As Finance Minister Chrystia Freeland works to develop the federal government’s 2021 budget, she faces conflicting pressures and numerous constraints.
To start, the country is still grappling with the seemingly endless COVID-19 crisis, with swathes of the business community – particularly in central Canada – on life support and the latest monthly data showing a sizable drop in national employment.
The economy is a long way from fully recovering from the COVID shock. In this setting, it is appropriate for Ottawa to continue providing financial support to displaced workers, struggling businesses and hard-hit non-profit organizations for a few more months at least. By summer, the arrival and distribution of vaccines hopefully will push the rate of new virus infections significantly below recent levels.
That said, the extraordinary government financial support measures adopted since last March cannot persist. The federal deficit is on course to reach an eye-watering $400 billion in 2020-21, equivalent to 17% of gross domestic product. Adding in the provinces, Canada has provided the largest fiscal stimulus of any advanced economy since the start of 2020, amounting to around one-fifth of GDP. The swelling deficit in part reflects the temporary effect of lower tax receipts. But it also incorporates unprecedented increases in government expenditures aimed at keeping the economy afloat.
The exploding deficit underscores the need for Ottawa to establish a “fiscal anchor” to guide the return to a sustainable financial position over the medium-term. Pre-pandemic, the federal debt was hovering around 31% of GDP. By the end of 2022, we expect it will be approaching 55%. The minister’s budget should present a plan to reduce the debt/GDP ratio to comfortably below 40% by the end of the decade. In the meantime, current low interest rates should not be taken as licence to launch a large-scale permanent expansion in the size and cost of government.
There is no evidence that Canada was suffering from an undersized public sector prior to 2020.
While a credible fiscal anchor is essential, it’s also important to foster conditions for a recovery in private-sector jobs and to put Canada on a path to greater prosperity. Among other things, this calls for some realignment in the focus of Ottawa’s program spending. More of it needs to be directed at making Canadian businesses and workers more productive – for example, by investing in infrastructure, skills, innovation and smart tax reform. To do this, the government will have to be disciplined in controlling and trimming spending in areas that aren’t aligned with the productivity imperative. That is likely to be a tall order for the Justin Trudeau government.
For Canada, strengthening the foundations of prosperity must include turning around the country’s woeful investment record. A new report from the C.D. Howe Institute shows that Canada continues to trail peer jurisdictions in private-sector investment in productive assets. The latest estimates find Canadian non-residential business investment per worker is one-quarter lower than the average for all industrial economies. And the gap is wider still with the United States. Alarmingly, measured on a per-worker basis, Canadian private-sector investment in machinery and equipment has been running at less than half of the U.S. level. And we are even further behind on investment in intellectual-property products.
Sluggish business investment means the Canadian economy will be operating with both a smaller and a less up-to-date capital stock. Unless the situation is corrected, there will be little chance of achieving the Trudeau government’s professed goal of expanding the middle class or of delivering higher real incomes for workers and households.
Finally, the forthcoming budget should lay out a road map to make Canada one of the global leaders in building a digital economy. Digitalization promises to transform how businesses and consumers transact, how people work and how many services are provided. The COVID crisis has accelerated digitalization across multiple economic and social domains. Canada has assets to work with, including good universities and colleges, a technologically literate young adult population and a rapidly growing cross-section of companies and research organizations focused on producing digital technologies and applications. Smart public investments in R&D, incentives to speed the diffusion of digital technologies and tools and an environment that enables the formation and growth of digitally enabled businesses are necessary for the Canadian economy to expand at a more robust pace to support gains in household incomes and keep the country’s ballooning debt burden managable.
Jock Finlayson is the Business Council of British Columbia’s Senior Policy Advisor; Ken Peacock is the Council’s Senior Vice President and Chief Economist.
As published in Business in Vancouver.