News Releases and Op-Eds
Finlayson Op-Ed: Memo to Finance Minister Bill Morneau (Troy Media)
Congratulations on your election to the House of Commons as the MP for Toronto Centre and your appointment as Minister of Finance. Business leaders across Canada wish you well as you come to grips with the economic challenges that lie ahead.
One challenge is that Canada appears to have entered a period of sub-par growth. Our economy lost ground over the first half of 2015, largely due to the impact of sharply lower oil prices together with weakness in the markets for many other commodities that form a large part of Canada’s export basket. More recent data signal a pick-up in activity over the summer and into the fall. However, for 2015 as a whole, inflation-adjusted gross domestic product (real GDP) is likely to increase by perhaps 1 per cent, down from an average of 2.2 per cent over 2013-14.
The economy should gain a bit of momentum through 2016, in response to the ongoing expansion in the United States, the low Canadian dollar, and continued accommodative monetary policy. Real GDP is expected to climb by 1.5-2.0 per cent next year. But looking further ahead, Canada also faces stiff economic headwinds from lower-for-longer commodity prices, record high levels of household indebtedness, and weak overall business investment. A slow growth macro-economic environment lends support to your government’s plan to expand infrastructure spending over the next few years. But while spending more on infrastructure is a sound idea, the most convincing reason for doing so is not to boost short-term aggregate demand, but instead to make Canada’s economy more productive and competitive. This includes ensuring that critical infrastructure is in place to enable our resource, manufacturing and tourism industries to connect with and efficiently sell into global markets.
A second challenge is to tamp down the expectations flowing from the election platform adopted by your party. It is true that a number of the platform promises were costed, including the proposed middle income tax cut, a lower tax rate for small business, a revamping of federal support to families with dependent children, a hike in the Guaranteed Income Supplement for low-income seniors, and new initiatives to stimulate youth employment, business innovation, and the clean technology sector. And some new revenue sources were also identified, notably via a higher tax bracket for individuals earning more than $200,000, a shift in the tax treatment of employee stock options, and the rolling back of annual contribution room for Tax-Free Savings Accounts. These latter measures, however, are likely to yield less incremental government revenue than the platform projects, as taxpayers alter their behaviour in response to higher marginal tax rates. This point should be reflected in the budget projections you will be tabling early next year.
Of more concern is the platform’s silence on the fiscal implications of several other high-level policy commitments: concluding a new “health accord” with the provinces, improving home care and mental health services, reversing Canada Post’s plan to phase out door-do-door mail delivery, developing a new “National Early Learning and Child Care Framework,” and addressing issues around housing affordability. These largely un-costed commitments could easily amount to many billions of dollars of additional federal outlays per year. With government revenues under pressure from low commodity prices and a generally sluggish economy, your cabinet colleagues will soon discover that there are limited resources to pay for new programs and expanded services, even with the decision to go back into deficit. Avoiding the risk that a large structural budget deficit could return arguably will be your most important task as Minister of Finance.
A final challenge is to strengthen Canada’s lacklustre productivity performance. Productivity measures the amount of economic output produced for every hour of work. Higher productivity means rising real incomes for workers and a better standard of living for all citizens.
Canada’s labour force growth rate is poised to steadily downshift over time, and as it does, the economy’s growth potential will also diminish. By the mid-2020s, economic growth will depend almost entirely on our ability to increase productivity. On current projections, potential real GDP growth could fall to 1.0-1.5 per cent within a decade, which is significantly below what Canadians have been accustomed to. Faced with this sobering prospect, it is essential that policy-makers start to reassess the structure and impact of both existing and new spending initiatives, taxes, regulatory frameworks and other government programs through a productivity lens. At the federal level, the Minister of Finance is in the most logical person to direct this work.
Jock Finlayson is Executive Vice President and Chief Policy Officer at the Business Council of British Columbia.