Morneau advisers urge sweeping changes to cope with looming tech disruption

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Canada is ill-prepared for the effects of widespread technological disruption reshaping the global economy, Finance Minister Bill Morneau's expert panel of economic advisers are warning in a set of reports scheduled for release this week.

To prevent the country's economic growth from falling behind that of other nations, the group is recommending a modernization of Canada's tax and regulatory systems to make them more innovation-friendly.

In addition, it is calling for a $15-billion spending surge to retrain workers so their skills are up to speed in a rapidly shifting labour market.

The recommendations are contained in advance drafts of the latest reports from the 14-member group, formally known as the Advisory Council on Economic Growth, obtained by The Globe and Mail.

"The latest wave of recommendations is geared towards preparing our economy … to capture the opportunities and handle the disruption coming over the next decade," said council chair Dominic Barton, global managing director of consultancy McKinsey & Co. Mr. Barton was one of several council members who spoke with The Globe about their third set of recommendations to government since the council's formation in March, 2016.

"The world is going through a period of unprecedented change, which offers many opportunities but also brings significant volatility," the council writes in one of the documents, received by Mr. Morneau earlier this month. "Canada must be prepared to navigate this change and volatility. It can no longer rely on the old formula for economic growth, which emphasized investments in machinery and equipment, and population growth."

The new reports come as Mr. Morneau crafts his third budget, for release in early 2018. They likely provide a sense of policy themes under consideration given the government's close co-operation with the council and quick action on several of its past calls. Proposals that have been adopted include the launch of an infrastructure bank, the creation of a federal entity to promote foreign investment into Canada, and changes to boost immigration levels and hasten the process for high-skilled foreigners to move here. A spokesperson for Mr. Morneau said the minister has had good discussions with the council and will carefully review its suggestions as he prepares the budget.

The council has focused on finding ways to grow economic output per capita at a 1.8-per-cent annual pace. While that is close to average levels over the past 50 years, it's also well above the forecast pace of 0.8 per cent in years ahead that would leave Canada lagging other advanced economies. Achieving the higher rate would boost median household income in 2030 by $15,000 above forecasts.

Its latest recommendations focus on boosting business investment – an area where Canada has chronically lagged global peers – and upgrading the skills of Canadians. To achieve the first goal, the council is calling for the creation of an expert panel to suggest "targeted" changes to tax law, including corporate and personal tax rates. "We want to ensure that we have a tax system that really encourages and supports innovation and encourages investment in both the hardware and the software that companies need," said council member Elyse Allan, chief executive of General Electric Co.'s Canadian unit.

Mr. Morneau has faced criticism this fall from business groups over proposed small-business tax changes set to take effect Jan. 1, and the government's appetite for undertaking further tax changes is unclear. Council member Christopher Ragan, a McGill University economics professor, said the group didn't discuss political challenges the Liberals may face in following its advice. "We don't care about the politics," he said. "Is this minister going to take it on? We'll have to wait and see. … I think he would because it's a good thing to do."

The council also calls for a panel to find ways to identify regulatory barriers to growth, suggesting Canada establish a more "agile regulatory system" than now exists. "We need to regulate differently than we have in the past," the group writes. The council notes that it takes applicants three times longer to obtain permits for construction in Canada than in the United States, and that Canada trails other countries in experimenting with new regulations for rapidly evolving sectors such as financial services.

The new reports focus on preparing Canadians for an economy rapidly shifting away from the production and sale of physical goods to the commercialization of digital services and intellectual property. That is being accompanied by changes in how work is done, and by whom – or by what. According to a recent McKinsey study, 45 per cent of activities performed by humans could be automated using existing technology. "Already, robots can build your car, take your lunch order, review your legal case history, sell you insurance or examine your X-rays," reads one council report. The council says at least 10 per cent of the Canadian work force – about two million people – face job losses by 2030 and will struggle to find new jobs "unless they acquire new formal qualifications."

The council acknowledges that federal and provincial governments are aware of the challenges and do fund training programs. Ottawa promised significant changes in the previous budget to existing agreements to transfer job-training funds to provinces and territories plus an additional $2.7-billion in related spending over six years. Federal Employment Minister Patty Hajdu said in an interview that negotiations to revise the transfers are going well and results could be announced in early 2018. The government previously responded to an earlier growth-council recommendation by setting up a new organization to study and report on Canada's skills needs.

But council member Ilse Treurnicht, former CEO of Toronto's MaRS Discovery District said, "much more needs to be done given the wave that's headed our way. It will take an all-hands effort." She added that other countries are experimenting with retraining efforts, but "it is still early in the process."

The growth council calls for a "jolt to the system" with the creation of a "third pillar" alongside the education system and regimes for funding retirement and unemployment insurance. "The focus has to be about providing skills upgrading capabilities and opportunities for people who are in the labor market," said council member Michael Sabia, CEO of the Caisse de dépôt et placement du Québec.

At the heart of the council's proposed $15 billion-per-year skills funding boost would be a new $2.5-billion-per-year government fund for training employed adults. The $15-billion amount would be jointly funded by government, industry and individuals. Mr. Sabia said it was "premature" to say how costs would be split. The council also calls for the government's employment centres to be transformed to provide not only help for the unemployed but also career and training guidance for working adults and employers. "What we're really saying is … the country has to get on with the discussion that's required about how are we are going to deal with this issue," he said.