Comparison of Canadian and American economies

The economies of Canada and the United States are similar because they are both developed countries and are each other's largest trading partners. However, key differences in population makeup, geography, government policies and productivity all result in different economies.

Government

Taxation

The American 50 Dollar Bill

In Canada total tax and non-tax revenue for every level of government equals about 38.4% of GDP,^[1] compared to the U.S. rate of 28.2%.^[2]

A significant portion of this tax differential is due to spending differences between the two countries. While the US is running deficits of about 4% of GDP,^[3] Canada's Federal government posted a budget surplus of around 1% of GDP per year from the mid-1990s until 2008, and under Stephen Harper's Conservative Party reached surplus again in 2015.^[4] During the 2015 election now incumbent Justin Trudeau of the Liberal Party of Canada pledged to run $40,000,000,000 in deficits over the next four years of his leadership, although after three months in office he has predicted his government will exceed this amount and won't reach surplus by 2019.^[5] The deficit patterns and indebtedness of Canada's individual provinces vary as they do in the US among different states. Considered in a revenue-neutral context, the differential is much smaller - Canada's total governmental spending was about 36% of GDP^[6] vs. 31% in the US.^[3] In addition, caution must be used when comparing taxes across countries, due to the different services each offers. Whereas the Canadian healthcare system is 70% government-funded, the US system is just under 50% government-funded (mostly via Medicare and Medicaid); adding the additional healthcare-spending burden to the above figures to obtain comparable numbers (+3% for Canada, +7% for the US) gives adjusted expenditures of 38–39% of GDP for each of the two nations.

The taxes are applied the same as well. Canada's income tax system is more heavily biased against the highest income earners, thus while Canada's income tax rate is higher on average, the bottom fifty percent of the population is roughly taxed the same on income as in the United States. However, Canada has a national goods and services tax (GST) of 5% on most purchases, while the U.S. federal government does not, increasing the tax burden on Canadian low-income earners due to the proportional nature of a sales tax. Canadian GST does not tax food and other essentials and a GST rebate for low-income earners mitigates regressiveness.^[7]

In addition to the 5% GST levied on most purchases, some Canadians also pay a provincial sales tax at a rate that varies by province from 0-10%. There are some purchases which are PST exempt, such as children's clothing. In the U.S., most states impose a sales tax, and cities and counties are often permitted to levy taxes as well, which can exceed 10% on purchases but realistically average at about 6-8%. Five U.S. states do not have any sales tax imposed.^[8] The Canadian province of Alberta and all three territories have no provincial or territorial sales tax on top of the GST.

Government Spending

Government spending at all levels (federal, state/provincial and local) has traditionally been higher in Canada than the United States. In Canada, government spending as a percentage of GDP peaked at 53% in 1992. Since 1992 spending has steadily declined in Canada to just below 40 percent in 2008.^[9]

Spending in the United States fluctuated narrowly around 34-38 percent of GDP over the same period.^[10] However, starting in 2008 US spending has turned sharply upwards to reach an estimated 42.7% of GDP in 2009 and stabilize at that level.

Social programs

For its higher taxes Canada has a larger system of social programs than the United States. This includes having a national broadcaster in the CBC, a largely government-funded health care system, and having all major universities receive partial government funding. The United States, however, does have most of its major universities subsidized by state government. The US also has two national public broadcasters which receive partial government funding, PBS (television) and NPR (radio).

