In light of the upcoming referendum in BC, several media outlets including Canadian Investor, The Province and JNW (an oil industry publication), have been reprinting conclusions from a 2016 Fraser Institute press release suggesting that proportional representation will drive up spending, deficits and debt.
In this mythbuster we’ll take a look at the research on PR and fiscal responsibility and show that the conclusions are not as simple as the Fraser Institute would like you to believe.
Proportional Representation: deficits, debt and surpluses
Carey and Hix (2009, London School of Economics) looked at all elections since 1945 in all democratic countries with a population of more than one million, taking a nuanced look at the relationship between a number of variables – including fiscal responsibility – and electoral systems.
Using data from 610 election outcomes in 81 countries between 1945 and 2006 they examined how countries performed based not just on a simple classification of majoritarian or proportional, but on how proportional the system was.
This was measured by “district magnitude”- which basically means how many members are elected per district.
One winner per district (a country using all single member ridings) defines a majoritarian/plurality system (like Canada, U.S. and UK). This is often referred to as “winner-take-all.”
Proportional systems are on a continuum from just a small amount of proportionality – such as electing two members per district – all the way up to the most proportional systems with over 20 members elected per district (a large part of the country or the entire country being one district, for example).
To put this continuum in a Canadian perspective, the Single Transferable Vote (PR-STV) model recommended by the 2005 British Columbia Citizens Assembly suggested districts up to 7 members (most common district size was 4 members), based on population density. This would be classified as a “low district magnitude PR system.”
It is important to note that moderately proportional systems such as this – maintaining local representation while producing proportional results – are the models consistently recommended for Canada.
Here is what Carey and Hix found about the degree of proportional representation, spending and deficits.
“To the extent that we found any differences between single member district systems and low district magnitude PR systems, the latter did better on spending, deficits, and scores on the United Nations Index of Human Development.”
The United Nations Index of Human Development – measures health, education, standard of living, and inequality.
Carey and Hix also found that:
“Any improvements in low-district magnitude PR systems, relative to single member systems, go away (and are even reversed) at higher district magnitude levels, which is why Persson and Tabellini (the research cited by the Fraser Institute) find the results they do when they test only linear models.”
In other words, they found that moderately proportional systems outperformed both winner-take-all systems and very highly proportional systems.
To add a note of caution to these findings, however, Carey and Hix found the positive results for low district magnitude PR systems using one kind of data analysis but not another*
Orellana (2014) in his comprehensive book of research examining how and why proportional democracies produce better outcomes, found that countries with proportional systems tend to have higher surpluses or lower deficits than less proportional systems, and lower levels of national debt.
Orellana finds that the projected national debt is 65.7 percent higher in majoritarian countries than in those with fully proportional systems.
This research also runs contrary to research the Fraser Institute cites. Why might this be?
According to Orellana, it has to do with what countries are included and how they are categorized – how a researcher deals with “outliers”.
For example, the paper by Clemens and Jackson released by the Fraser Institute categorizes Greece as a proportional system, even though – by giving a bonus of 50 post-election seats to the party with a plurality of the vote – its electoral system is deliberately designed to produce majoritarian results.
“Accurately categorizing Greece is critical because it is a country with extreme budget deficit problems. Even before its current economic crisis, Greece tended to have the highest budget deficits among OECD as a proportional system. If Greece is categorized as a proportional system, its deficits will significantly increase the average deficit of proportional systems. If Greece is categorized as a two-party system with political dynamics similar to those of single-member-district systems, then it will significantly increase the average deficit of two-party systems. Greece and Italy tend to have less diverse party systems even though they tend to be categorized as proportional systems. They essentially have two-party systems.”
He also notes that more diversity in the legislature does not equal more deficits – it’s the opposite. “The presence of more political parties tends to be associated with smaller deficits (larger surpluses).”
The research cited by Carey and Hix already suggests that governments in countries with moderately proportional systems do not spend more. Overall, do countries with PR spend more?
Government spending in OECD countries by electoral system:
Proportional representation: Average 44% of GDP
Semi-proportional: Average 41.8% of GDP
Majoritarian: Average 43.2% of GDP
In other words, far from a spending crisis in countries with PR, there is almost no difference between how much governments in countries with majoritarian and proportional systems spend!
What about corporate taxes – will PR mean businesses are taxed more?
It might surprise many people to find out that the average corporate tax rate in countries with proportional representation is lower than in countries with majoritarian systems. The only country with PR that has a higher corporate tax rate than Canada is New Zealand.
Proportional: 22.93% average corporate tax rate
Semi-proportional: 24.28% average corporate tax rate
Majoritarian: 29.81% average corporate tax rate
Opponents sometimes seem to suggest that proportional representation will hinder trade and investment. In fact, Evans (2009), in a study of 147 countries over 23 years, found that majoritarian systems have higher tariffs than proportional systems. Ardelean and Evans (2013) looking at countries over 19 years, found that tariffs were higher in countries with majoritarian systems.
What about economic growth and the strength of the economy?
While opponents claim that the supposed “uncertainty” of multi-party governance will scare investors away, the evidence simply does not support this.
Lijphart’s (2012) groundbreaking and highly acclaimed work comparing proportional versus majoritarian systems – 36 countries over two 25-year periods – and Orellana’s (2014) research found no relationship – positive or negative – between electoral systems and economic growth.
However, when Knutsen (2011) looked at a much longer historical period involving 3,710 country-years covering 107 countries from 1820 to 2002, he found that proportional and semi-proportional systems produced an “astonishingly robust” and “quite substantial” increase in economic growth – a one percentage point increase – compared to plurality-majoritarian systems. He concludes that PR and semi-PR systems generate more prosperity than majoritarian systems.
