Senior Vice-President and Chief Economist
This op-ed was originally published in The Globe and Mail on February 6, 2018.
The federal government is likely to outline its new fiscal plans before the end of March. Budget 2018 will focus on policies intended to share the benefits of a rising economy. While the narrative will emphasize helping the middle class, there will be an emphasis on removing barriers to success for disadvantaged groups, with a focus on gender.
One key challenge for fiscal planners will be projections of modest economic growth in the years to come. Indeed, after growing by 3 per cent last year, the trend pace of economic growth will be below 2 per cent a year in the coming decade. This modest outlook will limit tax revenues, unless governments take actions to bolster economic growth.
Economies grow either because there are more workers or workers are more productive. Removing obstacles to success can increase the labour participation of disadvantaged workers and improve the contributions they make to the economy. Addressing inequality is not just about fairness – it is a fundamental economic issue than can enhance growth. For example, women face greater obstacles to career success than men. Other large disadvantaged groups include people with disabilities, Indigenous people, newcomers, youth and older workers.
But, in the quest to support growth that reaches a wider part of the population, the government needs to be mindful to continue implementing policies to foster economic growth broadly. On this front, there are some growing challenges, chief among them being a low level of competitiveness.
In recent years, highly-indebted consumers and the real estate sector have fuelled the bulk of economic growth, which creates financial vulnerabilities. Looking ahead, exports and business investment will need to carry more of the burden of supporting growth, which poses some challenges. Exports are rising, but Canada is losing market share in the United States and other major trade destinations.
A lack of competitiveness in global markets can be traced in part to weak business investment. The Conference Board of Canada ’s Index of Business Confidence survey for winter 2018 showed 43 per cent of firms operating close to or above capacity, with the number rising to almost 80 per cent when factoring in firms operating slightly below capacity. However, only 52 per cent of business leaders felt now was a good time to invest. More than one-third of all firms are challenged by shortages of high-skilled labour . A greater headwind is that 48 per cent of businesses feel government policy is an impediment to investment.
Concerns about the North American free-trade agreement are surely weighing on the willingness of firms to invest. But businesses are also expressing concerns about policy choices, such as concern about rising minimum wages, new labour-law requirements, high electricity prices in certain provinces and rising Canada Pension Plan contribution rates. Taken collectively, Canada is becoming less competitive.
The Prime Minister has made clear Canada will not be matching the tax cuts now taking effect in the United States. This approach puts Canada at a competitive disadvantage, at least in terms of attracting foreign, and retaining domestic, capital. Canada ’s tax system is complex, inefficient and extremely burdensome. Simplifying the tax system while eliminating many tax expenditures and subsidies could provide the funds for a reduction in the general corporate-tax rate. Businesses should also be put on a more equal footing. For example, trade in services has great potential, but the services sector currently lacks the tax advantages that manufacturers receive.
Taxes are only one cost to business. Another is the regulatory burden on firms. Regulation should be predictable, efficient and consistent. Right now, regulation is complicated and onerous. The solution is to lighten the load, but also modernize regulation to foster growth in sectors with great potential, such as the life sciences, fintech and agrifood sectors.
What are the implications for the federal government ’s 2018 budget?
First, the government should keep debt as a share of the economy on a declining path even when revenue growth slows. The economy is in its ninth year of expansion. Policymakers should be mindful that recessions are a regular part of the business cycle and one will occur at some point in the not-too-distant future. It would be prudent to limit the deficit in the near term to provide the fiscal resources to respond to the next downturn. Since 2015, program spending has been rising at more than 6 per cent annually—the sustainable pace in the medium term is about 3 per cent.
Next, the government needs to focus on policies that might raise the future sustainable pace of economic growth. Public infrastructure investment can be a catalyst for private investment and reduce obstacles to economic growth. The government should deliver fully on its prior commitment to investment in productivity-enhancing infrastructure.
The government should also prioritize the development of the Canadian work force. High-skill workers are in demand, while middle-skill jobs have been lost and middle-income workers have seen little wage growth over the past decade. In addition to removing barriers to success for disadvantaged workers, policy should be directed to building the high-skilled work force of the future. Although education is a provincial responsibility, there are many channels through which the federal government can support skills development.
The next federal budget can be oriented toward reducing inequality, but it also needs to have policies aimed at boosting investment, innovation and competitiveness for business as a whole.