UPDATE: The federal budget for 2022 has been released. Read the highlights here.
One week before the release of the federal government’s pivotal 2022 budget, Royal Bank of Canada chief executive Dave McKay was uneasy as he surveyed the daunting challenges ahead for Canada’s economy.
From the tidy, L-shaped desk in his Toronto office on Thursday, Mr. McKay was channelling the hopes and frustrations of a business sector that feels disconnected from Ottawa and unsatisfied with the Trudeau government’s performance on economic matters.
RBC is a federally regulated bank with a full-time employee base of 85,000 – a head count that exceeds the populations of some Canadian cities. Its $1.75-trillion balance sheet dwarfs the economic output of many provinces. As its leader, Mr. McKay is accustomed to weighing in on matters of national importance.
On this day, he was doing so with a level of candour that is almost unheard of for a top executive in an industry that is wary of courting controversy. And he wasn’t alone: nearly three dozen other leading figures in Canadian business had recently shared similar views with The Globe and Mail.
As Canada emerges from two years of COVID-19 crises, he argued, it needs a focused, “postwar” style plan to set its economy on a path to lasting prosperity. The country requires urgent action to deliver on the federal government’s massive climate transformation plan, and it must work quickly to seize a chance to redraw supply chains to its advantage, he said.
But to get there, he added, leaders in Ottawa will need to repair relationships with the business sector that are marred by frustration and mistrust. His tone was exasperated as he described years of back-and-forth with federal officials, who he said are too often “artificial and tactical,” and capable of talk but little action.
Like many CEOs and senior figures in Canadian business, he is eagerly looking for signs that the government is ready to use next week’s federal budget to announce a pivot in its thinking on economic policy. Top executives say it’s past time for a shift from crisis management to a strategy that makes economic expansion and productivity top priorities. They want to see the government’s fiscal approach, which they characterize as being driven by big-ticket spending, altered to focus instead on growing the nation’s wealth in order to distribute it more fairly.
“Some of the challenges are ideology challenges,” Mr. McKay said. “And what we’re hoping to see in the budget is a shift in ideology from tax-and-spend, which does not create sustainable growth, to an incentive to take risks, and innovate, and grow and solve problems.”
“Tax and spend to me is like eating Sugar Pops for breakfast. You feel really good for an hour and you feel crappy by noon, at the end of the day. And that’s what tax-and-spend gives you. It doesn’t give you sustainable prosperity.”
His call to action resonates with broader discontent in the senior ranks of corporate Canada. The Globe and Mail interviewed more than 30 CEOs, senior business leaders, economists and former government officials, many of whom are increasingly concerned that, at a moment of massive global economic transformation, Canada is missing a chance to set itself up for long-term success. They worry the country is sending the wrong signals, failing to encourage businesses to spend on expansion and missing out on investments from foreign companies.
As the minority Liberal government prepares to commit to a major spending package to secure political support from the New Democratic Party, businesses are lobbying Finance Minister Chrystia Freeland to work equally hard on fixing what they see as structural problems that prevent Canadian businesses from delivering on their potential. The business community’s proposed solutions include setting stable and focused policies to attract and direct investment, and to improve productivity.
After years of talk, however, Bay Street and the broader business sector haven’t yet found a way to bridge the divide with Ottawa. “We need a new model of collaboration,” Mr. McKay said. “We need a new model of solving problems.”
The federal Finance Ministry declined The Globe’s request for an interview with Ms. Freeland, and did not provide detailed responses to questions submitted in writing. In an e-mailed statement, press secretary Adrienne Vaupshas highlighted Canada’s strong recent economic growth numbers: GDP increased 6.7 per cent in the fourth quarter of 2021 and has risen eight months in a row.
”This is a strong performance but now is not a time for Canada to be complacent. The government is focused on increasing the long-term economic capacity of our country. We are focused on attracting more investment, creating good jobs, sustaining strong economic growth, and making life more affordable for Canadians,” she said, promising further details when the budget is released.
