13 facts every Canadian economist needs to know

1. Canada is a big country

...but not as big as one might think. Some maps show Canada as an enormous country, about twice the size of China or the US, similar in size to the entire continent of Africa:

However maps like the one shown above distort the size of northern countries, making them appear much larger than they actually are. (This video explains why all world maps are wrong.) The "Peters projection" world map distorts the shape of countries, but shows their true size:

Measured by total area Canada is the second largest country in the world, bested only by Russia. Measured by land area, however - so not counting lakes, rivers, and oceans - Canada is the fourth largest country, smaller than China and the United States.

If the focus is shifted to arable land - that is, land suitable for agriculture - Canada's ranking slips to sixth, well below India and Brazil, and only slightly ahead of Nigeria and Argentina.   This is because...

2. Most of Canada is rocks and trees (and water).

Much of Canada is dominated by the ancient rocky hills and mountains, lakes and rivers, that make up the "Canadian Shield", shown in pink on the map above. In the east, the Appalachians extend up from the United States, stretching as far north as Newfoundland, also known as "the Rock". The West is dominated by a series of mountain ranges - the Coast Mountains, the Rockies, and other smaller ranges. There are pockets of fertile land in the eastern and western parts of the country - the Fraser Valley, the Annapolis Valley, the Okanagan, other river valleys and deltas - but rocks and trees predominate. 

The abundance of rocks and trees means that resource-based industries such as softwood lumber and mining have always been a significant part of the Canadian economy. But being a resource-based economy creates certain challenges. For example, how is resource wealth distributed? In particular, how is the wealth shared between people living now and future generations, and between resource-rich and resource-poor parts of the country? Also, resource industries tend to be fairly cyclical. How can workers and others be protected from the negative impacts of resource industry booms and busts? What happens to people and communities when the resources are gone - when a fishery collapses, for example? Who pays for the environmental harms?

3. Most Canadians live and work within 200 km of the US border

The map below shows where people live in Canada (Source). Although this map is based on 2006 Census data, the pattern it shows still holds today. The grey and green areas are sparsely populated; the red and orange areas represent cities and towns.

Relatively few people live on the Canadian Shield, in the mountain ranges of the West, or in the far North. Much of this area lacks basic infrastructure such as paved roads, water and sewage treatment facilities, cell phone coverage or high speed internet. Moreover, because the terrain is generally rocky or mountainous, and these areas are remote, remedying these infrastructure deficits would be very expensive. These places are stuck in a feedback loop - few people live there because there is no infrastructure; there is no infrastructure because few people live there. Or perhaps there are not many people who want to live where there is snow on the ground half the year, and the soil is too poor to have a garden.

 

The majority of Canada's population lives in the St Lawrence Lowlands - the rich fertile area around the St Lawrence River and Lake Ontario shown on the geological regions map above - or in BC's Lower Mainland.  A significant number also live in the interior plains where wheat, soy, canola and other crops are grown, or on the East Coast. 

The concentration of the Canadian population into cities and towns close to the US border means that, although Canada is one of the largest and least densely populated countries in the world, it is one of the most urban. 82% of Canadians live in urban areas, a higher percentage than in South Korea, Germany, Italy, France, and most other countries. 

Indeed, Canada's population is not just urban, it is concentrated in the big cities:  2018 OECD study estimated that 59% percent of Canadians lived in cities with more than 500,000 inhabitants. Cities accounted for 63% of national employment, and 61% Canadian GDP. More people working from home may change these patterns, but for now, most Canadians live and work in cities - and that's where the jobs are.

4. Canada is a small open economy

The proximity of Canada's population to the US border creates strong North/South ties. People in Vancouver take weekend trips to Seattle, not Toronto. Ottawa grocery stores stock Georgia peaches not British Columbia ones. Canada's geography, proximity to the US, and population size mean that it is a small open economy - our actions do not affect the world very much, but the actions of others, particularly the United States, affect us. Being a small open economy closely linked to the US constrains Canadian fiscal, monetary, tax, and social policies. 

