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Don’t be fooled by high-speed rail

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6 minute read

From the Frontier Centre for Public Policy

By Randal O’Toole

Rail advocates admit that trains can’t compete with airliners over long distances or with cars over short distances but claim there is a middle distance – supposedly around 150 to 800 kilometers – in which rail has an advantage over its competitors. That would be true only if the trains were almost 100 percent subsidized.

The Canadian government is considering spending $6 billion to $12 billion to introduce what it calls “high-frequency trains” between Toronto and Quebec City. Though some media reports have described these as high-speed trains (which generally means trains capable of going 250 kilometers per hour), they won’t be. Building such a rail line would easily cost $60 billion and probably much more.

Passenger-train advocates argue that Canada needs to join the international race to have the fastest trains in the world. But this is a race Canada can afford to lose because the country has something that is faster and far less costly: jet airliners.

High-speed trains were already obsolete in 1964, when Japan started operating its first bullet trains. Six years before that, Boeing had introduced the 707 and Douglas the DC-8, both of which cruised four times faster than the early bullet trains and twice as fast as the fastest trains in the world today.

Aside from speed, airliners also have a huge cost advantage because they don’t require a lot of expensive infrastructure between cities. While airports are infrastructure, the only infrastructure airliners really need are paved runways and perhaps a Quonset hut for ticket agents, baggage handling, and a waiting room—which is all that some of Canada’s more remote airports have.

Today’s big-city airports with huge concourses, shops, and jetways were built up over time and mostly paid for out of ticket fees. In contrast, rail advocates want taxpayers to put up tens of billions of dollars before a single wheel turns in the hope that trains that are slower than flying, less convenient than driving, and more expensive than both will somehow attract a significant number of travelers.

Rail advocates admit that trains can’t compete with airliners over long distances or with cars over short distances but claim there is a middle distance – supposedly around 150 to 800 kilometers – in which rail has an advantage over its competitors. That would be true only if the trains were almost 100 percent subsidized.

Air Canada and its competitors currently offer more than three dozen flights a day between Toronto and Montreal with fares starting at $118, less than 25 cents per passenger-kilometer. Fares on VIA Rail Canada averaged 68 cents per passenger-kilometer in 2022, and more than half of its costs are subsidized. People are simply not going to ride high-speed trains in large numbers if those trains cost far more than airlines, buses, or driving.

Amtrak’s only high-speed train, the Acela, collected fares of CN$1.80 per passenger-kilometer in 2022, and while Amtrak claims it covers its operating costs, all of its infrastructure costs are paid for by taxpayers. Amtrak brags that it carries more passengers in the Washington-New York corridor than the airlines, but cars and buses in this corridor carry well over 10 times as many intercity passengers as Amtrak.

The other argument rail advocates make is that high-speed trains will offer shorter downtown-to-downtown times than airlines in some markets. But most people neither work nor live downtown. Toronto and Montreal each have three commercial airports and residents are more likely to be near one of those airports than downtown.

Finally, rail proponents claim that high-speed trains will emit fewer greenhouse gases than cars or planes. But as usual they ignore the construction costs—that is, the billions of kilograms of greenhouse gases that would be emitted to build a high-speed rail line. It is likely that operational savings would never recover this cost, especially since it would be far less expensive to power jets and automobiles with biofuels.

One thing is certain: building high-speed or even high-frequency rail will require lots of workers. Far from being a benefit, Canada is currently suffering a labour shortage that is not expected to end soon. If the government decides to spend billions on a rail line, it will only make the costs of housing, cars, and just about everything else rise even faster.

China, Japan, and Spain have practically wrecked their economies by spending too much on high-speed trains. Just because other countries are foolishly building high-speed rail lines doesn’t mean Canada should do so any more than the country should spend billions on other obsolete technologies such as telegraphs, electric typewriters, or slide rules. Taxpayers should tell the government not to waste money on such boondoggles.

Randal O’Toole is a transportation policy analyst and author of Building 21st Century Transit Systems for Canadian Cities. (20 pages) March 12,2024.

Business

Broken ‘equalization’ program bad for all provinces

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From the Fraser Institute

By Alex Whalen  and Tegan Hill

Back in the summer at a meeting in Halifax, several provincial premiers discussed a lawsuit meant to force the federal government to make changes to Canada’s equalization program. The suit—filed by Newfoundland and Labrador and backed by British Columbia, Saskatchewan and Alberta—effectively argues that the current formula isn’t fair. But while the question of “fairness” can be subjective, its clear the equalization program is broken.

In theory, the program equalizes the ability of provinces to deliver reasonably comparable services at a reasonably comparable level of taxation. Any province’s ability to pay is based on its “fiscal capacity”—that is, its ability to raise revenue.

