Ottawa goes all in on growth in risky economic gamble – The Globe and Mail

Ottawa has gone all in on its bet that the economy can outpace the enormous debt burden incurred during the COVID-19 pandemic. Tax hikes are out, spending cuts won’t happen. Growth is the gambit.

“Above all, we know that our national focus, once we emerge from COVID-19, must be growth and competitiveness,” Finance Minister Chrystia Freeland asserted in her economic and fiscal update in December. “Measures to promote them will figure prominently in the budget.”

The Liberals have pointed to the country’s sizzling labour market as proof of their economic management prowess. Canada is indeed a leader among developed countries in creating jobs. But we’re at the back of the pack in creating wealth.

Rising productivity, not jobs, is what will be key to not just outrunning the shadow of the federal debt burden, but in creating the fiscal capacity to deal with climate change, an aging population and a host of other huge challenges in coming decades.

How business leaders in five key sectors say Canada should build a 21st-century economy

Stimulating the economy was easy. Taming inflation will be much trickier.

Ms. Freeland’s fiscal update speech mentioned jobs nine times. Productivity got zero mentions. Competitiveness, just one.

That lopsided emphasis is one warning sign. Another is Canada’s last-place finish in an October study from the Organization for Economic Co-operation and Development on projected growth in per capita gross domestic product from 2020 to 2060 among its 38 member countries. That’s in keeping with a dismal long-term trend that has seen Canadian productivity growth slide over the past 50 years.

If the Liberals’ gambit is to pay off, that 50-year slump must end. Canada needs a productivity plan. But so far, the federal government hasn’t produced one. “There’s a lack of ambition, a lack of commitment,” says Scotiabank chief economist Jean-François Perreault.

There were some micromeasures in the budget aimed at boosting the rate of technology adoption by small and medium-sized companies. Ms. Freeland has pointed to “social infrastructure” spending as the foundation for the Liberals’ growth agenda, including more money for education, housing and higher levels of immigration. The biggest single initiative is child-care expansion, which the government portrays as a catalyst for productivity comparable to continental free trade, asserting it will boost economic growth for decades.

But economists cast cold water on those assertions, particularly the notion of a long-lived effect. There will be some boost from smoothing the path to the labour market for parents, although for the most part that will come from the hard, slow work of increasing the number of child-care spaces rather than the higher-profile policy of slashing the fees parents pay.

But even child care, by far the most ambitious policy the Liberals have presented, falls far short of what’s needed to reverse Canada’s decades-long slide in productivity and wealth creation. Big ideas are needed to galvanize growth, to set Canada on a path to greater prosperity.

The big slump

Canada real GDP per capita growth, quarterly, 1961-2020

the globe and mail, source: scotiabank Economics;

Statistics Canada

The big slump

Canada real GDP per capita growth, quarterly, 1961-2020

the globe and mail, source: scotiabank Economics;

Statistics Canada

The big slump

Canada real GDP per capita growth, quarterly, 1961-2020

the globe and mail, source: scotiabank Economics; Statistics Canada

“We need a strategy now,” says Perrin Beatty, president and chief executive officer of the Canadian Chamber of Commerce, arguing that the federal government needs to move quickly and not wait until the coronavirus crisis has receded.

Ahead of the 2022 federal budget, The Globe talked to economic thinkers across the country about what they view as key parts of a growth agenda for Canada – and to stick to ideas the federal Liberals could conceivably sign on to.

Hang your hat on a goal

John F. Kennedy didn’t just say America would land astronauts on the moon. In 1962, the then U.S. president declared America would do it before the end of the 1960s, committing to a firm and ambitious goal even though not every part of a plan had been worked out. (Indeed, his landmark speech on the space race noted that American spacecraft would use new alloys, “some of which have not yet been invented.”)

By contrast, Ottawa has committed to boosting Canada’s productivity in only the vaguest terms, verging on wishful thinking. A chart in last spring’s budget purported to show long-term productivity gains resulting from child care and other measures. But its projections simply assumed a surge in productivity, and a reversal of a half-century of decline.

“We need an objective-based economic agenda,” says Mr. Perreault, suggesting that the government explicitly commit to a goal of boosting GDP per capita by 2 per cent a year. That might not seem impressive, but it would mean a doubling of current rates.

The target could be to get Canada into the top 10 among OECD countries for productivity growth within a decade. Or, as Mr. Beatty suggests, there could be a goal such as a certain percentage of trade from Asia flowing through Canadian ports.

Whatever that goal is, it shouldn’t be easy, he says. For there to be a prospect of success, there also needs to be the possibility of failure – and a motivation for action by the government. The federal Liberals are well aware of the power of such a public commitment; it is at the heart of their climate change plan.

