Where we were is no longer there

TORONTO—If things go well as we gradually reopen the economy, by the end of 2021 we should be back to where we were at the end of 2019. That’s progress of sorts. But individual Canadians will, on average, be poorer and many businesses which survived will be weaker than they were two years ago. Individuals, businesses and governments will also be much more heavily in debt. While this may be the best we can hope for, even bigger challenges lie beyond the immediate reopening, as a team of former senior policy-makers from the federal government warn in a report 'Spring 2020 Economic Outlook,' published by law firm Bennett Jones. We have to rebuild the economy as well—actually build a new economy—and do it under extraordinarily difficult circumstances. Otherwise, we will end up even poorer. Rebuilding, as the former federal officials—former Bank of Canada governor David Dodge, former deputy minister of finance Michael Horgan, trade expert John Weekes, and Serge Dupont and Richard Dion, former senior officials in Energy and Finance—say, is not simply an exercise in getting back to where we were. Where we were is no longer there. The world has changed—it will be a more difficult, more competitive and less friendly world—and we have to find our place in it. We will need a more muscular economy and strengthened social cohesion. For Canada to get back on a more dynamic growth path, we have to overhaul much of what we do and many of the arrangements we have to rebuild the economy while addressing the huge buildup of federal debt and negotiating new fiscal arrangements with the provinces—and do all this while also dealing with unacceptable levels of inequality and accelerating the transition to a low-carbon economy as we face growing problems from climate change. These challenges will test our institutions and our capacity to make really difficult choices. We have to not only deal with the consequences of the pandemic, but also make up for our failure to address deep-rooted problems in the economy and society that we knew were there but chose not to address. As the report says, even before the pandemic Canada had moderate growth prospects of less than one per cent per capita over the medium term. This meant, even before the pandemic, we were not on track to generate the good jobs and wealth creation we needed along with the fiscal capacity to handle an aging society and provide other public goods we value. We deluded ourselves by thinking we were an energy superpower and counted on oil to generate prosperity. But that was not to be. Turning things around was always going to be difficult but as the four former public servants argue, after the pandemic “Canada’s challenge will even more daunting and the climb ahead even steeper.” Partly, the report argues, success depends on Canada accelerating the transition to a digital economy, where “tangible assets and physical capital remain at the heart of our intangible modern economies,” but where “intangible capital generates and captures a growing share of the economic value.” Intellectual capital (talent and skills) and intellectual property (patents, copyright, trade secrets) and creative content are now critical across the broad range of industries that make up the economy. “Indeed, virtually all industries depend increasingly on innovation, IP, and data analytics for productivity and competitiveness” while “transformational technologies like 5G, big data, artificial intelligence, robotics will further intensify this shift in value from tangible to intangible capital.” Canada has not been a leader in this game, they say, so businesses and government will have to “re-think and adapt strategies to generate, protect, grow and commercialize intangible capital.” This means that rather than enticing foreign corporations to set up R&D branch plants in Canada to develop intellectual property for their foreign parents, Canadian governments and business need to work together to “convert talent and knowledge into capital that can be utilized and commercialized for Canadian prosperity.” We need to build up many more Canadian companies that can compete in the new global marketplace. For governments, now burdened with massive new debts to get us through the pandemic, the fiscal pressures will be great. They will need to review their spending priorities and the tax system (time for a wealth tax?) and will face what the report calls “hard choices to raise new revenues and cut spending.” After more than a decade of tax cuts we face a future with tax increases. Not only will governments emerge from the pandemic with much more debt—they will also face new fiscal pressures, the Bennett Jones report warns, including public expectations for additional investment in the healthcare system. “There will be no way around raising some taxes, and cutting some spending,” it says. This also means setting out a fiscal framework which, they argue, should keep growth in programme spending “well below” growth in revenue to place the deficit on a downward path and making room for rising debt-servicing costs as future interest rates rise. Moreover, there will be strong pressures to renegotiate federal-provincial fiscal arrangements as we redesign income security programmes and address health and other transfers. None of this will be easy. Moreover, these policy choices will also have to pay attention to income distribution and the distributional impact of changes in spending and taxation. As we face a difficult future of wide-ranging and difficult change, social cohesion —building a national consensus on the country’s priorities for a future economy— will require extraordinarily strong leadership as various groups compete for resources and every province demands its “fair share” of federal support. “Unity achieved during the crisis will be tested when the bills have to be paid” the report warns. But if we succeed in building a more innovative and productive economy, led by a growing legion is world-class Canadian businesses, the burden will be less. David Crane can be reached at crane@interlog.com. The Hill Times