An example of the gulf that divides senior bankers and top officials at the Finance Ministry arose in the aftermath of the last federal election. CEOs from the country’s largest banks were still stinging from a campaign pledge that surprised and angered them: a new surtax and special levy on large financial institutions that would shift nearly $11-billion from their revenues to government coffers over four years.
Rather than fight back publicly and risk alienating the government, the CEOs quietly urged Ottawa to spend those dollars in a way that could create some economic payback, according to six sources with knowledge of the talks. The Globe and Mail is not identifying the sources because they were not authorized to discuss confidential conversations with government officials and feared doing so could jeopardize their companies’ relationships.
In private conversations that included deputy finance minister Michael Sabia, the bank CEOs jointly and individually pitched the idea of letting banks and insurers keep more than $5-billion that would otherwise be taken from them under the new measures. Under the industry’s proposal, the institutions would earmark that money for investments and lending in areas that are high on the government’s agenda, like housing supply or climate transition.
It was proposed as a win-win: the government would get credit, the money would be used in ways that could spur economic growth and activity, and the banks would avoid having a multi-billion-dollar hole punched in their finances.
But the Finance Department wasn’t interested, the sources said. It values its financial flexibility and wasn’t eager to leave the money in banks’ hands, or to tie potential revenue – even from a temporary levy – to specific priorities.
Mr. McKay and other senior bankers declined to comment on the discussions.
In the months since then, business leaders have noted that Ms. Freeland and key members of the federal cabinet, such as Innovation Minister François-Philippe Champagne, have appeared more willing to embrace a pro-growth agenda. Within the Finance Department, civil servants are well aware Canada is lagging its peers on key measures of productivity and investment.
In the government’s economic and fiscal update in December, Ms. Freeland said “our national focus, as we emerge from COVID-19, must be jobs and growth,” and that measures targeting those priorities “will figure prominently in the budget.”
Goldy Hyder, president and CEO of the Business Council of Canada, said in an interview that he has high hopes for the government’s upcoming fiscal plan. “This is a serious time that requires a serious budget. It’s very sobering what we’ve all been through and where we are. I think there is a recognition and a realization that there’s a need for a real, long-term economic growth strategy. They’ve said it in those words, so I take them at their word.”
Not everyone is so optimistic that Ottawa will follow through.
Many executives say they aren’t convinced Mr. Trudeau and his staff are committed to that pivot. They worry his office has come to wield outsized influence over a Finance Department that now tends to operate in lockstep with the PMO, and that Mr. Trudeau remains laser focused on dividing the economic pie more equitably, rather than making it larger.
The Liberals’ recent pact with the NDP has only compounded those concerns by committing the government to more spending in the form of national dental and pharmacare programs, on top of plans to boost defence spending.
“The government is in a pickle. They’ve got big spending plans and we don’t see a corresponding plan for growing the economy,” said Dan Daviau, chief executive of investment bank Canaccord Genuity Group Inc. He said for all the government’s talk of spurring economic growth by creating superclusters – Ottawa’s term for regional centres of excellence in sectors such as AI and advanced manufacturing – there has not been tangible action.
Canaccord’s clients include businesses in tech, telecom and biotech – sectors that are critical to a knowledge-based society. “The federal government needs to ensure risk capital is readily available in growth sectors,” Mr. Daviau said.
With so many big-ticket programs on tap, businesses are urging government to present a streamlined budget – to accomplish more by promising less. “The last budget we saw was just a scattered buffet of stuff,” Mr. McKay said. “That’s why we didn’t achieve as much of it.”
Focusing on a narrow set of key priorities, CEOs argue, would help rein in spending, cut deficits and rebuild the country’s balance sheet so it is better prepared to withstand future crises.
“The feedback I’ve given to decision-makers is priorities should be clearer,” said Charles Brindamour, chief executive officer of Intact Financial Corp., the country’s largest home and auto insurer. “There’s lots of initiatives, there’s lots of things being supported and … you need to be bolder with a limited number of priorities. I think that’s the area where we have an opportunity as a nation to be far more focused on where we want to win.”
