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

Main articles: Taxation in Canada and Taxation in the United States

The American 50 Dollar Bill

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

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, Canada's Federal government posted a budget surplus of around 1% of GDP per year from the mid-1990s until 2008, and is projected to enter back into a surplus by 2016. The deficit patterns and indebtedness of Canada's individual provinces vary like 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 vs. 31% in the US. 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.

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 and can be as high as 10%. In Ontario, for example, where the provincial sales tax (PST) is 8%, consumers must pay a total of 13% sales tax on top of the purchase price. (It should be noted that Ontario has eliminated both the PST and GST, replacing them with harmonized sales tax, or HST, of 13%, which changes the sales tax on some items.) 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. 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 no 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 0.5% in 1962. Since 1980 spending has steadily declined in Canada to just below 75 percent in 2008.

Spending in the United States fluctuated narrowly around 34-96 percent of GDP over the same period. However, starting in 2008 US spending has turned sharply upwards to reach an estimated 26.7% of GDP in 2009 from 0.7% in 2008. Spending is expected to reach 1.7% of GDP in 2011 , and stabilize at that level.

Social programs

See also: Canadian and American health care systems compared

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, and total healthcare spending is much higher - 14.6% of GDP in the US vs. 10% in Canada. Canadians, however, receive comparable care to those Americans who receive treatment, and result measures. 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 to avoid waiting for medical treatment, joining "medical tourists" from many nations, including the US. Despite these sporadic problems, Canada's healthcare performance is generally on par with the US. 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.

Anti-trust

Main articles: Canadian competition law and United States antitrust law

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, Windmobile 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

See also: Fiscal policy of the United States and Monetary policy of the United States

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.

Market size

One of the most important differences historically between Canada and the United States was the size of the two markets. When both nations had high tariffs the two countries did not have a unified market. Canada's smaller market led to higher prices and greater inefficiency.

A good example of this is the automobile industry, which can be clearly demarcated into two periods: before and after the free trade creating Auto Pact of 1969. Before this, Canada had its own production lines creating each of the models that would be sold in Canada. These branch plant factories would only make small production runs of each vehicle, requiring frequent, and expensive retoolings. The factories would also generally be smaller. Fewer varieties were available to Canadian consumers and prices were generally higher. However, these cars were almost all still made by American companies. After the Auto Pact, the industry was transformed as a unified North American market was created. The Canadian factories were rebuilt to be much larger, but to make only one model that would be sold in both countries creating large economies of scale. The prices of cars fell in Canada as wages and total employment in the automobile sector increased.

After the Second World War tariffs between the two countries gradually fell, with full free trade being established by the 1988 Canada-United States Free Trade Agreement. Some industries are still protected, however. These are mostly perceived as sensitive areas such as cultural industries including publishing, television, and newspapers, all of which have stringent foreign ownership rules. Other areas such as the transport industry are also protected with Canadian control of the airlines and trains being viewed as in the national interest.

This tends to create far more monopolies in Canada. For instance the air travel industry in Canada until recently was dominated by a single airline, Air Canada. Canada has long had to make a trade-off between monopolization and efficiency which the United States has not. The United States can support a number of airlines that are big enough to operate efficiently, and still have a competitive market (although in recent years the competitiveness of the major US airlines declined sharply). Canadians are forced to choose between small inefficient airlines that would be competitive, or monopolistic airlines that will generate their own inefficiency.

Banking

Canada and the United States have long had very different banking systems. The United States' was copied from England, while Canada's was taken from Scotland. The United States traditionally has had a plethora of banks, some with very few branches. The U.S. system continues to support the creation of numerous small banks through both government-sponsored institutions like the Federal Home Loan Banks and similar non-government entities like Bankers' bank, that does not exist in markets like Canada. This has led to a more competitive but less stable system, with many thousands of banks having collapsed during U.S. history. The Glass–Steagall Act and other laws and regulations prevented U.S. banks from growing beyond certain limits. Changes allowed U.S. banks to grow and the Glass–Steagall Act was repealed in 1999. Canada has always had far fewer banks per capita, but the banks have been larger and quickly expanded nationwide. Canadian banks have many branches and distributed assets. Canada has only had one major bank, the Home Bank, collapse in its history. This concentration of banks in Canada relative to the U.S. has continued to this day. In 2002, Canada's the six largest banks controlled 90 percent of Canadian domestic banking assets, while the five largest U.S. banks controlled only 9.7 percent of their domestic assets.

There are several subsidies in the U.S. system that do not exist in Canada. In terms of direct impact to consumers, mortgage interest is a tax deductible in the U.S. (a market distortion designed to encourage home ownership), but is not in Canada. The U.S. also indirectly subsidizes mortgages through a plethora of government sponsored enterprises. The U.S. entities do much more than provide mortgage insurance, and use their own huge balance sheets to purchase mortgages. The Canada Mortgage and Housing Corporation historically was mainly limited to providing mortgage insurance, although now facilitates funding of mortgages also through the Canada Mortgage Bond program, which has also grown to be quite large.

