THE CANADIAN ECONOMY
Why, in 2007, does Canada not invest much more in education at all levels? A better educated, more innovative work force is essential to Canada’s future well-being. But whereas the U.S. increased public spending on education by 3.3 per cent a year since 1993, Canada only managed a paltry 0.2 per cent a year. As well, Canada is last among developed countries in spending on early childhood education, managing only a paltry 0.25 per cent of GDP.
Dramatic action is required. For example, why not offer free employee training to employers who locate or expand their operations in Canada? Why not consider free college tuition? It is only through vastly increased public investment in education and training, sector by sector, that we will stop shedding so many valuable middle-income jobs, especially in manufacturing, that traditionally have allowed workers to climb the income ladder. We have to focus on keeping people employed, instead of warehousing those laid-off.
We must also develop a bold national strategy to provide substantial financial assistance to the best and the brightest in our scientific community, supporting a wide range of “bottom-up” excellence-driven research similar to the European Union’s European Research Council. Only free wide-ranging scientific innovation will ensure the necessary advances in such critical areas as renewable energy sources, energy conservation, environmental causes of ill-health, and waste reduction.
Leaders in the oil, gas, pipeline, energy retail and electricity industries, such as Patrick Daniel, CEO of Enbridge Inc. continue to call on Ottawa to implement a national energy policy – a clear statement of Canada’s interests and objectives with respect to energy, clear national regulations, infrastructure investments and immigration and education policies, a national strategy to help corporations map out an energy development agenda and prioritize initiatives, including research and development, and training. This is yet another example of where strong national leadership is urgently needed – not to create new intrusions into provincial jurisdiction, but to better articulate how the federal government will act within its already established jurisdiction and competency. These corporations understand that a clear statement of federal intentions can ease the cost burdens faced by the companies and uncertainties faced by their shareholders, and also ameliorate the incoherence of the patchwork of provincial and federal laws.
For example, a carbon tax regime and carbon trading system (see “Environment” discussion above) would enable corporations to better estimate the full cost of the proposed projects. Energy companies also recommend that the federal government encourage an increase in the immigration of both skilled and unskilled workers and promote education for oil workers.
We must also develop a national strategy and a clear statement of the very important federal role in assisting our cities to improve energy efficiency and energy conservation as well as develop integrated energy systems involving on-site renewable energy, district energy and combined heat and power. Cities are where at least 50% of energy is used in Canada and require our urgent attention.
A national strategy for nuclear power is also needed. Despite concerns over the long-term storage of nuclear waste, even important environment activists such as Tim Flannery (The Weather Makers) and David Suzuki are willing to contemplate a role for a clean source of energy such as nuclear, at least until such time as our conservation and efficiency efforts produce much greater dividends. Fortunately, there is growing optimism in the scientific community that within the next century, we should be able to develop more effective ways to deal with nuclear waste and significantly reduce long-term radioactivity.
We should be concerned about the closing of so many locally based head offices, and the takeovers of Canadian companies by foreign state-owned entities. Even gold magnate Peter Munk of Barrick Resources and Gerry Schwartz of Onex Corporation have expressed concern about the outsourcing of decision-making to Switzerland and California. Canadian icons, from the Hudson’s Bay Company to our heritage hotels, beer and steel companies, are currently bought up by foreign interests with no protest. We must stop and examine the impact of these losses on the future of Canada’s economy.
The evidence is clear that outside buyouts of Canadian companies have spiked since 2005, reaching some $90 billion in 2007, and greatly exceeding Canadian acquisitions abroad during the same period ($61 billion in 2007). The federal government has established an expert panel to review the situation and report next year, but has effectively restricted the review to a narrow interpretation of “national security” concerns and the purchase of Canadian assets by foreign state-owned firms.
Roger Martin, the Dean of the Rotman School of Management at the University of Toronto, warns that Canada has left itself vulnerable to a “hollowing out” of its corporate sector by allowing foreign takeovers by companies based in jurisdictions that do not play by the same free market rules. For example, the proposed $5 billion takeover of Calgary’s PrimeWest Energy Trust by Abu Dhabi National Energy Company (TAQA) is creating significant anxiety.