Norris (2011, John F. Kennedy School of Government, Harvard), examining the relationship between different aspects of democratic institutions and economic growth concluded, “the direct effects of proportional representation electoral systems are also significantly related to income, further confirming Knutsen’s conclusions.”
Alfano and Baraldi (2015), looking at 91 countries from 1979–2010, find a non-linear relationship between proportionality and rates of growth. The relationship appeared as a curve with the growth rate reaching its maximum value in correspondence with an intermediate degree of proportionality. In other words, they find that countries moderate systems of proportional representation (those recommended for Canada) are better in terms of economic growth. They conclude:
“Firstly, in systems with an intermediate degree of proportionality, the beneficial accountability characteristics
of plurality/majoritarian systems (which may induce office-motivated politicians to enact growth-promoting policies) are put beside the beneficial representativeness characteristics of PR (which induce politicians to enact public policies that benefit broad rather than narrow interests). Secondly, a mixed method enhances both political and government stability stimulating a relatively high growth rate.”
This backs up the findings of Carey and Hix (2010, London School of Economics) that there is an “electoral sweet spot” where moderately proportional systems out-perform both winner-take-all systems and extremely proportional systems.
In fact. 9/10 of the top economic performers in the OECD – with the highest GDP per capita – use proportional representation.
You cannot ignore the issue of “Policy Lurch”.
An underlying problem with ‘false majorities’ and one that is often overlooked by academics is the issue of policy-undoing or lurch where new Government’s feel the need to go back and undo or fix the previous government’s policy.
These vast policy swings perpetuated by switching between ‘false majorities’ cause instability in the investment sector and create challenges for business long-term planning and forecasting.
Both Canada and the United States use first-past-the-post voting where a small percentage of voter preference can mean a wholesale change in Government. The Liberal Government felt a need to undo the work of the Harper ‘false-majority’, Trump spent the first several weeks of his tenure signing executive orders undoing Obama’s work and BC is now experiencing the undoing of ‘false-majority’ Liberal policy.
To quote former Conservative Senator Hugh Segal:
“As first past the post elections manufacture contrived majorities – where thirty eight percent of electors can elect sixty percent of the seats-majority governments who classically eschew compromise with other parties get to impose economic policies from the right or left that do not reflect a balanced or inclusive economic policy framework. This can and has led to bad policy, excessive or inadequate tax initiatives, tilted labor relations, excessive or incompetent regulatory régimes. All of these can and have cost Canada and provinces economic slow downs, wild lurches from one economic policy to another and so on. This costs us vital time and setbacks on issues like jobs, investment, tax reform, poverty reduction, and education. These are setbacks that hurt people’s lives, aspirations and economic and social prospects.”
Proportional representation systems require parties and politicians to work together, to compromise and cooperate. Policy development may take a bit longer but the results are policy outcomes that have been fully vetted, debated, and approved by parties representing a true majority of the electorate. Canada has several stellar examples of policy created in a minority situations where parties had to work together on behalf of their constituents: our healthcare system and the Canadian Pension plan.
Business should welcome a continuum of stable policy decisions
If we were in a cycle of government where policy was a collaborative effort supported by a true majority we would be able to build policy that looked to the future. Governments would be able to build upon the last government, not undo the past at a massive cost to the taxpayer. Such a system of cooperation would provide a stable environment for business projections where business could feel confident that they were investing in projects that would not be undermined by negative policy decisions of future Governments.
What’s the bottom line?
The studies the Fraser Institute cites are two among a body of research.
How electoral systems relate to economics and fiscal policy is a very complicated issue, with different credible researchers getting different results based on how they classify countries and what statistical analysis they use.
At the very least, research overall and data from the OECD provides no compelling evidence that moderately proportional systems perform worse on spending, deficit and debt than winner-take-all countries. In fact, there is some evidence to suggest citizens are getting better results, for less money – more efficient government.
The only thing PR guarantees is a legislature that better represents us and more inclusive, cooperative decision making on policies which affect us all.
On the matter of PR and economics, there’s no justification for fear mongering.
Where proportional systems are performing better: Read here.
Alfano, M. & Baraldi, A. (2015). Proportional Degree of Electoral Systems Growth: A Panel Test. Rev. Law Econ. 2015; 11(1): 51–78
Ardelean, A., & Evans, C. L. (2013). Electoral systems and protectionism: An industry‐level analysis. Canadian Journal of Economics/Revue canadienne d’économique, 46(2), 725–764.
Carey, John M. and Hix, Simon (2009). “The Electoral Sweet Spot: Low-magnitude Proportional Electoral Systems.” PSPE Working Paper01-2009. Department of Government, London School of Economics and Political Science, London, UK.
Evans, C. L. (2009). A protectionist bias in majoritarian politics: An empirical investigation. Economics & Politics, 21(2), 278–307
Fair Vote Canada (2016). A Look at the Evidence: Submission to the Special Committee on Electoral Reform. http://www.fairvote.ca/category/fvc-erre-submissions/
Knutsen, Carl (2011). “Which Democracies Prosper? Electoral Rules, Forms of Government, and Economic Growth.” Electoral Studies 30: 83-90.
Lijphart, Arend (2012). Patterns of Democracy. Government Forms and Performance in 36 Countries. New Haven, CT: Yale Press.
Norris, Pippa (2011). Making Democratic-Governance Work: The Consequences for Prosperity. HKS Faculty Research Working Paper Series, John F. Kennedy School of Government, Harvard University.
OECD data (2015). General government spending. Retrieved October 1, 2017 at https://data.oecd.org/gga/general-government-spending.htm
Orellana, Salomon (2014). Electoral Systems and Governance: How Diversity Can Improve Policy Making. New York: Routledge Press (summarized by FVC: http://tinyurl.com/gmjtg2t).