5. The first people to live in Canada were Indigenous Canadians, the "First Nations"

At the time of first contact between the Indigenous peoples of Canada and European settlers, Indigenous people had a standard of living comparable to, if not higher than, that of wage earners in London (source). Although their housing might not have been as durable, Indigenous people enjoyed a meat-rich diet unaffordable to the average European, and their clothing was generally warmer and more water-proof.

Initially the relationship between Indigenous peoples and Europeans was cooperative, as Indigenous people's hunting skills were essential for the highly profitable fur trade (source, gated). However as more Europeans settled in Canada, Indigenous people's property and other legal rights were severely curtailed, often without adequate compensation. The standard of living of Indigenous people plunged (source). For generations, Indigenous people had very limited economic opportunities (see chapters 8 to 11 here, ungated).

This history matters for economists concerned about inequality. Indigenous Canadians today continue to face economic and other challenges. To be effective, anti-poverty and other policies must be sensitive to the realities of Indigenous Canadians.

Economists also have a role to play in reconciliation, that is, documenting the harms caused by treatment of Indigenous people in the past, developing renewed fiscal arrangements between the federal government and First Nations, and working on strategies for Indigenous economic development.

6. Canada is divided into 10 provinces and 3 territories

The provinces and territories vary widely in area, population, and a host of other ways. Ranked by area, Nunavut is the largest among the provinces and territories, but it had a population of less than 40,000 people in 2020. Ranked by population, Ontario is the largest, with (as of 2020) a population 14.7 million - approximately one in three Canadians. Alberta, Saskatchewan and Manitoba are often referred to as "the Prairie provinces"; Prince Edward Island (PEI), New Brunswick, Nova Scotia and Newfoundland and Labrador make up "Atlantic Canada"; "the territories" are Yukon, the Northwest Territories, and Nunavut.

Being aware of the differences between Canada's provinces and territories is important for economists doing empirical work. For example, most datasets (the exception is the Census) over-sample smaller provinces and rural areas to get a large enough number of respondents to estimate, for example, the employment rate of 35 to 44 year olds in New Brunswick. When using these datasets, it is important to weight responses appropriately.

7. Most government spending is done by provincial, territorial or local governments

The Canadian constitution gives Canada's provinces exclusive responsibility for health care, education, municipal institutions, local and provincial transportation infrastructure, as well as "Charities and Eleemosynary Institutions" - which basically means the relief of poverty.  A complete list of areas under provincial jurisdiction is set out in the Constitution Act.

The federal government is responsible for national defence, currency, banking, the regulation of trade and commerce, immigration, unemployment insurance, and other areas set out here. Any area that is not specifically listed in the Canadian constitution as a provincial responsibility is a responsibility of the federal government.

This division of responsibilities probably seemed like a good idea when it was first set out in the British North America Act of 1867. However it creates some tensions today.  

The chart above shows that provincial, local and territorial governments  account for the vast majority of spending on health, education, transport, public order (policing), and so on. The only areas of spending where the federal government plays a large direct role are national defence, "social protection" (old age pensions, employment insurance benefits, child benefits and other income-tested benefits), and general government services, which includes interest on the public debt. 

Provincial spending is set to increase substantially in the next few years as the baby boom generation (people born between 1945 and around 1962) ages and needs expensive medical and long-term care. Moreover, when baby boomers retire and stop paying as much in income taxes, provincial revenues will suffer. Some provinces, too, have relied heavily on resource revenues to meet their spending needs, and decreases in commodity prices put serious pressure on their budgets.

Even in the best of times, however, provinces' and territories' revenue-raising ability is limited. If any one province tries to impose significantly higher taxes than other provinces, taxpayers - especially high income tax payers and corporations - can just move. This combination of factors means that...

8. The fiscal situation of most provinces and territories is not sustainable

 

The chart above shows the Parliamentary Budget Office's 2020 calculation of the "fiscal gap" for each province and the territories, defined as "the difference between current fiscal policy and a policy that is sustainable over the long term." Only three provinces - Quebec, Nova Scotia, and Ontario - have sustainable fiscal policies. The rest can expect to see the gap between revenues and expenditures widen over the medium- to long-term - unless they change their taxing or spending policies.

