Proven economic policies, not ‘bold ideas,’ needed to spur growth in Canada
Later today federal Finance Minister Bill Morneau (pictured above) will meet with his government’s appointed Advisory Council on Economic Growth, which will provide advice on how to spark long-term growth in Canada.
The council, led by McKinsey’s Dominic Barton, is expected to release its first round of recommendations, and media reports suggest the focus will partly be on policies that attract skilled workers and investment.
These are worthy goals. However, the reality is that recent federal policies are working against achieving them. What Canada needs is not “bold ideas” from the council—such as a bureaucratically-driven “Invest in Canada Office”—but rather a return to proven economic policies that set the foundation for growth.
First consider how federal changes to personal taxes make it more difficult to both attract and retain skilled workers and investment. Ottawa’s tax hike on highly skilled and educated workers, along with provincial changes, have made Canada’s top personal income tax rate among the highest in the developed world. Yet high and uncompetitive marginal tax rates discourage people from working, saving, investing and being entrepreneurial—all things that propel the economy forward. They also make Canada less competitive internationally as a place to work and do business. This policy change is clearly inconsistent with the goal of attracting and retaining top talent.
Moreover, the federal government remains committed to a misguided fiscal policy approach that spends borrowed money in the hopes of increasing prosperity. The government itself projects deficits over the next five years totalling $113 billion, but that total could reach up to $200 billion under more realistic spending scenarios.
With no end in sight to budget deficits, the government is set to pile on more debt. The likely result: slower growth as growing public debt increases uncertainty for households and investors and leaves the burden of repayment for future generations.
Importantly, the projected ramp up in debt and corresponding uncertainty is driven by policy choices made by the government to dramatically increase spending. But that does not bode well for Canada’s growth prospects. The evidence shows that growing the economy through increased spending isn’t likely to work.
And critically, virtually none of the debt-financed spending is actually being used to invest in growth-enhancing infrastructure. In fact, just $4 billion of the $29.4 billion projected deficit this year is for spending on new infrastructure. The uncertainty is compounded by the fact that Ottawa is digging deeper into debt at a time when the economy is growing, albeit slowly. But what happens if the economy falls into recession?
If Morneau is serious about spurring growth, he should first consider how his government’s policies are erecting barriers, before seeking “bold ideas” from the council. Canada needs a return to proven economic policies that create an economic environment for long-term growth. And for this he could take lessons from former Liberal governments led by Jean Chretien and Paul Martin.
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