The greatest difference in social programs is in health care. Contrary to popular belief, the U.S. Government spends as much on health care, 7% of GDP, as the Canadian government does,^[11] and total healthcare spending is much higher - 14.6% of GDP in the US vs. 10% in Canada.^[12] Canadians, however, receive better care to those Americans who receive treatment, and result measures.^[13] The Canadian health care system is said by some also to be attractive to employers, as in Canada health care is mostly paid through employee income taxes, while in the United States most companies choose to extend health benefits to full-time employees. Many employers in Canada do offer employees some additional medical coverage, for non-necessary treatments, and for pharmaceuticals which are not universally covered by the government-paid health insurance system. The most common complaint regarding the Canadian system are the long lines and waiting periods that have appeared for minor and non-life-threatening procedures over the last 15 years, since the introduction of widespread cuts to public funding. Separately, a number of medical tests and screenings are not covered (or due to increasing costs, are no longer covered) by the Canadian health system, forcing patients to pay for these services out of their own pockets. For these reasons, some relatively wealthy Canadians undergo treatment at private healthcare facilities at their own expense, either in Canada, in India, or in other nations^[14] to avoid waiting for medical treatment, joining "medical tourists" from many nations, including the US.^[14] Despite these sporadic problems, Canada's healthcare performance has been of higher quality on most factors.^[15][16] Efforts were made to reduce wait times by many provincial governments in the 1990s and 2000s, in an effort to improve care. Furthermore, healthcare coverage is universal for Canadians, and transferable outside a home province within Canada. In the United States, however, the most common complaint is that approximately 50 million people are uninsured, and thus do not have access to even the most basic healthcare services which Canadians have access to. This puts a burden on the emergency room services in the States and causes increases in healthcare costs significantly.

Anti-trust

The United States has since the Sherman Anti-Trust Act been strongly opposed to monopolies. In Canada this has been far less of an issue, and Canada has never had rigorously enforced rules against monopolization, and in certain situations the government has even encouraged monopolies. However, the Canadian government is more willing to interfere in the operations of large, integrated firms where they appear to be acting against the public interest, offsetting in part one reason that American law prevents large-scale monopolization. Historical transport policy led to the promotion of one railway operator & one dominant flag carrier and the promotion of bus carriers through the suppression of other bus-like services. In telecommunications policy, oligopoly conditions are reinforced through the actions of the Canada Radio and Telecommunications (CRTC). Foreign ownership has been banned in Canada's cell phone market (Though one Egyptian-owned entrant, WIND mobile, has led to a possibility of a liberalization of telecommunications) Banking policy has been regulated through Bank Acts passed by Parliament.

Fiscal and monetary policy

Canada is generally forced to follow American monetary policy quite closely, any large difference in interest rates could quickly lead to large problems for the Canadian economy. The U.S. Federal Reserve and the Bank of Canada both staunchly believe in fighting inflation while neither aggressively pursue policies of full employment. One difference that has emerged recently is that while Canada is still hewing closely to the balanced budgets policies of the 1990s the United States has moved into a heavy deficit, a policy both countries followed in the 1970s and 1980s.

Prices

In Canada prices have long tended, on average, to be higher than in the US. While some items are as much as 40% higher,^[17] others are similar in price or even cheaper in Canada. (For example, the Big Mac Index shows that in January 2006 a Big Mac cost $3.15 in the States and only $3.01 in Canada ^[18] (both figures in USD)). There are numerous reasons given for the price disparity, which were reported on in early 2013 by the Canadian Senate committee on national finance, including:

• different tariff rates on imported items. Examples of such consumer products include cotton T-shirts and cotton trousers and shorts, sports footwear, bed linen and ice skates, which carry an 18% tariff in Canada.
• Canadian retailers may import smaller number of goods, due to smaller market size, which means they do not have the same discounts as large US orders,
• American retailers are often much larger than Canadian retailers, and thus benefit from economies of scale,
• the costs of starting and running a business in Canada may be higher,
• “country pricing” — the practice of some large multinational suppliers of charging Canadian retailers more than U.S. merchants,
• higher fuel prices in Canada, due to higher taxes on gasoline and diesel, increase delivery charges to a more widely dispersed population,
• a tendency for Canadian shoppers to not press for lower prices,
• greater competition among retailers, and a wider selection of goods in the US which tends to keep prices lower,
• fluctuations in the exchange rate between the two currencies which are not immediately reflected with price adjustments,
• Different product safety standards between the two countries, where the cost for Canadians are spread out over fewer consumers.

