the Jan. 1999 Fraser Forum, Richards “has five proposals for retooling the welfare state: clarify and balance budgets (citizens begin to understand program benefits and their costs in terms of taxes); maintain accountability (one level of government should be responsible for social policy); respect comparative advantage (the decentralization of jurisdiction between Ottawa and the provinces in terms of social programs); encourage two-parent families (where one parent is a mother and the other a father); and emphasize workfare.”

Clearly, the Fraser Institute’s master plan for Saskatchewan goes far beyond simply privatizing the Crown corporations.

Labour Laws

It should be noted at the outset that the Fraser’s previous provincial study, Saskatchewan Prosperity: Taking the Next Step (May 2002), contained no discussion or policy recommendations regarding unions or labour laws.

The institute states in its current report that Saskatchewan’s labour market regulations “must be drastically altered if the province is to capitalize on its current opportunity.” To get there it recommends:

– prohibiting mandatory union membership and dues-payment clauses in collective bargaining agreements;

– removing successor rights, technological change laws, and forced arbitration; and,

– freezing the minimum wage.

The Fraser states that union security laws – that is, the rules governing union dues and membership, are perhaps “the most important aspect of what went overlooked” in the Saskatchewan Party government’s 2008 labour reforms.

“Saskatchewan allows both union membership and full union-dues payment (i.e., representation- and non-representation-related costs) to be included in a collective agreement as a condition of employment,” the report notes. Buried in the footnotes, however, is this tidbit: “These laws are not a phenomenon limited to Saskatchewan; all other Canadian provinces also have such laws.” Obviously, this isn’t a burning issue.

The Fraser states that, “Economic research has shown that allowing mandatory union membership as a condition of employment results in higher rates of unionization,” but provides no examples of where this has happened in Saskatchewan. In fact, according to the institutes own research, the rate of unionization in the province has actually decreased over the last decade.

The Fraser’s Measuring Labour Markets in Canada and the United States, 2003, report shows that between 1998 and 2002 unionization as a percent of total employment in Saskatchewan was 35.6%.

The organization’s Measuring Labour Markets in Canada and the United States: 2008 Report shows that between 2003 and 2007 the average rate of unionization in the province was 35.4%. The Fraser’s latest study says the rate in 2007 was 34.8%.

The Fraser is opposed to successor rights. It says that these “rights are important to investment because they may deter potential investors from purchasing a business if an existing collective agreement which they had no part in negotiating prevents them from reorganizing the business to improve its performance.” The operative word here is ‘may’ and, again, the institute fails to provide examples of where this has happened in Saskatchewan.

Additionally, it’s only in the footnotes that the institute bothers to tell readers that every province in Canada has successor rights legislation.

The Fraser is opposed to technological change provisions in labour relations laws that “require employers to send affected unions a notice of technological investment and change.” The institute says that such “provisions impede investment because they limit the ability of unionized firms to adapt to changing conditions.” Four other provinces (B.C., Manitoba, Quebec and New Brunswick) have this provision so it doesn’t appear that onerous. And once again, the institute fails to provide examples of where this has occurred in Saskatchewan, and to the extent that it is causing so much harm that it requires immediate attention.

The Fraser is opposed to what it calls “forced arbitration.”

Saskatchewan’s Trade Union Act provides ample opportunity for parties to settle a grievance through mediation before it gets to arbitration. Section 25 of the Act states that all differences between parties to a collective bargaining agreement are to be settled by arbitration “after exhausting any grievance procedure established by the collective bargaining agreement.” Section 26.4 allows for parties to resolve a grievance by referring it “to a grievance mediator for the purpose of resolving the grievances in an expeditious and informal manner.” According to the provincial government’s labour website grievance mediators are “assigned without cost for their services.”

In its report the Fraser states: “Proceeding immediately to binding arbitration without taking prior steps may not only result in increased costs for both parties but it may also create hostility between the parties.” The institute then suggests that it would be better “if parties are free to prolong the dispute until it’s in the best interests of all parties to voluntarily enter a process of final and binding resolution (i.e., arbitration).”