“When the signals are consistent, there’s a clear sense of priority, private capital moves. When there’s uncertainty as to priorities and continuity of direction, it can freeze the capital up.”
The question now is whether the power centres in government and in corporate Canada can draw closer and build an economic plan together, or whether they will fall farther apart.
“We are looking for a budget that is growth focused – one that drives economic activity, investment and hiring,” said John McKenzie, chief executive of Toronto Stock Exchange owner TMX Group Ltd. “Our concern would be a budget with new spending or new regulations that create barriers to growth and raising capital, as that would damage the economy.”
A history of rocky relations
During Mr. Trudeau’s time as Prime Minister, business and government sources say, he has shown only passing interest in economic issues. Instead, his focus has been on establishing a progressive legacy built on fairness, inclusion and redistribution of wealth. That stance has set the tone for the Liberal government throughout more than six years in power.
More than a dozen business leaders, from industries as disparate as finance, energy and insurance, told The Globe they recognize a strong social agenda as one of Canada’s strengths and endorse measures like affordable child care to boost the economy. But they want a dual mandate: one that both safeguards the economy and protects the vulnerable.
CEOs have come to believe Mr. Trudeau and his team have little interest or experience in the businesses that drive the economy, some of which employ tens of thousands of people and command budgets that rival those of mid-sized cities and provinces. And in turn, Mr. Trudeau and some of his closest advisers are seen as suspicious of businesses’ motives.
Mr. McKay said the two sides don’t always see eye to eye on what drives the country.
“We’re about incenting risk-taking, investment, productivity, attracting capital, and they’re about tax and redistribution,” he said.
The strain in relations is not new. Prominent CEOs still speak bitterly about a gathering years ago of top business leaders, who met with Mr. Trudeau at an event space in The Globe and Mail’s headquarters. The group of executives was chastised by the Prime Minister, who said people don’t trust them, according to two sources’ accounts of the event.
In this government’s early years, and in the early months of the pandemic, corporate Canada took some comfort in the presence of Bill Morneau, Ms. Freeland’s predecessor as Finance Minister.
Mr. Morneau is a businessman who had been CEO of his family firm. On his watch, Finance was seen as having a measure of independence to set an economic agenda, with the Prime Minister’s input, as was typical in past governments. But in the chaotic early months of the pandemic in 2020, that relationship changed.
As Ottawa assembled relief and stimulus programs in face of a global calamity, Mr. Morneau’s arguments for restraint in the size and scope of programs fell out of favour. Programs were quickly expanded and scaled up, and the PMO gradually took more control. Daily press conferences to announce new measures made normal due diligence, checks and balances nearly impossible.
Ms. Freeland replaced Mr. Morneau as Finance Minister in August, 2020, and retained her previous role as Deputy Prime Minister. This changed the way the Finance Ministry interacts with the PMO, drawing them closer. And it divided the Finance Minister’s portfolio: Ms. Freeland’s days were consumed in February with efforts to disperse blockades in Ottawa and at border crossings. More recently, she has been leading Canada’s response to the war in Ukraine. Her public schedule has been marked by travel to Europe for high-stakes meetings with world leaders, even as the crucial final stages of budget preparation have continued at home.
Four senior figures in the business world lamented the loss of what they saw as a healthy tension between Finance and the PMO that was evident in past governments, both Liberal and Conservative. Finance’s role as guardian of the public purse requires that it be empowered to push back on some political impulses to defend economic interests.
The interruption of that dynamic has become a structural problem for government, Mr. McKay said. At times, he added, the parallel worlds of Finance and the PMO collide in an unhealthy way.
“They’re two very big jobs, to be Deputy Prime Minister and deal with crises like a war and geopolitical issues every day, and to be core comptroller and CFO of the country. And it may be too much,” he said. “You don’t see that in any other market that I know of. So it’s a lot. It’s a lot of hats to wear.”