Another factor is Canada's Supply Management system for certain food items such as chicken and milk which ensures farmers are paid fairly but results in higher retail prices,^[19]

When asked about "Country Pricing", members of the Retail Council of Canada were told by manufacturers that there are three main reasons for these discrepancies: 1) Canadians are used to paying more for products in Canada; 2) the higher prices charged to retailers in Canada subsidize the costs of maintaining suppliers offices and operations in Canada; and 3) the higher prices are necessary to compensate Canadian distributors which face higher costs in Canada.^[20]

One area of particular concern for Canadians is the price of vehicles, even those built in Canada, which often cost thousands of dollars more. Even the "Freight and PDI" charge in Canada is usually twice as much for a Canadian living within view of the car factory, as it is for an American living in Hawaii, buying the same Canadian-built vehicle.^[21] In an effort to disguise the price difference, many manufacturers will have a similar price for their lowest-priced trim-level of a particular vehicle model, but that trim-level will have less content. For example, in 2015, the lowest price Honda Fit in Canada was C$16,126 (2015-08 = US$12,215),^[22] while the lowest in the US was US$15,790 (2015-08 = C$20,845).^[23] However, the Canadian trim-level was "DX" which did not include automatic transmission, air conditioning, cruise control or one-step electric windows. This trim-level was not available in the US.

The Organization for Economic Cooperation and Development (OECD) tracks price comparisons for industrialized countries, and in June 2015 Canada was listed as 6% more expensive than the United States, when the US dollar was used as the reference currency.^[24] On a Purchasing Power Parity scale, where the income levels and costs are used to calculate the difference in the affordability of a similar basket of goods, Canada is rated as 26% more expensive than the US in 2014.^[24]

Productivity

Canadian workers are estimated to be 82% as productive per hour as their American counterparts.^[25] The industries with the largest productivity advantages for the U.S. are the manufacturing (particularly electronics and computer), finance, and service sectors. Industries where Canada is more productive than the U.S. are the construction and natural resources sectors with Canadian workers achieving 129% relative productivity.^[26]

The productivity gap had been even larger in the 1950s but the difference has been narrowing, aided by the elimination of the smaller market problem through free trade. The gap was still closing somewhat in the 1980s but at a much slower pace than in the 1960s. From 1961 to 1973 labour productivity rose annually by 3.3 percent in Canada and 1.7 percent in the United States. From 1973 to 1995 productivity growth was 1.1% in Canada and 0.8% in the United States.^[27]

The productivity gap began to widen again in the 1990s, particularly in the manufacturing sector. By 2000, this was called Canada's "Excellence Gap" by the Chief Economist of Canadian Manufacturers & Exporters.^[28] The United States has the second-highest productivity of the G8 countries,^[29] while Canada's is 5th based on the 1997 estimate.^[30]

Five main reasons for the productivity gap: the lower capital intensity of economic activity in Canada; an innovation gap in Canada relative to the United States; Canada's relatively underdeveloped high-tech sector; less developed human capital in Canada in terms of proportionately fewer university graduates and scientists and engineers in research and development; and more limited economies of scale and scope in Canada.

Organized Labor

Both Canada and the U.S. follow the Wagner Act model of regulating trade unions and collective bargaining, though legislation regulating organized labor principally falls under provincial jurisdiction in Canada. That North American model differs significantly from patterns of organized labor found in other developed countries.

Unemployment

For several decades Canada typically had reported its unemployment rate as somewhat higher than the US rate. For example, in June 2008 the reported unemployment in the US was 5.5 percent and 6.1% in Canada. However, a closer examination reveals that the two countries measure the unemployment rate differently. Craig Riddell, a University of British Columbia economist, found that a 0.9% difference was caused by the differing measurement systems.^[31] Statistics Canada has also acknowledged this, and it now publishes a second unemployment rate using the same methodology as the Americans. Using the American methodology, the June 2008 Canadian unemployment rate was 5.3%, which was 0.2% lower than the American rate.^[32]

Prior to the identification of the difference in methodologies, some politicians claimed that higher income taxes, restrictive labour laws, unions, universal healthcare, and greater unemployment benefits in Canada were causing a higher actual unemployment rate. However, when unemployment insurance and welfare were sharply cut in many parts of Canada during the 1990s there was little gain in employment relative to the Americans. Others attempted to explain the reported difference in terms of the large number of seasonal workers in trades such as fishing and logging who are unemployed for a portion of the year.