9. Some provinces are richer than others

Some provinces and territories have higher GDPs, relative to their population, than others. For example, per capita GDP in the sparsely populated but resource-rich Northwest Territories is more than twice that of Prince Edward Island.

Notice, however, that a high per-capita GDP does not translate into fiscal sustainability - some of the richest provinces and territories, measured on a per capita GDP basis, have some of the least sustainable long-term finances. 

In part, this reflects policy choices made, for example, Alberta's decision not to have a provincial sales tax, and to have a low corporate tax rate.

Second, it is hard for governments to raise revenue from capital-intensive industries, such as the oil, potash, and mining industries that make some Canadian provinces and territories rich. In these industries, much of the income generated goes to the owners of capital - the shareholders - to compensate them for their investments. However the tax rate on capital income - capital gains, dividends and so on -tends to be significantly lower than the tax rate on wage and salary income - that is, money earned by employees. Lower tax rates on capital income translate into lower revenues from capital-intensive industries.

Third, resources run out, and then all you have left is the cost of clean-up - and a large fiscal gap. 

10. Canada would be a very different place without federal transfer payments

Canadian citizens and permanent residents can receive hospital and physician care, at no charge, anywhere in the country. They can get an undergraduate degree at a top university and pay tuition fees of less than $10,000 per year - a fraction of the amount paid by undergraduates at top US schools. Canadian public school systems provide most children with a decent education free of charge, regardless of the income or wealth of their parents (to see how Canadian students' academic performance compares with other countries, see the OECD PISA test results). 

These health and education systems are possible largely because of transfer payments from the federal government to provincial governments. The Canada Health Transfer funds health care. The Canadian Social Transfer funds education and social programs. Equalization payments are designed to equalize the fiscal capacity of the provinces, and compensate have-not provinces for having a smaller tax base and less revenue-raising capacity. With these federal transfers, poorer provinces can provide public services comparable to those  available in richer provinces.

11. Quebec is distinct 

The province of Quebec was, historically, a French colony, and is still predominantly French-speaking (this animation https://atlas.gc.ca/ette/en/index.html shows how Canada has evolved over time).

Students of public policy need to know that, in many areas, policies in Quebec are different from policies in the rest of Canada. For example, Quebec has its own pension plan (QPP), and largely sets its own immigration policy. It does not participate in federal-provincial tax collection agreements, which gives it greater control over how its income tax is constructed. Quebec also has different policies with respect to maternity/parental leave, child benefits, child care, and in other areas. Unlikely the rest of Canada, which is governed by the "common law", Quebec has a "civil law" based legal system.

Empirical economists need to to take into account Quebec's distinctiveness when analyzing policy. Analyzing returns to education? Remember that in Quebec high school ends at grade 11, and is followed by two years at CEGEP before university. Analyzing impact of marital status on earnings? Remember that living together without being married ("common-law") is far more common in Quebec than the rest of Canada.

12. One in five Canadians are immigrants

In 2015, the most recent year for which data is available, 21.8 percent of Canadians were immigrants. Canada is far more open to immigration than the US, where immigrants make up 14.5 percent of the population. In recent years, approximately 300,000 new immigrants have entered Canada each year, and immigration has accounted for 80 percent of Canada's population growth.

Historically, Canada's immigration policy strongly favoured British, Northern European, (white) American, and central or southern European immigrants - roughly in that order. People who were not white or Christian often faced considerable barriers if they wished to immigrate to Canada. For example, from 1885 onwards a special "head tax" was imposed on Chinese immigrants to Canada, and in 1923 the Chinese Immigration Act effectively banned most Chinese would-be immigrants. A 1911 Order in Council banned "negro" immigration on the grounds of climactic unsuitability. Canada's response to Jews fleeing the Holocaust was none is too many. Other examples abound. New immigration regulations began to eliminate these racist policies in 1962, and other reforms in 1967 and 1976  created the points-based, skills-focussed immigration system we have today.