Canada bringing up the rear

Projected real GDP per capita growth, CAGR*,

OECD countries, 2020-2030, %

Costa Rica

Czech Rep.

New Zealand

OECD average

Euro area avg.

*Compound annual growth rate

the globe and mail, Source: business council

of british columbia; oecd

Canada bringing up the rear

Projected real GDP per capita growth, CAGR*,

OECD countries, 2020-2030, %

Costa Rica

Czech Rep.

New Zealand

OECD average

Euro area avg.

*Compound annual growth rate

the globe and mail, Source: business council

of british columbia; oecd

Canada bringing up the rear

Projected real GDP per capita growth, CAGR*, OECD countries, 2020-2030, %

Costa Rica

Czech Rep.

New Zealand

OECD average

Euro area avg.

*Compound annual growth rate

the globe and mail, Source: business council of british columbia; oecd

Bribe the provinces to create a national economic space

For decades, commissions and white papers have pointed to an obvious step Canada can take to accelerate growth: dismantle trade and regulatory barriers between provinces to create a unified national economic space. And for decades, those recommendations have collided with the political inertia of provinces unwilling to irritate their constituencies for the sake of the national good.

To cut through that made-in-Canada protectionism, Mr. Perreault suggests borrowing a page from the federal Liberals’ approach to health care (which is in provincial jurisdiction): Give the provinces money in exchange for dismantling those internal barriers.

He estimates that the federal government would reap a fiscal dividend of between $13-billion and $15-billion if there were free trade within Canada. Ottawa can offer that cash ahead of time to the provinces, a huge inducement to get on board with radical regulatory reform. “Basically, you’re bribing the provinces,” he says.

Create a pandemic buffer

The pandemic exposed an unlikely Achilles heel of the economy: Canada’s already overstretched intensive care capacity. Countries with higher per capita counts of ICU beds were more able to avoid, or at least minimize, lockdowns and other draconian measures, says David Macdonald, senior economist at the left-leaning Canadian Centre for Policy Alternatives (CCPA).

Provincial premiers are already clamouring for billions of dollars more in health care transfers. Mr. Macdonald suggests Ottawa accede to their requests, but tie that new funding, at least in part, to the provinces increasing spending on the infrastructure and staff needed to expand Canada’s ICU capacity – as a buffer against a future health emergency.

Cut red tape to go green

The federal Liberals want to shift the Canadian economy away from fossil fuels to a greener future, including battery production for electric vehicles. But Beata Caranci, Toronto-Dominion Bank’s chief economist and a senior vice-president, points out a major flaw in that push. A thicket of regulations means that it can take 15 years for a mine that would produce the minerals for batteries to start operating, an obvious disincentive for any investor, and particularly damaging for an emerging sector.

Clear out that thicket, Ms. Caranci says, with a goal of reducing the regulatory turnaround to just three years. That example echoes a broader point from others, that layers of regulations built up over decades are choking innovation. Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business, says the federal government needs to rethink about introducing any new regulations, at a minimum.

Even without a regulatory paring, Mr. Kelly says, Ottawa can move to reduce the (literal) paperwork burden on businesses by speeding a shift to virtual government – the virtues of virtual having been made clear during the pandemic.

Show-us-your-receipts corporate tax cuts

Cuts in the general corporate tax rate didn’t do much to spur investment over the past decade. And, in any case, the federal Liberals have not expressed any enthusiasm for a laissez-faire approach to business investment.

But there are glimmerings of a strategy to channel private-sector dollars toward boosting productivity. In 2018, the Liberals put in place targeted tax benefits for investment, with accelerated depreciation for certain sectors for investments made up until 2028.

Last year, the government introduced a measure to allow for the immediate expensing of eligible investments – but that program was limited to private Canadian-controlled corporations and only up to a ceiling of $1.5-million.

Mr. Macdonald says making accelerated depreciation a permanent measure could spur investment by the private sector, while avoiding the peril of cutting corporate tax rates only to see the resulting tax expenditures flow out of the company in the form of dividends or share buybacks.

Ms. Caranci of TD Bank has a variant of that idea: Give tax breaks to small and medium-sized companies based on their rate of expansion. That would challenge the political orthodoxy that has seen many federal and provincial governments lavish praise and tax benefits on small businesses. But those measures have also created a tax cliff, Ms. Caranci says, where businesses that expand see their tax rates climb sharply. A tax measure tied to growth would help to erode that tax cliff and reward businesses that dare to invest, expand and win, she says.