In response, two government sources said Ms. Freeland’s dual role gives Finance influence and a broader perspective on a range of economic and financial issues.
The departures of key cabinet members such as Mr. Morneau, Scott Brison, Jane Philpott and Navdeep Bains have contributed to a sense that the government is less sympathetic to business than it used to be. And there has been turnover among senior bureaucrats, with deputy minister Paul Rochon, advisers Tim Duncanson and Richard Botham, and senior assistant deputy minister for tax policy Andrew Marsland also leaving.
Key staff who now wield influence in the Finance Department – such as Ms. Freeland’s chief of staff, Leslie Church, and director of economic strategy and planning Tyler Meredith – are viewed as being more closely aligned with the PMO than their predecessors.
The ear every business leader wants to bend belongs to Mr. Sabia, the deputy minister. He is a former CEO of telecom giant BCE Inc. and the Caisse de dépôt et placement du Québec pension fund, and he is seen as the staunchest ally to businesses inside the government. Mr. Sabia has a reputation for being sympathetic to calls for growth-friendly policies and spending restraint. But he has so far struggled to deliver on those priorities.
When asked whom the government listens to in the senior ranks of business, executives struggle to name a single CEO. Finance Department veterans say the Prime Minister and his key advisers seem to talk more often to consultants and academics than to business leaders.
Some senior executives – a constituency that is, admittedly, not accustomed to being ignored – find this government aloof and indifferent to their advice and concerns. And while none were oblivious to the ethical risks governments face when appearing to accommodate corporate or private interests unduly, their overwhelming impression was that their interests – as leaders, as employers, as institutions – were treated as lesser priorities.
Ms. Freeland’s interactions with business leaders and economists are relatively frequent. In meetings, she listens intently, takes copious handwritten notes in a notebook that’s always at hand, and comes across as inquisitive and engaged. Those conversations can be very frank. “I think that’s a strength of Chrystia,” Mr. McKay said. “We agree to disagree.”
Business leaders struggle to gauge how often the government will act on what Ms. Freeland hears in those conversations.
“There’s a lot of listening, but not a lot of action. And it’s almost like they listen to placate us, honestly,” Mr. McKay said. “Because the ideologies are different, they don’t have a lot of intent to really act on what we’re doing. And business is incredibly frustrated by that.”
Even leaders at federally regulated companies in crisis say the Liberal government is disengaged. Last fall, Rogers Communications Inc. was engulfed in an unprecedented battle for control of its board and executive suite – an astonishing corporate feud that left one of the country’s largest telecom players with no clear leadership for weeks. Not one senior executive at the company received an inquiry from the PMO or the Finance or Industry departments about the chaos, according to a source with direct knowledge.
The lack of engagement predated the pandemic, but the intense early days of the crisis were an exception. Government officials and business leaders were forced into a flurry of close and constant contact, uniting them in an effort to head off economic carnage. Business leaders played an unfamiliar role, pressing government to move fast, spend big and fix program flaws later.
As the most acute phase of the crisis passed, however, CEOs reverted to urging fiscal restraint – a switch in stance that revealed a difference of opinion about how fast to turn down the stimulus taps, and where to shift priorities. “We’ve gone back to our corners and that collaboration is back to where it was, or worse than it was pre-pandemic,” Mr. McKay said. “We need more of what we saw in the pandemic to solve some of those real challenges that we have to solve for, that are complex.”
When the Prime Minister does turn his attention to a business issue, such as climate change, CEOs say things get done. For example, Shell Canada president Susannah Pierce said, the federal Liberals were collaborative, rather than confrontational, when they rolled out ambitious plans last week to cut greenhouse gas emissions by 42 per cent by the end of the decade. “We are seeing a roll up the sleeves, get the job done approach from government,” she said. “It’s clear we’re all working towards the same goal, which is net-zero.”
