Economic Influence: Perception vs. Reality

We have shown previously that Torontonians factored economic evaluations into their vote choice in the recent Mayoral election.  Those individuals who believed the city’s economy had improved in the year prior to the election seemingly were willing to reward Doug Ford for his brother’s performance.  The question such a finding raises, however, is why the city’s economy mattered for decisions in the mayor race.  Municipal governments and politicians have far less influence over the economy than do either federal or provincial governments.  As such, the question we consider in this blog post is whether citizens differentiate between the impacts of different orders of government on economic conditions?  Are they aware of the relatively economic impotence of municipal governments?

The Theory

Canada’s federal and provincial governments have constitutionally entrenched and clearly specified scopes of authority over a variety of economic policies.  Both levels of government have available to them a great number of levers that provide the potential to influence economic conditions.  Such levers include the ability to set tax rates (corporate, personal and sales taxes), go into deficit to spend and potentially stimulate the economy, and the ability to borrow money from both domestic and international sources.  At both levels, then, governments typically have significant and tangible authority to impact the economic conditions of their geographic area.

Do local governments, and specifically the City of Toronto, have an independent ability to influence economic conditions?  Municipal governments in Canada have far less independent authority than do their federal and provincial counterparts. Comparatively speaking, the financial tools available to municipalities are severely limited, and their power is highly constrained by the provincial governments that create and ultimately control them. For most municipalities, the property tax is the only major economic lever they have the authority to set. While property tax and other minor sole source municipal revenues, such as user fees, are useful for funding basic municipal services (e.g. snow removal, garbage collection, water) they do little to allow municipalities to implement, on their own, policies that could directly influence their local economy.

The economic influence of municipal governments is further limited by provincial laws that restrict municipal capital debt and prevent municipalities from running an operating deficit. Provincial and federal governments are able to spend and run deficits to help boost the economy during recessions.  Canadian municipalities, like their American counterparts, do implement economic development policies. For instance, many large cities have development corporations responsible for the development of city-owned land. While some of these corporations focus solely on the development of said land (e.g. Build Toronto), others are also tasked with stimulating development in declining areas of the city (e.g. CentreVenture in Winnipeg). However, there is little evidence, even in the United States where municipalities have a greater variety of tools at their disposal, that local economic development policies work.  Municipalities in Canada, therefore, have little, if any, ability to stimulate their own economy, and most certainly their influence is dwarfed by both the federal and provincial orders of government.

The Data

As noted above, Canada’s federal structure and the fact that municipalities have no constitutional standing and relatively little policy setting power suggest that the decisions of municipal governments should have little effect upon the economy, and certainly less of an impact than either the federal or provincial governments.  It is unknown, however, whether citizens perceive the municipal government’s power in such a manner.  The TES includes questions that ask respondents whether they believe each government has had a positive or negative effect upon the economy, or no effect at all, allowing us to evaluate this proposition.

The following table shows the perceived impact of each level of government upon the economy, based upon the following question:  “Have the policies of the [municipal/provincial/federal] government made Toronto’s economy better, worse, or not made much of a difference?”  Note that N = 2890.

Negative impact 25.7% 31.7% 28.3%
Neutral impact 43.0% 40.9% 43.0%
Positive impact 18.0% 13.2% 13.6%
Don't know 13.3% 14.3% 15.2%

The most immediately striking feature of the table is how little variation there is between the perceived impact of each level of government.  Values in the ‘neutral’ and ‘don’t know’ rows are remarkably consistent for each level of government.  The share of respondents who believe each government has had an impact, either positive or negative, is also very similar.  43.7% of respondents thought the municipal government had influenced Toronto’s economy, compared to 44.9% and 41.9% for the provincial and federal governments, respectively.  Perhaps surprisingly, fewer respondents believe that the federal government had an impact upon the city’s economy (either negative or positive) compared to the municipal or provincial governments.  Given the vastly different fiscal and policy setting power of the various levels of government, such a pattern is quite unexpected. 

So what might account for our potentially surprising finding?  One possibility is that political rhetoric may be such that voters are led to make incorrect links between the economy and the government effect.  In other words, it may be the perception of a politician’s economic impact, rather than the objective truth, that matters for vote choice.  The side that does the best job of arguing its economic impact stands to benefit from an issue that should likely not factor into mayoral election outcomes.  Indeed, Rob Ford claimed in the months leading up to the election that “I have transformed Toronto into an economic powerhouse.”  Such specious claims are hardly beneficial for political accountability through realistic economic voting, and they may be damaging the ability of voters to correctly gauge the impact of the municipal government upon Toronto’s economy.