Freeland’s first budget must set Canada on a strong investment-innovation growth path

TORONTO—Finance Minister Chrystia Freeland’s first budget must set Canada on the strong investment-innovation growth path that we urgently need. The reality today is that we are not up to the challenges of a much more competitive global economy and failure to respond will mean a stagnant standard of living and an inability to afford the things we need to do as a country. We are losing ground. So we need a budget that is realistic about the challenges we face and which honestly acknowledges that putting the economy on the right path will be disruptive. It will take time and require policies that are big enough to have a real and lasting impact. Growth, to be sure, is not an end in itself. But if we want more and better jobs, the capacity to address challenges such as the aging society or a zero-emissions economy, and the tax base to provide the public goods we need or want, then we need a stronger economy driven by a rising level of innovation and the productivity it brings. One of the best measures of where we stand is the potential growth rate of the economy. This measures how fast we can grow without triggering a rebound in inflation and the need to apply the economic brakes. It is the economy’s sustainable speed limit and is determined by the rate of growth in the labour force and the rate of growth in innovation or what economists call total factor productivity. For many years our potential growth rate was above three per cent. But even before the pandemic, it had been slowing. The Bank of Canada estimates it at just 1.8 per cent in 2019 and, going forward, it estimates an average of just 1.4 per cent over 2021-2023. A key reason is the weak growth in productivity, the result of low investments in people, technology, infrastructure and intellectual property, and the persistence of interprovincial trade barriers. The Bank of Canada estimates it at just 1.8 per cent in 2019 and, going forward, it estimates an average of just 1.4 per cent over 2021-2023. The Hill Times photograph by Andrew Meade This is reflected in the declining growth of per capita Gross Domestic Product. From 2002 to 2011 per capita GDP grew at an annual average rate of one per cent. But the International Monetary Fund expects an annual average per capita GDP growth rate of just 0.2 per cent from 2012 to 2021. Another indicator we should worry about is our chronic account deficit. This measures whether we are paying our way in the world—can we earn to pay for what we want from the rest of the world? Since 2009, the answer has been 'No,' and the IMF sees persistent current account deficits continuing until at least 2025, the end point in its current projection. This cannot be blamed on oil prices. Canada has had a non-energy merchandise trade deficit for the past 15 years. We are not producing enough of what the rest of the world wants to buy. We are consuming more than we produce and paying our bills by borrowing from the rest of the world, raising our foreign debt and interest obligations to non-residents. So what do we do? The most critical challenge is to grow the tradable goods and services sector of the economy which means more investment in the productive side of the economy—in the skills and talents of people, in investment in machinery and equipment, and in our intellectual property and other intangibles. In a recent paper for the C.D. Howe Institute, William Robson and Miles Wu show a widening gap in business investment between Canada and the U.S., especially in machinery and equipment and intellectual property. For example, U.S. businesses are investing more than $3,500 in machinery and equipment per worker than Canadian companies. This gap has widened significantly since 2009. The gap in spending on intellectual property is even worse—Canadian businesses have been spending about $2,000 per worker since the mid-2000s while the U.S. figure has risen from about $3,000 to $7,000. These gaps put Canada at a serious disadvantage. They mean our workers have less technology to utilize, which could limit them to lower value-added industries with smaller pay cheques (and lower tax revenues for government). More business investment is needed for better-paying high-value manufacturing. As Canadian Manufacturers and Exporters point out, U.S. manufacturing investment was more than 50 per cent higher in 2019 than its level in 2004 but only 8.5 per cent higher in Canada. In fact, our capital stock in manufacturing has been declining since 2000. U.S. manufacturing productivity leapt ahead of Canada in 2000 and there is now a significant gap. Canadian manufacturing output has been the weakest in the G7 since 2005. Shockingly, it recently found that 55 per cent of its members see no use for advanced and emerging manufacturing technologies while another 15 per cent see only limited use. So there is a huge need for access to know-how and technology diffusion to upgrade. Pushing greater business investment has to be an immediate goal of the budget. One way would be a refundable investment tax credit for new investments in machinery and equipment and IP. But we need much more than that. We need a strategic innovation strategy, not the piecemeal and transactional strategy we currently have, but a strategy based on rigorous analysis with clearly stated objectives and priorities. Today we have a wide array of different programs, with different time frames and funding levels but no overarching strategy or priorities, except meaningless notions of Canada becoming a global leader in innovation. The goal should be to improve the competitiveness of the Canadian economy through higher-value activities that raise our productivity rate, thus improving our potential growth rate and delivering a higher standard of living. Programs, then, should demonstrate how they contribute to higher productivity. The budget must signal how the government will better focus its investment and innovation policies to achieve clearly stated goals. This is a necessity we cannot afford to ignore and will be the most important test of the budget. In the meantime, other countries are racing ahead. David Crane can be reached at crane@interlog.com. The Hill Times

Freeland’s first budget must set Canada on a strong investment-innovation growth path

The budget must signal how the government will better focus its investment and innovation policies to achieve clearly stated goals. This is a necessity we cannot afford to ignore and will be the most important test of the budget. In the meantime, other countries are racing ahead.

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Freeland’s first budget must set Canada on a strong investment-innovation growth path

The budget must signal how the government will better focus its investment and innovation policies to achieve clearly stated goals. This is a necessity we cannot afford to ignore and will be the most important test of the budget. In the meantime, other countries are racing ahead.

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