Why Freeland’s next budget has to be an honest one

TORONTO—In the 2023 federal budget, Finance Minister Chrystia Freeland needs to deliver what I would call an honest budget. An honest budget is one that is up front with Canadians on the challenges we face and fully transparent on the state of the nation’s finances. An honest budget would also acknowledge that we will need to raise taxes, and soon. For a number of years, budgets have largely failed to meet this honesty test. Paul Martin’s 1994 budget was an exception. Instead, they have become partisan statements designed for short-term political advantage, sidestepping the serious challenges we face, inserting whatever wedge issues they can, and too often engaging in fuzzy accounting that hides the true pressures on the nation’s finances going forward. Today, we face pressing concerns. One is the state of the nation’s finances, where there is a significant debt and growing pressures on the public purse arising from meeting the needs of an aging society, financing the huge transition to net-zero emissions, and meeting our defence spending promises. Not to mention the costs of addressing the infrastructure, housing, and other costs from needed growth in immigration, and providing the essential education and training needs of Canadian workers as we undergo a period of intense creative destruction with new technologies displacing old industries and skills. At the same time, we face a critical need to improve the management, policy analysis, and service delivery capabilities of the federal government, all of which appear to have declined in recent years after a long period of neglect. In fact, a serious plan to improve the capabilities of the public service is essential. A tax increase will have to be part of our future, as a new C.D. Howe Institute paper by William Robson, Don Drummond, and Alexandre Laurin makes clear. This is both an issue of fiscal responsibility and intergenerational fairness. As the three authors point out, large deficits were incurred during the COVID pandemic to enable families to pay their bills and businesses to survive. Now, the Canadians who benefited from the huge pandemic-related federal spending should be the ones to help pay for it, rather than passing the bill onto the next generation. The three authors propose a one percentage point increase in the GST in 2024 and another in 2025, bringing the GST level back to where it was in 2006. This would raise an additional $23.5-billion in 2025-26. As well, to accelerate the transition to net-zero emissions, they suggest raising the GST on gasoline and other transportation fuels, starting in 2025-26, which would raise another $8-billion that year. But—and this is the other critical need of budget 2023—without a solid future-looking growth agenda to significantly improve Canada’s productivity performance, Canada will face a much bigger problem in meeting its future needs: from a robust health-care system, and a successful transition to net-zero emissions, to an innovative economy with good jobs and a rising standard of living. As the paper notes, the 2022 federal budget “missed the opportunity to engage Canadians in a serious discussion about rising private investment and productivity.” Meeting many of our challenges will be easier if we can raise our productivity performance. This is all about increasing the economy's speed limit, the rate of economic growth we can achieve without triggering a surge in inflation. This is the potential growth rate of the economy and the two key drivers are growth in the labour force and growth in productivity, which in turn is a consequence of our investment and success in innovation. Since even with plans that could see at least five million immigrants arriving Canada over the next decade, labour-force growth will be modest since the existing population is aging rapidly. We will be increasingly dependent on our ability to improve productivity performance—which means we must become much more innovative in our business sector since, ultimately, innovation takes place mainly in businesses. According to the OECD’s just-published compendium of productivity indicators, Canada’s is just 70 per cent of the Unite States' level, with Canada ranking a lowly 18th among advanced economies. As well as boosting investment in innovation, improving innovation-linked productivity will also require ensuring we have the people to deliver results. This means a much better job of identifying and planning for future skills needs. This isn’t just about university education; many of the jobs in the net-zero world will depend on increased apprenticeships and community college skills. Overall, we need to increase investments in both intangible assets, such as research and development, business organization, and employee training, along with tangible investments, such as machinery, equipment and new structures. All of this will be happening at a time of significant creative destruction in the economy as advances in manufacturing systems, digitalization, artificial intelligence, quantum computing, analytics, and the biosciences, along with a transition from a fossil-fuel economy to an electric economy upend many traditional businesses and legacy investments in obsolescing systems. Here the challenge is also an opportunity. As three European economists—Philippe Aghion, Celine Antonin, and Simon Brunel—argue in their book, The Power of Creative Destruction, “creative destruction can serve as a lever of growth” if public policy accompanies the process of creative destruction, not obstructing it, by encouraging the reallocation of resources to support the entry of new firms and new activities that are more productive. This includes helping affected workers and communities succeed as well as focusing on Canadian companies with scale and scope for international success, based on their own intellectual property and other intangible assets, to lead the country’s growth. So budget 2023, if it is to be an honest budget, will have to meet high thresholds. This cannot be another lost opportunity, because Canada can’t really afford that. Our future is at stake. David Crane can be reached at crane @interlog.com. The Hill Times

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Why Freeland’s next budget has to be an honest one

This cannot be another lost opportunity, because Canada can’t really afford that. Our future is at stake.

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