This year, equalization payments will total a projected $25.3 billion with all provinces except B.C., Alberta and Saskatchewan to receive some money. Whether due to higher incomes, higher employment or other factors, these three provinces have a greater ability to collect government revenue so they will not receive equalization.

However, contrary to the intent of the program, as recently as 2021, equalization program costs increased despite a decline in the fiscal capacity of oil-producing provinces such as Alberta, Saskatchewan, and Newfoundland and Labrador. In other words, the fiscal capacity gap among provinces was shrinking, yet recipient provinces still received a larger equalization payment.

Why? Because a “fixed-growth rule,” introduced by the Harper government in 2009, ensures that payments grow roughly in line with the economy—even if the gap between richer and poorer provinces shrinks. The result? Total equalization payments (before adjusting for inflation) increased by 19 per cent between 2015/16 and 2020/21 despite the gap in fiscal capacities between provinces shrinking during this time.

Moreover, the structure of the equalization program is also causing problems, even for recipient provinces, because it generates strong disincentives to natural resource development and the resulting economic growth because the program “claws back” equalization dollars when provinces raise revenue from natural resource development. Despite some changes to reduce this problem, one study estimated that a recipient province wishing to increase its natural resource revenues by a modest 10 per cent could face up to a 97 per cent claw back in equalization payments.

Put simply, provinces that generally do not receive equalization such as Alberta, B.C. and Saskatchewan have been punished for developing their resources, whereas recipient provinces such as Quebec and in the Maritimes have been rewarded for not developing theirs.

Finally, the current program design also encourages recipient provinces to maintain high personal and business income tax rates. While higher tax rates can reduce the incentive to work, invest and be productive, they also raise the national standard average tax rate, which is used in the equalization allocation formula. Therefore, provinces are incentivized to maintain high and economically damaging tax rates to maximize equalization payments.

Unless premiers push for reforms that will improve economic incentives and contain program costs, all provinces—recipient and non-recipient—will suffer the consequences.

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Alberta

Alberta’s fiscal update projects budget surplus, but fiscal fortunes could quickly turn

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From the Fraser Institute

By Tegan Hill

According to the recent mid-year update tabled Thursday, the Smith government projects a $4.6 billion surplus in 2024/25, up from the $2.9 billion surplus projected just a few months ago. Despite the good news, Premier Smith must reduce spending to avoid budget deficits.

The fiscal update projects resource revenue of $20.3 billion in 2024/25. Today’s relatively high—but very volatile—resource revenue (including oil and gas royalties) is helping finance today’s spending and maintain a balanced budget. But it will not last forever.

For perspective, in just the last decade the Alberta government’s annual resource revenue has been as low as $2.8 billion (2015/16) and as high as $25.2 billion (2022/23).

And while the resource revenue rollercoaster is currently in Alberta’s favor, Finance Minister Nate Horner acknowledges that “risks are on the rise” as oil prices have dropped considerably and forecasters are projecting downward pressure on prices—all of which impacts resource revenue.

In fact, the government’s own estimates show a $1 change in oil prices results in an estimated $630 million revenue swing. So while the Smith government plans to maintain a surplus in 2024/25, a small change in oil prices could quickly plunge Alberta back into deficit. Premier Smith has warned that her government may fall into a budget deficit this fiscal year.

This should come as no surprise. Alberta’s been on the resource revenue rollercoaster for decades. Successive governments have increased spending during the good times of high resource revenue, but failed to rein in spending when resource revenues fell.

Previous research has shown that, in Alberta, a $1 increase in resource revenue is associated with an estimated 56-cent increase in program spending the following fiscal year (on a per-person, inflation-adjusted basis). However, a decline in resource revenue is not similarly associated with a reduction in program spending. This pattern has led to historically high levels of government spending—and budget deficits—even in more recent years.

Consider this: If this fiscal year the Smith government received an average level of resource revenue (based on levels over the last 10 years), it would receive approximately $13,000 per Albertan. Yet the government plans to spend nearly $15,000 per Albertan this fiscal year (after adjusting for inflation). That’s a huge gap of roughly $2,000—and it means the government is continuing to take big risks with the provincial budget.

Of course, if the government falls back into deficit there are implications for everyday Albertans.

When the government runs a deficit, it accumulates debt, which Albertans must pay to service. In 2024/25, the government’s debt interest payments will cost each Albertan nearly $650. That’s largely because, despite running surpluses over the last few years, Albertans are still paying for debt accumulated during the most recent string of deficits from 2008/09 to 2020/21 (excluding 2014/15), which only ended when the government enjoyed an unexpected windfall in resource revenue in 2021/22.

According to Thursday’s mid-year fiscal update, Alberta’s finances continue to be at risk. To avoid deficits, the Smith government should meaningfully reduce spending so that it’s aligned with more reliable, stable levels of revenue.

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