It’s been established that the Act provides for mediation before a grievance gets to arbitration. Furthermore, it seems absurd the Fraser would suggest that letting a problem fester indefinitely until the parties decide to end the dispute voluntarily is a viable option. Would allowing a problem to drag on for weeks, or even months, not result in increased costs and create hostility – not to mention the risk of poisoning the atmosphere in the rest of the workplace?

The Fraser claims that “members of provincial labour relations boards… have the potential to exert great influence over the resolution of industrial disputes” but fail to mention that the board is composed equally of business and labour representatives, with an independent chair. How is this unfair?

Finally, the Fraser is calling for the minimum wage to be frozen. In an editorial following Velduis’s visit to Saskatoon, The StarPhoenix noted that “in a province whose employment numbers are growing and where labour is in short supply, the Fraser economist’s call for a freeze on the minimum wage seems oddly out of touch the reality that most employers are offering well above the legislated $8.60 an hour.” [Fraser’s analysis of Sask. Crowns lacks credibility (StarPhoenix, Feb. 21, 2009)]

Crown Corporations

The Fraser does not support Crown corporations. It says they have a “tendency to underinvest in capital” and recommends “policy makers in Saskatchewan to commit to transferring ownership of these businesses to private interests.”

In the same editorial The StarPhoenix blasted the Fraser saying that Veldhuis’s “ideologically-driven analysis… does a disservice to informed to informed public debate” and “lacks credibility.”

“It also does the institute and Mr. Veldhuis no favours that his presentation in Saskatoon coincided with news out of Alberta that the once-mighty giant of the Canadian economy is slated to go into the hole to the tune of $1 billion this year, a shocking turnaround from the surplus of $8.5 billion projected just six months ago. So it turns out that the “Alberta advantage” had mostly to do with what it was being dug and piped out of the ground than almost anything else, including its tax policy,” the StarPhoenix said.

The newspaper also said the Fraser’s report offered little evidence “that relates directly to Saskatchewan enterprises being less efficient or uncompetitive.” [Fraser’s analysis of Sask. Crowns lacks credibility (StarPhoenix, Feb. 21, 2009)]

TILMA

This is a bad deal that just won’t go away. Naturally, the Fraser supports it recommending that “Saskatchewan should immediately reconsider joining TILMA to eliminate the remaining restrictions and impediments to trade and investment.”

Like most pro-TILMA studies, the Fraser makes no attempt to list the trade barriers between provinces. And, like labour reform, interprovincial trade barriers are not mentioned as being impediments to greater prosperity in the institutes May 2002 report on Saskatchewan.

The Fraser’s report relies heavily on a recent study conducted by trade consultant and TILMA supporter Robert Knox and the institute’s associate director of globalization studies Amela Karabegović and completely ignores a Jan. 2008 report that was done for Saskatchewan cities by the Estey Centre for Law and Economics in International Trade. While the Estey study does not cover every aspect of TILMA’s reach, it does raise enough red flags and compliments research done by others (Steven Shrybman and Marc Lee and Erin Weir in particular) to warrant rejecting the deal.

The Estey findings include:

– “Normally, trade agreements specify those aspects of international commerce to which its principles will apply, with exceptions applying in all other sectors – this is known as a positive list approach. The TILMA, on the other hand, takes a less common negative list approach whereby the agreement’s principles apply to all aspects of inter-provincial commerce unless they are specified in the exceptions included in the agreement. If nothing else, this approach suggests that the signatories to the agreement have a high degree of confidence in their ability to predict the future – the signatory provinces cannot envision a situation in the future where they would like to create a new exception.” [p. 4]

– “A dispute system need not have been included in the TILMA because Canada has a well-functioning system of national courts. Trade agreements normally restrict standing – the ability to bring cases – to the contracting governments. The TILMA extends standing to individuals which greatly increases the complexity (and likely the cost) of settling disputes.” [p. 5]

– “City activities considered as ‘Essential Jurisdiction’ are potentially faced with greater challenges in a negative list type internal trade agreement, than a positive list agreement. As the negative list agreement encompasses all matters, including unpredicted future issues, unless it is specifically exempted, the broad and general powers undertaken as part of Essential Jurisdiction are more likely to contravene provisions of a TILMA-style agreement.” [p. 11]

