Ottawa wants ‘fairness’ for the budget, but what about economic growth?

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Craig Alexander is a contributing columnist for The Globe and Mail. He has served as chief economist at Deloitte Canada, the Conference Board of Canada and Toronto-Dominion Bank.

Canada faces a growth and innovation crisis. This is because of the country’s flagging productivity, which is threatening the potential for long-term economic growth, income gains and living standards. To drive home this point, Bank of Canada Senior Deputy Governor Carolyn Rogers recently said, “You know those signs that say, ‘In an emergency, break the glass?’ Well, it’s time to break the glass,” on “Canada’s long-standing, poor record on productivity.” It was a frank assessment that highlights the depth of concern.

The problem is that while the central bank can sound the alarm, it doesn’t have the policy levers to address the crisis. Other than returning Canada to a sustained low-inflation environment, all the central bank can do is encourage governments and the private sector to tackle the issue in earnest. Hence, the strongly worded call to action.

By emphasizing the state of emergency, the onus is now on the federal government to respond. So, will we have a pro-growth and productivity budget?

Unlikely. The speech, shortly before next week’s federal budget, didn’t provide the government with much time to react, and Prime Minister Justin Trudeau has indicated that the budget will focus on “fairness.”

This is consistent with the Trudeau government’s emphasis over the past seven years on creating inclusive, sustainable economic growth – with the emphasis on reducing inequality and addressing environmental issues. Make no mistake, there have been measures in recent years to boost investment and innovation, such as the launch of the Canada Infrastructure Bank, the Canada Innovation Corporation and the Innovation Superclusters Initiative. However, their positive impact on productivity has been limited.

Beyond the matter of priorities, the federal government may feel it has to be restrained on new initiatives in the coming budget. It doesn’t want to stimulate the economy in a way that will stoke inflation.

There also may have been limited funds for new measures. Based on the current tracking of the federal fiscal balances, it appears that tax revenues will be a tad stronger than anticipated at the time of the last Fall Economic Statement, but government expenses have grown significantly faster than previously projected to the extent that the deficit is tracking toward being larger than forecasted. Despite this, Finance Minister Chrystia Freeland has said that the government’s finances will not deviate materially from what was in the Fall Economic Statement.

It is not clear how this accounting feat will be achieved, but it doesn’t leave money in the kitty for significant new programs. And all of this is before any fiscal response to the international pressure on Canada to significantly increase its defence spending.

The government might try to thread the needle by having a few new targeted innovation measures and then spend a chunk of the budget document outlining what initiatives it has under way that have limited fiscal cost but could have a positive impact on productivity.

For example, Mr. Trudeau has announced $2.4-billion in additional support for artificial-intelligence-related investments. The budget could highlight that the government is currently doing a review of its innovation programs, including the Scientific Research and Experimental Development tax incentives, and is looking into the possibility of introducing patent boxes to promote intellectual property development.

One could argue that while addressing housing affordability is about fairness, it also has productivity and competitiveness dimensions as businesses have been warning that high shelter costs are making it hard to attract and retain talent. The government could highlight its continuing efforts on infrastructure as well as making further commitments to reduce the barriers to competition in many of the country’s overly concentrated industries, building on the recent changes in Canadian competition policy.

The real challenge is the scope of the productivity problem. All the above-mentioned initiatives could pay productivity dividends. However, a concerted effort to tackle the crisis likely requires more, including major reforms to government subsidies, changes to business tax policy, targeted investment in productivity-enhancing infrastructure, deep regulatory reforms and greater fiscal discipline on government spending and budget management.

A pro-productivity budget would prioritize creating a favourable business environment that would incent greater private-sector investment and foster more intellectual property development.

To sum up, the Bank of Canada was right to sound the alarm about Canada’s productivity crisis, but the timing means that the coming federal budget will get assessed on whether it is addressing this threat to the well-being of Canadians. A tall order given the complexity of the productivity problem and the range of policies required to address it.