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Economic Prosperity and
the Size of Government in Manitoba
1
Niels Veldhuis
Senior Research Economist
The Fraser Institute
www.fraserinstitute.ca

Presentation Outline
2
‣ Economic Prosperity in Manitoba
‣ Size of Government
‣What does the research say?
‣How Big is Manitoba
Government?
‣ Taxes

Economic Prosperity:
Manitoba in the Canadian Context

Gross Domestic Product (GDP)
Per Capita (2003)
4
45,000
40,000
1997 CDN Dollars
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
AB ON SK BC QC NF MB NB NS PEI

Disposable Income Per Capita
(2003)
5
25,000
20,000
1997 CDN Dollars
15,000
10,000
5,000
0
AB ON BC QC MB NS SK NB NF PE

Avg Total Employment Growth
(2000-2004)
2004)
6
3
2.5
2
Percent
1.5
1
0.5
0
AB ON QC PE NS BC NB NF MB SK

Avg Private Employment Growth
(2000-2004)
2004)
7
3
2.5
2
Percent
1.5
1
0.5
0
AB NF ON PE QC BC NB NS SK MB

Unemployment Rate
(2000-2004)
2004)
8
18
16
14
12
Percent
10
8
6
4
2
0
AB MB SK ON BC QC NS NB PE NF

Duration of Unemployment
(2000-2004)
2004)
9
25
20
Percent
15
10
5
0
AB PE MB NB SK NS ON BC NF QC

Net Migration Within Canada
(1996-2001)
10
6
Percent of Base Population
4
2
0
-2
-4
-6
-8
AB ON PEI NS BC QC NB MB SK NF
* Between 1996 and 2001, 21,041 people left Manitoba.

Net Business Capital Formation
(1994-2003)
11
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
AB NF BC NS ON PE MB QC SK NB

Restraints to Prosperity
12
‣ Size of Government
‣ Taxation: Burden of
Government

Size of Government
13

Size of Government &
Economic Growth
14
‣ Grossman (1988): negative relationship between
growth in government and rate of economic growth
‣ Grier & Tullock (1989): Government had significant
negative effect on economic growth.
‣ Peden & Bradley (1989): government negatively
affects economic base and rate of economic
growth.
‣ Vedder (1993): Increased government spending
leads to lower rates of economic growth.

Size of Government &
Economic Growth
15
‣ Vedder & Gallaway (1998): large transfers have
negative growth effects, moderate reductions in
government resulted in increased economic growth,
and that the marginal effect of government is
negative. Recommended reducing government to
17.4% of GDP.
‣ Barro (1991): Consumption spending by
government did not enhance productivity but did
result in lower savings and growth rates.

Size of Government &
Economic Growth
16
‣Folster
& Henrekson (2001): 10% increase in
government spending reduces GDP growth by 0.7 to 0.8
percentage points.
‣Alberto
Alesina (2002): increases in government
spending as a percent of GDP result in significantly lower
investment as a percentage of GDP.
‣ Sala-I-Martin (2004): Government consumption as a
share of GDP and public investment as a share of GDP
are negatively related to economic growth

Optimal Size of Government
17
‣ Scully (1991): Optimal tax burden for 103 countries
was 19.3 GDP.
‣ Peden (1991): Optimal size of government = 17% GDP.
‣ Scully (1995): Optimal US tax burden = 21.5% GDP.
‣ Grubel & Chao (1999): Optimal Cdn Burden = 33%
GDP.
‣ Mackness (1999): Optimal Cdn size of government
equaled roughly 20 to 30% of GDP.

Size of Government:
(Provincial & Municipal Only)
18
35
30
Percent of GDP
25
20
15
10
5
0
AB ON BC NS SK NF MB NB QC PE

Size of Government:
(Federal, Provincial & Municipal)
19
70
60
Percent of GDP
50
40
30
20
10
0
AB ON BC SK QC MB NF NB NS PE

Size of Provincial-Local Government
20
percent of GDP
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1989/90
1990/91
1991/92
Source: Statistics Canada, Financial Management System (2003).
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04

Size of Provincial-Local Government
21
percent of GDP
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1989/90
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
ON MB SK AB BC

MB Government Spending
(Inflation-Adjusted)
22
Millions
9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
5,000
1990/91
1991/92
1992/93
Source: Statistics Canada, Financial Management System (2003).
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04

MB Government Spending (Real)
(2005 Budget Data)
23
8,500
8,000
Millions of Dollars
7,500
7,000
6,500
6,000
5,500
5,000
2002/03
2003/04
2004/05
2005/06
2006/07

Taxation: Burden of Government
24

Top Marginal P.I.T. Rates (2004)
Provincial-Only
25
20
15
Percent
10
5
0
AB BC SK MB ON NB PE QC NS NF

General C.I.T. Rates (2004)
Provincial-Only
26
Percent
18
16
14
12
10
8
6
4
2
0
AB NB BC NF ON MB PE NS QC SK

Corporate Capital Taxes (2003/04)
As a Percent of Own-Source Revenues
27
Percent
6
5
4
3
2
1
0
AB NF PE BC NB NS ON MB QC SK

Sales Tax Rates (2004)
Provincial-Only
28
10
8
Percent
6
4
2
0
AB BC SK MB QC NF NS NB ON PE

Effective Corporate Tax Rates (2004)
29
Percent
40
35
30
25
20
15
10
5
0
NF NB AB PEI NS QC BC ON MB SK

Conclusion & Recommendations
30
‣ Spending restraint / reductions with the aim of
reducing government to 20%-30% of GDP
‣ Tax relief and reform:
• Focus on incentive based tax relief
• At minimum bring taxes rate in line with
Canada’s more prosperous provinces

Questions & Answers…
31