William G. Watson

Demographic change provincial fiscal behaviour and regional economic growth.

Demographic differences from province to province and region to region have an effect on economic growth in Canada both directly by changing the skill and productivity mix of regional populations and indirectly by influencing the levels of regional taxes and public expenditures. The interaction of these variables can be captured best in a regional general equilibrium model of regional growth and migration which is an extremely expensive undertaking. In the absence of such a model it is possible to consolidate a set of observations based on partial equilibrium studies. These studies suggest the following process: 1) demographic differences across regions give rise to differences in tax rates; 2) differences in tax rates cause interregional migration; 3) interregional migration causes unfavorable demographic effects in regions people leave; and 4) these effects in turn reduce economic growth both directly through reduced productivity of the labor force and indirectly as tax rates rise even further in order to support proportionately greater public expenditures from a reduced tax base. These observations suggest that market solutions to the problem of interregional allocation of labor may not be the most effective approach.