Budget 2021 is not up to the challenges we face

TORONTO—We need a new federal budget, this time one in which Finance Minister Chrystia Freeland clearly and candidly sets out the fundamental challenges facing the country and in which she also presents a clear plan on how to put Canada on the path to a more successful economy. Freeland’s first budget failed on both counts. Rather, the budget was a pre-election manifesto. With far-sighted Liberal policies Canadians, we were promised, were going to “punch our way out of the COVID recession” and position Canada to “come roaring back” with “bold new economic muscle” to achieve prosperity “for years to come.” To quote Greta Thunberg, the climate activist, “blah, blah, blah." But no credible plan to meet the needs of a future economy. If there is a single number that crystalizes Canada’s challenge, it is the economy’s potential growth rate. This is often described as the economy’s speed limit. It is the maximum growth rate the economy can achieve over time without triggering rising inflation and necessitating policies that apply the economic brakes. The potential growth rate is a combination of the growth in the workforce, which is slowing in Canada, and the growth in productivity, where Canada lags the U.S. and many other countries. Over the extended period, from 1970 to 2019, our potential growth rate has averaged 2.7 per cent. But over the past five decades, this growth rate has declined each decade. For 2020-2029, the 2021 budget projects it averaging just 1.7 per cent a year. With such a low potential growth rate, Canada faces great difficulty in delivering good jobs and a rising standard of living, and along with that the ability to generate the tax revenues need to manage an aging society and meet public expectations on quality education and healthcare, or do the new things we would like to do. Canada’s best hope is to become a much more innovative nation, prompting much higher levels of investment in human skills, physical capital, from smart infrastructure to digital and other advanced technologies in industry, and much greater focus on investment in intangibles such as research and development and ideas or proprietary knowledge in the form of intellectual property. Budget 2021 had some worthwhile initiatives, but too little went to the big investments needed to transition Canada to a much more innovative, productive and knowledge-based economy. Canada has been underinvesting in its future, which is why we are in trouble today—instead of putting more money into productive growth we have been living off past capital and become more of a rentier society putting our savings into real estate or, in the case of our pension plans, foreign stock markets. While the Budget said its plans would begin “improving Canada’s growth potential," there was little indication of how it planned to do this—what level of investment would be needed, for example. It predicted that raising Canada’s potential growth rate by one percentage point a year would increase per capita GDP by about $6,000, it failed to set out a plan to accomplish this. Likewise, Budget 2021 said that if Canada reduced its significant productivity gap with the U.S. by just one-tenth, this could raise real GDP growth by 1.5 percentage points over two decades. But it did not set out a strategy to do this. In their staff assessment of the Canadian economy in March, economists from the International Monetary Fund underlined the urgent need to increase the productive capacity of the economy. “Over the medium term, weak external competitiveness, low productivity growth, and population aging will limit potential growth to 1.7 per cent,” the IMF economists said, setting out the core challenge facing Canada. In fact, their report expected that real output by 2026 will be an estimated one per cent below its pre-crisis trend due to the disruptions to the labour market, capital investment and sectoral shifts in the economy. “Low productivity and an aging population will not be able to sustain output growth in the long run,” the IMF economists said, reiterating similar messages from earlier reports. “Canada needs to attract productivity-enhancing investments that can diversify the economy beyond traditional sectors, including the oil sector.” One sign of Canada’s poor economic performance is our weak international position. Canada is projected to continue running deficits in merchandise and services trade through 2026, continuing our chronic current account deficit. The current account measures our international transactions with the rest of the world, and the ongoing deficit shows that we are not earning enough in our international transactions to pay our way in the world. In particular, we are not producing sufficient goods and services the rest of the world, wants to buy, a problem that will worsen as the world moves away from oil and coal. This deficit each year is offset by increasing foreign debt or the sale of Canadian assets, including Canadian companies. Canada’s gross external debt, equivalent to 116 per cent of GDP in 2015, reached 125.6 per cent by 2019 and is projected to reach 135.3 per cent of GDP by 2026. While the budget failed to address the long-term needs of the economy, it was also remarkable for its absence of a sense of urgency. Yet as Global Trends 2040, a report of the U.S. National Intelligence Council, warned earlier this year, over the next two decades, the world “will face more intense and cascading global challenges, ranging from disease to climate change to the disruptions from new technologies and financial crises,” while “global competition for the core elements of technology supremacy will increase.” By 2040, China will have the largest economy in the world, followed by the U.S., India and Japan. The world is moving East. How does Budget 2021 prepare us for this highly contentious world? Budget 2021 is not up to the challenges we face. Freeland’s responsibility is to do much better in the 2022 budget. The alternative is a poorer and weaker Canada and a brain-drain as our talent pursues opportunities elsewhere. David Crane can be reached at crane@interlog.com. The Hill Times

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Budget 2021 is not up to the challenges we face

Chrystia Freeland’s responsibility is to do much better in the 2022 budget. The alternative is a poorer and weaker Canada and a brain-drain as our talent pursues opportunities elsewhere.

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