Balance of trade

While the United States has in recent years had a large trade deficit, Canada had for several decades maintained a trade surplus, which turned to a deficit since 2006.^[33] The Canadian surplus had been almost entirely due to trade with the United States. Canada has trade deficits with Europe and Asia, just as the Americans do. In 2005, Canada exported about $109 billion worth of goods more than they imported from the U.S. With the rest of the world, Canada had a trade deficit of $47 billion creating an overall surplus of some $62 billion.^[34]

Income

Although wealth is more highly concentrated in the U.S., the median (50th percentile) worker has essentially the same purchasing power in each nation. In terms of purchasing power parity, the most recent statistics from the IMF has Canada (US $35,494) lower than that in the United States (US $43,444).^[35]

In the late 1990s, the GDP gap widened. In this period, GDP increased by 5% annually in the United States, and 2% in Canada. Earlier, it had been narrowing between 1961 and 1995. However, it was closing at a much faster rate in the 1960s than the early 1990s. From 1961 to 1973, real GDP grew at an average annual rate of 5.5% in Canada and 4.0% in the United States. From 1973 to 1995 it was 2.6% in Canada and 2.3% in the USA.^[36] Canada was not hit as hard by the economic downturn in 2001, however, so cumulative growth in real GDP has been almost exactly the same amount in each country over the last 15 years.

Standard of living

The United Nations Human Development Index ranks the United States (fourth) higher than Canada (eighth).^[37] Other independent groups, such as the Economist have ranked each of Canada's four largest cities as better places to live than any American city. In their 2005 ranking, Toronto, Montreal, Vancouver and Ottawa ranked within the top 10 livable cities while the highest-ranked American cities, Cleveland and Pittsburgh, were tied at 26th place.^[38]

Canada ranks higher than the U.S. in statistics such as life expectancy (80.22 years in Canada versus 77.85 in the U.S.) and lower regarding infant mortality (4.75 Canadian deaths per 1000 versus 6.50 in the States). Both countries rank highly with 99% literacy rates. The United States has more major consumer goods per capita than Canada. For instance, while Canada had only 297 computers per 1000 people in 1996, the United States had 403.

Average income is slightly higher in the United States. However, as of 2009, Canada's median family income surpassed that of the USA by approximately 10%. In terms of racial disparity, United States African-Americans and Hispanics have a lower standard of living than the rest of the population; in Canada, Aboriginal peoples and Black Canadians are disproportionately likely to live in poverty, although these groups represent 25% of the US population and only 6% of Canada's. In both countries, recent immigrants tend to have lower earnings than more established residents. Canada's French-Canadians also used to be a poorer group, but since the Quiet Revolution in the 1960s this has been partially remedied.

The United States measures poverty, while Canada does not have an official measure (see Poverty in Canada#Measures of poverty in Canada), although Statistics Canada measures something called the Low-Income Cutoffs, the statistical agency repeatedly states that this is not a poverty measure (it is an income dispersion measure like the Gini coefficient). In the United States the poverty line is set at triple the "minimum adequate food budget." When a common measure is used, such as that of the Luxembourg Income Study, the United States has higher rates. The LIS reports that Canada has a poverty rate of 15.4% and the United States 18.7%. In both countries lower incomes are found in those most affected by poverty include single-parent families and single elderly people.

It may be said the cost of absorbing lower skilled, poorer workers in the US skews comparison studies downward for the United States^[39] (see also Economic impact of illegal immigrants in the United States). In recent years, what otherwise would have been a reduction in the low-income cutoff, was more than offset by the impact of immigration. According to a 2003 study by Statistics Canada "The rise in the low-income rates in the three major Canadian cities, and in Ontario and B.C. during the 1990s in particular, was largely concentrated among the immigrant population. Basically, low-income rates have been falling over the past two decades among the Canadian born, and rising among immigrants."^[40] A more recent January 2007 study by Statistics Canada explains that the low-income rates of new immigrants has deteriorated by yet another significant amount from 2000 to 2004^[41] (see also Economic impact of immigration to Canada).

Home ownership

While home ownership rates in both countries are very high compared to worldwide (or even developed countries), Canada has a slightly higher level of home ownership at 69.0%^[42] versus 65.3% for the United States^[43]

See also

• Economy of Canada
• Economy of the United States

References