– “While cities have little jurisdiction over trade in goods and labour mobility, the investment related provisions of a TILMA-style agreement have the potential to impact the activities of cities to a considerable degree. A significant portion of what cities do is to manage what businesses do in their community in accordance with their unique set of values and preferences. Given the ambiguous definition of ‘restrict or impair’ as discussed below, and the provided definition of ‘investment’, much of this municipal activity could be considered restricting or impairing of investment, particularly if cities in other provinces do not share similar regulations, standards or bylaws.” [p. 12]

– “The most effective means to completely protect cities’ Essential Jurisdiction is to negotiate the complete exclusion of cities from a negative-list style internal trade agreement.” [p. 16]

– “Once cities are included in a negative-list style agreement, they are subject to challenge on what is and what is not included in the specific exemptions. For example, even were a city’s essential jurisdiction exempted, the city would be subject to challenge on every bylaw or policy as to whether it was or was not included in “essential jurisdiction”. Also, if in the future a Province wishes to change or expand a city’s essential jurisdiction, as the role of cities change, that different essential jurisdiction would not be exempt from TILMA.” [p. 16]

– “Other minor changes that may assist in protecting cities’ interests include requesting less ambiguous definitions or more inclusive definitions of terms used in the agreement. Specifically in the TILMA, a more definitive description of ‘restrict or impair’ in Articles 3 and 5 would improve clarity and reduce uncertainty. Similarly, TILMA Article 6 (Legitimate Objectives) could have a specific clause for cities that defines a wider list of legitimate objectives that better reflects municipal goals (i.e. the unique character/democracy/socio-community clause). While many activities of cities might well be upheld if a challenge were made in the disputes system, the ambiguity leaves open the opportunity for a challenge and, hence, the cost and effort of mounting a defence.” [p. 17]

– “The low threshold values for Article 14 expose cities to potential procurement challenges for purchases that are less economically significant but highly costly. The low thresholds add a significant burden to cities’ procurement activities. More contracts that are worth less must be publicly tendered. Doing so requires cities to expend significant resources, which can easily outweigh the value of the goods or services being procured. Such activities also are a larger relative burden for smaller centres that have fewer resources to expend. Consider that Saskatoon requires publicly advertised tenders for contracts over $100,000. This is a significantly higher threshold than the $10,000 listed in the TILMA.” [p. 18]

– “Even if cities were given standing so that they could defend themselves directly, given the negative list approach taken in TILMA, there may be numerous cases in the investment area until the panels have a record upon which some precedents can be established. These cases can be costly to defend against and may represent a large burden on the taxpayers of smaller cities. The negative list approach combined with a failure to directly deal with the appropriate exemptions for cities in the TILMA means that panels are not obliged to take account of the need of cities to have policy space to foster their global competitiveness.” [p. 29]

Unfortunately, it appears The StarPhoenix has flip-flopped on TILMA – again.

In an editorial on May 15, 2007 the newspaper endorsed the trade deal without reservation urging then NDP Premier Lorne Calvert “to push for Saskatchewan’s inclusion as soon as possible.”

“TILMA’s success is based on the notion of including everything unless there’s a darn good reason to leave out a sector,” the StarPhoenix said. [TILMA gives clout to Sask. (StarPhoenix, May 15, 2007)]

Then when the Estey report was released the newspaper backtracked stating that, “With cities lacking the legal standing the deal accords to individuals and companies to seek redress when they feel their economic interests are stymied by TILMA, it’s only sensible that they strive to seek total exemption from such agreements… and to have the well-established court system to resolve disputes rather than rely on some newly created trade panel to do the job.” [TILMA analysis wise approach by Sask. cities (StarPhoenix, Mar. 17, 2008)]

A year later The StarPhoenix is now saying that Veldhuis’s call for Saskatchewan “to join TILMA” makes “good sense.” [Fraser’s analysis of Sask. Crowns lacks credibility (StarPhoenix, Feb. 21, 2009)]

Good grief. At least The StarPhoenix got one thing right and that is the Fraser Institute’s report on Saskatchewan lacks credibility.