Canada's banks have traditionally been fierce competitors internationally, while America's largest banks have had a more significant presence overseas. In part, the history of this situation is rooted in Canada's smaller market. For Canadian banks, international exchange was always a central concern. For American banks, domestic banking was paramount. In the 1920s, Canadian banks dominated the international banking sector due to greater expertise and focus in the American economic centre of New York. Thus Canadian banks came to have a wider spread networks. Much of the banking system in the West Indies is controlled by the Canadian banks. Canadian banks also have far more of a presence in the United States than American firms do in Canada. In part, this is because American firms cannot buy Canadian banks, but Canadian banks have, at times, been able to buy American ones. Since the large Canadian banks already operated nationwide chains of a thousand or more branches, they find it relatively easy to integrate smaller chains of American banks into their systems.

In recent years this advantage has disappeared as American banks have also grown substantially in size and today have many branches, and the large American banks are now operating over 2000 branches each. In fact, the ten largest banks in North America today are all U.S.-based. Overseas, American banks have a larger presence than Canadian banks. Only Royal Bank of Canada's RBC Capital Markets division has a global scale that even approaches that of the U.S. investment banks.

Until recently, Canadian banks had historically been far less strictly regulated than their American counterparts. Canadian banks had, until the Gramm-Leach-Bliley Act in 1999, been freer to participate in the financial planning and insurance industries than their American counterparts. In the 1980s and 1990s, the large Canadian banks acquired almost all significant trust and brokerage companies in Canada. They also started their own mutual fund and insurance businesses. As a result, Canadian banks broadened out to become supermarkets of financial services, a trend that started later in the U.S. market. The average U.S. bank is a domestic banking operation. The large Canadian banks are financial conglomerates, with large domestic Canadian banking operations.

Bank regulation in the United States is highly fragmented compared to Canada which has only OSFI as the bank regulator (although credit unions are provincially regulated). In the U.S., a bank's primary regulator could be the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, or any one of 50 state regulatory bodies, depending on the charter of the bank. And within the Federal Reserve Board, there are 12 districts with 12 different regulatory staffing groups. The U.S. is also one of the most highly regulated banking environments in the world; however, many of the regulations are not safety and soundness related, but are instead focused on privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and promoting lending to lower-income segments. Even individual cities enact their own financial regulation laws (for example, for usury lending). Canadian banks have not faced laws against usury, or interest guarantees on deposits. Return on equity for Canadian banks were generally comparable to U.S. banks (with return on assets lower, but with Canadian banks using more leverage to compensate).

Credit unions in Canada are tax-paying entities, while they have been tax-exempt in the U.S. However, as restrictions on the size of credit unions in the U.S. have eased, the American Bankers Association has lobbied to have credit unions taxed to level the playing field.

Prices

In Canada prices have long tended to be higher. This is partly because of structural issues in Canada such as low population density and harsher weather, and partly due to Canada's tax system, which depends more heavily on sales taxes relative to income taxes than the US. This has contributed to phenomena such as cross-border shopping. Since the early 1990s this has not been the case, as the Canadian dollar had fallen low enough that it more than made up for price differences. Today prices are somewhat lower in Canada for at least one item: the Big Mac Index shows that in January 2006 a Big Mac cost $3.15 in the States and only $3.01 in Canada [1] (both figures in USD). In October, 2007 a strong Canadian dollar rose to parity with a weak American dollar, benefiting Canadian travelers and consumers. However, this was not favorable to Canadian manufacturers and exporters who do most of their business south of the border. As the economic conditions decayed in 2008, a flight to safety in the American dollar and lower prices for Canadian commodities reversed some of the growth in the Canadian dollar relative to the American dollar.

Fuel prices have always been higher in Canada, even though Canada is a net exporter of energy. This is because Canada, unlike many oil producers, does not heavily subsidize fuel. Prices are based on the world market price.

Productivity

Canadian workers are estimated to be 82% as productive per hour as their American counterparts. 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.

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.

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. The United States has the second-highest productivity of the G8 countries, while Canada's is 5th based on the 1997 estimate.

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 Labour

Both Canada and the U.S. follow the Wagoner 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. 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.

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. 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.

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).

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. [2] 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). 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.

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 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, the gap in median incomes is minor. 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%. [3] 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 (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." 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 (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), the United States has a slightly higher level of home ownership at 68.9% [4] versus 67% for Canada [5]. This number has converged in recent years.

See also

• Economy of Canada
• Economy of the United States