More often, talks are still happening in the pre-pandemic pattern of fits and starts, with flurries of close contact and outreach to address pressing issues, but no larger discussion of an economic vision for Canada. The government has been quick to call on businesses to pitch in at moments of crisis, but more reluctant to engage in crafting a longer-term strategy.
“The way forward must be underpinned by thoughtful and deliberate collaboration between government and business – it is, in fact, virtually essential to create the future that Canadians deserve,” said Joe Natale, a veteran telecommunications executive and former CEO of Rogers.
A number of government departments and ministers regularly talk to the private sector, especially on industry-specific issues. But the discussions are transactional, said Monique Leroux, a corporate director and former Desjardins Group CEO, who chaired the federal government’s Industry Strategy Council.
“So it is: let’s do a project, okay, let’s do that piece of paper or let’s discuss a particular topic, but it is not sometimes in a way that makes sense from a kind of global strategy,” she said. “And if we want to be successful there are long-term investments that have to be made.”
Policy ideas, but no policy
It’s not as though the current government hasn’t tapped leading business minds for ideas about how to spur faster economic growth before.
An Advisory Council on Economic Growth led by Dominic Barton, the former managing director of consulting powerhouse McKinsey & Co. (and, more recently, the government’s ambassador to China) produced three sets of recommendations in 2017 aimed at “resetting Canada’s growth trajectory.” The proposals included investments in infrastructure, a plan to attract more foreign direct investment, measures to improve access to growth capital for businesses, and skills development for working Canadians.
The Industry Strategy Council led by Ms. Leroux produced a report at the end of 2020 that was pitched as “an ambitious growth plan” for Canada’s economy. It brought together leaders from specific sectors and identified four pillars for further investment: The digital economy, clean energy and clean technologies, advanced manufacturing and agri-food industries.
The ISC estimated that its proposals could add 1.1 percentage points to GDP annually by 2030.
To business leaders, it’s not clear that the government is taking that advice, and some fear the reports have gathered dust on Finance Department shelves. Ms. Freeland “was appreciative of the work and some of the ideas,” Ms. Leroux said, but “it’s very difficult for me to comment” on the extent to which they have taken hold within government.
“Frustration emanated from a lot of work and effort on the strategic side that got shelved and ignored,” Mr. McKay said. “There was a lot of consultation, dialogue that went nowhere.”
Senior figures from the business world have argued for a clear fiscal anchor to restrain spending, with concrete debt-to-GDP targets, and they have pushed for business-friendly tax policies in direct discussions with government officials, as well as through advocacy groups like the Business Council. They have also argued for a national strategy on energy transition that would include investments they say would make Canada a leader in carbon capture. And they have pushed for policy to nurture innovation in key sectors like clean tech, artificial intelligence and biotech. They want the government to knock down interprovincial trade barriers and double down on Canada’s existing strengths – including in energy, natural resources and technology, as well as social programs.
Some executives think business leaders need to change the way they engage with Ottawa. “These guys are looking for solutions, not complaints, and I think that’s the mindset we need to have as a business community.” Mr. Brindamour said. “It’s been on and off over the past few years, but I would say in the last year there has been a meaningful shift in engagement.”
Not all advice offered by businesses is ready to be put into action. “I can tell you from being on that side of that seat and actually genuinely wanting business input, they were rarely that adept at giving it,” said Don Drummond, adjunct professor of policy studies at Queen’s University and a senior official in the Finance Department of the 1990s. “They were pretty good at giving you rhetoric, but I’ve got to write legislation, and that was harder to come by.”
Where there is broad agreement is on the need for a more coherent strategy to boost productivity, encourage investment and retrain the work force to address labour shortages and ensure Ottawa generates enough wealth to reduce deficits and cover its ambitious spending plans.
“It is very good to have a social agenda,” Ms. Leroux said. “However, if we want to achieve those goals long term, you need to have foundations on structural recommendations for your economy, because you need to create wealth before distributing wealth. ... And I think [government leaders] are probably at this point in time ready for that. They are ready for this agenda.”