Economists need to keep this racist history in mind when doing empirical analysis. For example, when comparing the earnings of Canadian-born people of colour (POC) and white Canadians, it is often a good idea to restrict the sample to people under the age of 50, as there are so few Canadian-born POC over that age. Likewise, when doing any comparison of white and POC Canadians, it is useful to remember that the white group will be considerably older than the POC group.

Today Canada's immigration policy is driven by economic and compassionate considerations - the majority of new permanent residents are admitted under "economic categories", which means they have education, skills and work experience valuable in the Canadian labour market. Most of the remainder are admitted under family reunification categories - people married to Canadian citizens, for example - or are refugees. Because most new labour market entrants are immigrants, the recognition of immigrants' educational credentials, and the matching of immigrants with jobs, as a vital economic issue.

13. Where to find out more

Statistics Canada is the best source of data on Canada. Top sources for data that compare Canada and other countries are the World Bank and the OECD. For analysis of Canadian economic policy, check out Canadian Public Policy, the Canadian Journal of Economics, or publications of think tanks such as the Institute for Research on Public Policy. The Discover Canada citizenship guide gives a concise well-written summary of Canada's history and political institutions. This list is far from comprehensive, however - please suggest additional sources, or suggest other important facts that should be on this list, in the comments below.

 

Comments

[Gavin Moodie]

Thanx very much for this most informative post.

Why is it 'hard for governments to raise revenue from capital-intensive industries'? Haven't governments just chosen to tax capital income at low rates?

While tax payers are in principle mobile, taxable capital assets such as land and pipelines are not mobile. Governments could even regulate more the movement of money, tho capitalist governments are most unlikely to do so. But at least they could tax the transfer of money.

While taxpayers are currently free to move jurisdictions, how likely are they to do so in Canada? Unfortunately I did not keep the reference, but I thought that high taxing USA states do not have low proportions of highly taxed taxpayers. That is, the high taxing states of Wisconsin, New York and Michigan, for example, have not lost high taxpaying tax payers to Tennessee, Nevada and Wyoming.

[Frances Woolley]

Gavin - thanks for your kind words, and for your careful reading - you've zeroed in on what's probably the most speculative aspect of this entire post.

There's a general consensus among economists that there are limits to how much it is possible to tax capital, because it is highly mobile, so if one jurisdiction tries to tax capital the capital will just move elsewhere. But does this really apply to resource-based industries such as oil or forestry? After all, since the oil is in Alberta, the oil production kind of has to be in Alberta.

What's not in doubt, however, is that capital income *is* taxed at a much lower rate than labour income in Canada, and that a greater percentage of provincial GDP comes from "gross operating surplus" i.e. capital income in Alberta than in most other provinces - see https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610022101. So whether one believes that the lower taxation of capital income is a necessity or a choice, there's no doubt that the capital income as a % of GDP affects a province's revenues (if not necessarily their revenue raising capacity).

[Frances Woolley]

Gavin - on interprovincial mobility, the classic paper is Milligan and Smart http://irpp.org/wp-content/uploads/2016/01/aots5-milligan-smart.pdf - there seems to be some amount of interprovincial movement in response to tax rates.

[Gavin Moodie]

Thanx very much for referring me to a most informative chapter.

[Amrita Rani Deb]

Thanks a lot for sharing this informative write up. Those facts are very important for them who wish to know more about Canada and analyze it.
Before reading the article, I never knew about those facts besides the highly globalized Canadian economy and its modern culture. I feel more amazed after knowing about Canadian federal governments equalization payments transfer policy to provincial governments which helps to generate more tax revenue of ‘have not province’. So, rural based province governments also can offer advanced services to their citizens.
I thought, Canadian federal Government’s huge participation in Social protection, Health, education, science and technology is great reflections of the government transparent policy and civil liberties. For which Canadians lived quality life with economic and social freedom.
Surely, Canadian economy is small open economy. But, it has become one the world’s largest economics despite the US’ economy’s huge impacts on it. In recent century Canadian manufacturing, mining and service sectors transformed a lot which is a good example for other developing countries.