Streamline the tax code

The Income Tax Act has grown in heft and complexity since its introduction more than a century ago. But University of British Columbia economist Kevin Milligan proposes a reversal, if a gradual one, that would aim to continually simplify and consolidate rules and incentives in personal and corporate taxation. (Prof. Milligan, who was seconded to the Privy Council Office in fiscal 2020-21, says he does see the 2021 budget as laying out a strategy for rejuvenating economic growth.)

He says he’s wary of a big-bang approach to rewrite the tax code all at once. But a continuing commitment to eliminate a few complicated tax measures each year would, over time, create a more transparent system, he says. “That’s an agenda any government should want to grab onto.”

The government could pocket the revenue resulting from eliminating byzantine subsidies, or roll back tax rates, he says. The Liberals have already taken that latter approach in their first term, when they eliminated a slew of Conservative tax exemptions, then cut the middle income tax bracket for individuals.

Mr. Beatty makes a similar point, arguing that a wide-ranging review of the tax system is long overdue. But the goal should be to increase the efficiency and fairness of taxation, not necessarily to cut rates for businesses, he says.

Tap into grey power and parent power

Canada’s work force will need all hands on deck to avoid labour shortages as the population ages.

That imperative will include young seniors, and will require the federal government providing incentives for them to continue working past 65. A decade ago, the Conservatives tried to address that need with a move to gradually bump up the age of retirement – a policy the Trudeau Liberals promptly reversed after being elected in 2015.

A reversal of that reversal seems most unlikely. But Mr. Perreault of Scotiabank says there are other ways the Liberals could make delayed retirement more desirable, though not mandatory. One possibility: increasing the benefits from deferring Canada Pension Plan and Old Age Security benefits. Another would be to increase the amount that seniors can earn if they keep working, without reducing their government benefit payments.

Parents, particularly mothers, are another obvious cadre of reinforcements for a stretched work force. The Liberals are already moving on that front, with a child-care policy aimed at increasing work-force participation rates for women by cutting out-of-pocket fees for parents and by expanding capacity.

But the CCPA’s Mr. Macdonald suggests that further investment focus on capacity expansion will deliver a bigger impact on productivity than simply reducing fees for families already using child care.

Personnel trainer

There are tens of thousands of stay-at-home moms who desperately need training to re-enter the work force, says Wilfrid Laurier University economist Tammy Schirle. Yet formal training programs are typically tied to unemployment benefits, and are usually out of reach for women who have been out of the work force for years.

A new approach that untethered training from job loss and instead treated it as a bridge to employment, whatever the starting point, would not just benefit individuals, but eliminate mismatches and inefficiencies in the labour force, Prof. Schirle says.

Other people could also benefit: gig workers trapped in low-end jobs; labourers who will need a second, less physically demanding career as they age; and seniors. Ultimately, she says, a more efficient labour market is a key component of a more productive economy. “We’re looking for that efficient allocation of talent.”

Tilt the table on innovation

Former BlackBerry Ltd. chairman and co-CEO Jim Balsillie says he has a big idea to drive innovation that won’t cost Ottawa a dime: Stop giving away our best ideas, and corral that intellectual property within Canada. The tech entrepreneur and chair of the Council of Canadian Innovators says Canadian policy hasn’t kept up with seismic changes in the global economy, most notably the accelerating shift from a production economy to a knowledge economy.

For Mr. Balsillie, Ottawa’s current approaches, such as attempting to spur the growth of superclusters for key industries, simply fails to understand and embrace that change. The debate should not be about shifting from resource extraction to factories making gear for the green economy. Canada should not try to compete on labour costs in a world where many other nations can offer much more favourable terms.

Instead, the focus of policy should be creating conditions for Canadians to invent the next world-beating electric battery, rather than make someone else’s. “The money is owning the idea, and capturing value on that,” he says.

One immediate change he recommends: leverage federal research funding to capture more of the economic value of Canadian innovation. That could be done by requiring that the rights to any intellectual property have to be retained in Canada, so that domestic firms can make use of that technology.

Big data is another area that needs a public presence, says Mr. Balsillie, arguing that the federal government should create data collectives that can be licensed by private firms, rather than see big tech companies fill that void. Canada has a long tradition of using public institutions to build the country and economic capacity, he says. It’s time to build on that history.

Mr. Balsillie acknowledges that his proposals mark a necessary break with the prevailing mindset of official Ottawa, particularly the notion of abandoning a laissez-faire approach to intellectual property. But he says the stakes could not be higher. Canadians can either seize the high ground in the increasingly digitized global economy, and reap outsized benefits, or this country will see itself relegated to at best second-tier status.

The choice should be obvious for this government, or any other, Mr. Balsillie contends. “There is nothing partisan about prosperity.”

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