The economic challenges ahead
Calls for a reset on Canada’s plan for economic growth are rooted, in part, in a series of concerning economic trends.
Canada’s economic growth has been strong, and is off to a good start this year with help from soaring commodity prices. But, on a per capita basis, the rate of the country’s GDP growth has been slowing for years, and it’s now falling farther behind the United States.
The country’s labour productivity as measured by workers’ hourly output trails the U.S., the United Kingdom and Australia, as well as the OECD average, and the gap is widening. And domestic businesses aren’t investing at the same rate as their peers: investment in machinery, equipment and commercial buildings has fallen since the Liberals took power in 2015, resulting in a wider gap in investment between Canadian and U.S. companies.
“This is something I have noted many times with policy-makers, including Ms. Freeland: You can’t increase standard of living in Canada without increasing productivity and you can’t increase productivity if you don’t increase investment,” said Jean-François Perrault, chief economist at Bank of Nova Scotia. “You can redistribute around that, you can reduce inequality so some portions of the economy are doing better than they would have been. ... But you’re not necessarily lifting all boats.”
Labour shortages are a growing problem that has shot to the top of business leaders’ agendas. Bank of Nova Scotia estimates that there are nearly 916,000 job vacancies in Canada. “Labour constraints are a huge problem,” Mr. Perrault said. “It might also limit our ability to attract investment, might limit our ability for businesses to grow if they can’t get the people that they need.”
Mr. McKay noted that there is $500-billion of cash sitting in consumer and commercial accounts, much of it accumulated during the pandemic, that is being spent largely on residential real estate, stocks, and consumer goods and services, all of which contributes to inflation. What is lacking, he said, are tax and investment policies to channel some of that money to more productive ends, like the climate transition or creating new supply chains.
“Think about it: It’s almost like a postwar effort we need to direct investment,” he said. “Tax incentives, structural incentives from the government can really help take the current capital surplus that we have and find a home for it that enables the transition.”
At the same time, alarm bells are ringing on Canada’s ballooning national debt, which stands at more than $1-trillion, after a budget deficit of $327.7-billion last year. Credit rating agency Fitch downgraded Canada to double-A+ from triple-A in 2020. Many business leaders think the government has taken a certain level of economic growth for granted.
“Worse than that, they assume growth will be stronger,” Mr. Drummond said, citing the government’s optimistic projections from the 2021 budget.
The next budget will be tabled against a backdrop of persistently high inflation and the prospect of slower economic growth as Canada’s central bank raises interest rates to keep price increases in check. High oil prices will help, giving a shot in the arm to economic output. But robust economic growth is not a given.
“From a risk management point of view I would say that a high-inflationary, low-growth environment is what we need to be prepared for,” Mr. Brindamour said. “Right now, growth is good. That is good for us as a country. But you don’t need to look too far to see us in an environment where inflation and cost of living is high and going up, but growth is not what it is right now. And I think that as a country we need to manage that risk by having some degree of prudence from a fiscal point of view.”
That is likely to be harder to achieve in the context of the government’s promises to the NDP, which commit the Liberals to significant, sustained spending on dental care and pharmacare. Bank of Nova Scotia economist Rebekah Young estimates that the promises underpinning the pact will likely add $15-billion to $20-billion of new spending over three years, and as much as $40-billion by 2027. And that does not include another $12-billion that could be earmarked to top up defence spending.
“If I were in the business world I’d be extremely depressed, because we are at some point going to have to turn to how we fund all this spending, and it would seem the go-to funding source is corporate income tax,” Mr. Drummond said.
Ultimately, the government’s commitment to a renewed agenda to spur the economy for years to come will have to be proven in next week’s budget. In executive suites across corporate Canada, there is a measure of hope that pro-growth language from the government’s recent economic updates will be translated into concrete commitments. But there is also skepticism about whether the recent uptick in outreach from Ottawa has been genuine.
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