New Brunswick election launches a “natural experiment” in economics

One of the reasons that economic theory is so hard to prove in practice is that it is hard to run experiments.

One of the reasons that economic theory is so hard to prove in practice is that it is hard to run experiments. You pull one lever like cutting taxes or boosting job training, and a hundred other factors like oil prices, exchange rates, business confidence or interest rates all change the next day and muddy the waters.

It’s not like medicine, where you give a new pill to 1,000 randomly selected patients and compare their results with 1,000 other patients taking a placebo.

However, Canada is offering up a unique “natural experiment” in economics. Saskatchewan, Alberta and B.C. are all pro-fracking and low tax (by Canadian standards). New Brunswick, on the other hand, elected a new government earlier this week that plans to emulate Nova Scotia’s no fracking, high tax strategy.

It’s not a perfect experiment, since a drug researcher would want to isolate fracking from taxes. From an economics point of view, however, you don’t often get much clearer experiments than this. The western and Maritime provinces are in the same country, and are broadly similar in terms of things like legal systems, workforce education, proximity to international markets and so on.

In five years, we should have some interesting evidence about both the economic well being of the two sets of provinces, as well as environmental damage done. We’ll also be able to see how Canadians vote with their feet, since interprovincial migration is well tracked.

On taxes, Nova Scotia currently has the highest personal income taxes in the country other than Quebec (and is higher than Quebec on corporate taxes and sales tax). New Brunswick’s contribution to the experiment is new Liberal Premier Brian Gallant’s plan to leapfrog Nova Scotia. The new top rate for New Brunswickers earning over $250,000 will be 54.75 per cent, the highest marginal rate in North America according to Kevin Mulligan, a UBC tax guru.

Everyone loves to squeeze the “rich” until the pips squeak, as Lloyd George used to say, but don’t forget that doctors, professionals and business owners are pretty mobile these days. Those making more than $250,000 who choose to live in New Brunswick will be paying 15 points more tax than they would in Alberta. That could be tens of thousands of dollars a year difference in after-tax income.

Some say tax rates aren’t that important compared to family connections, community ties and other factors. Others point out that discouraging entrepreneurs and high-productivity jobs is a risky strategy. The governments of Nova Scotia and New Brunswick will give us a chance to see which argument is right.

On fracking, the diverging points of view are also stark. The Nova Scotia government announced a de facto moratorium on fracking recently, and the newly elected New Brunswick premier promised the same. Meanwhile, B.C. Premier Christy Clark is staking her reputation on building a natural gas economy in her province, Alberta has been actively fracking for decades and Saskatchewan Premier Brad Wall is proudly bringing pro-fracking motions forward in the legislature.

He enjoys taunting the Saskatchewan NDP leader with twitter salvoes like “Thanks @cambroten and the @Sask-NDP for their support of our motion affirming the use of fracking for sustainable energy dvlpt & ec growth.”

The interweb is full of people saying that fracking creates jobs, imperils the environment, generates tax revenues and sets tap water on fire. As usual with the Internet, it is not easy to figure out who to believe. As with taxes, however, in a few years we’ll be able to compare the western provinces with New Brunswick and Nova Scotia and see how things actually turned out.

One doesn’t want to pre-judge an experiment. However, it’s worth noting that in some ways the experiment has been going on for a few years already. Nova Scotia and New Brunswick already had high taxes even before New Brunswick’s latest move. And even though both are moving against fracking this year, they didn’t ever have significant onshore oil and gas activity. Similarly, Alberta and Saskatchewan have been running low tax and frack-friendly policies for years.

So how do things look for the two groups of provinces? TD Economics has published a series of reports. Their data shows that New Brunswick and Nova Scotia are the two provinces with the lowest economic growth over 2009-12. Alberta, Saskatchewan and B.C. are the top three. The two Maritime provinces also have per capita incomes about $5,000 below the Canadian average, while both Saskatchewan and Alberta are above average and B.C. is slightly below.

On interprovincial migration, New Brunswick and Nova Scotia each lost 0.5 per cent of their populations in 2012. That is a lot of people in one year. Alberta and Saskatchewan each saw a net population increase. Unemployment rates suggest a reason for this, with all three western provinces having unemployment rates better than the national average in 2012, while New Brunswick and Nova Scotia were 3.0 and 1.8 percentage points higher, respectively.

Looking at budget balances, the three western provinces have surpluses planned for 2014-15, according to TD Economics, while the two Maritime ones have sizeable deficits. B.C.‘s provincial debt, the highest among the three western provinces, is half of the Maritime provinces’ as a share of their economies.

In five years there will be another set of provincial elections, and voters will decide which set of policies they like. In the meantime, keep an eye on those interprovincial migration figures.

* * *

Correction: a keen-eyed reader spotted an error in my Canada Day column in which I speculated about what life would have been like here if the border between the Russian and British Empires had run, as suggested at one point, down the 135th meridian. Incorrectly I stated that Riverdale would have remained a bastion of freedom while Copper Ridge might have ended up as a drab Soviet housing development. It turns out, if you have your map oriented the right way, that Riverdale would have been on the Russian side of the border. Freedom-lovers would have had to move to Pine Ridge or Golden Horn.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith

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