In determining how better to ensure foreign investment contributes a net benefit to Canada and Canadians, we must consider the 21st century context. As Roger Martin and others note, Canadian firms now face a completely different success model – overseas operations, global mangers, global economies of scale, much higher research and development spending. We need to consider options to help Canadian businesses grow and withstand foreign takeovers, including reductions in corporate taxes, allowing interest deductions on foreign acquisitions, and permitting bank mergers, as well as amendments to securities regulations to give firms more time to ward off predatory corporate raids.
General Taxation and the National Debt
It is important to maintain national revenues through fair and efficient taxation. Cutting the GST is a costly and inefficient step, encouraging consumption in an era in which we must curb the excesses of consumption and our footprint on the planet.
In contrast, cutting personal income taxes and taxes on savings and investment is the correct route to follow to encourage people to save and invest. Taxes on business must also remain competitive, and significant reductions in corporate taxes may be the most effective way to encourage investment in research and development, and increase productivity.
We must implement a carbon tax and other taxes or levies to raise the cost of polluting activities. The revenue generated will allow income tax reductions, as well as support enhanced refundable tax credits for children (National Child Tax Benefit), seniors, and a meaningful Working Income Tax Credit. Substantial additional national revenues can also be generated simply by eliminating a wide range of distorting, inefficient corporate subsidies. This could yield anywhere from $2 to $4 billion dollars.
The successful economic policies and sound fiscal management of Liberal governments in Ottawa have brought about a remarkable state of affairs: a situation of fiscal surplus in our nation’s coffers which allow us both to decrease income taxes and to increase expenditures on national programs and initiatives for the benefit of all Canadians. The interest cost of the current national debt of $470 billion has dropped significantly from 32 cents of every dollar of tax revenue in 1993 to 14 cents in 2007.
Unfortunately , two years of minority Harper government and three Harper budgets have dissipated the surplus and severely diminished national revenues through ill-considered and massive tax cuts of some $60 billion over 5 years, while transferring substantial sums to provincial coffers with little or no accountability for the expenditures. Budget 2008 imprudently paid $10 billion down on our national debt, and projects a dangerously low budgetary surplus of only $1.3 billion, well below the minimum prudent margin of $3 billion.
Following the federal budget, financial commentators such as Terence Corcoran endorsed the proposal by Liberal leader Stéphane Dion that debt reduction should be limited to $3 billion a year and that any surplus above this could be used for essential long term infrastructure. Economic growth alone will permit our total national debt to continue to decline significantly as a percentage of GDP to 25% by 2012, well down from 68% in the mid-1990s.
Harper’s “Open Federalism” and Dismantling the National Government
Mr. Harper’s “open federalism” will dismantle the national government. “Open federalism” means reducing national revenues so that the national government no longer can undertake the kind of national standards and national programs that we require as a nation. “Open federalism” means so-called national initiatives will simply be a lowest common denominator amalgam of what provincial governments are willing to undertake.
“Open federalism” makes it easy for Mr. Harper to buy into the provincialist/separatist rhetoric of “fiscal imbalance,” which he purported to correct through increases in equalization payments, and through a significant reduction in federal taxes – personal, business and consumption – so that provinces can then move into the tax room themselves and impose their own taxes.
The reality is that there was/is no fiscal imbalance. It was primarily Québec driving the initiative to correct the alleged fiscal imbalance, since the term “fiscal imbalance” was coined by the 2002 Report of the Quebec Séguin Commission on the Fiscal Imbalance. As respected Québec commentator, Alain Dubuc, writes in his book, L’Éloge de la Richesse, Québec spends more per capita than any other province ($1500 more per capita than Ontario), taxes its citizens most heavily and is the most indebted. Its university fees are the lowest in North America; it has $7 a day child care, a provincial drug plan, low hydro rates, not to mention an international presence to rival the federal government – 28 missions/offices abroad with the Québec flag flying, among other locations, next to the Brandenburg Gate in Berlin. Yet despite the fact that all provinces, including Québec, have the same fiscal capacity as the federal government – the same access to corporate and personal taxes, the same ability to collect tax revenues, Québec refuses to increase taxes or cut spending, and cannot create more revenue through economic growth. Instead, Québec demands, and receives in the latest Harper budget, the money from the rest of Canada.
The fact is that Ottawa’s share of total revenues is the smallest of any central government in the developed world (44 per cent versus 67 per cent in the U.S.), and the portion of national income that is going to federal coffers has actually declined from 18.5 per cent in 1992/1993 to 15.5 per cent in 2004/2005. The fact is that Ottawa places the fewest strings on the money it transfers to the provinces – $29.8 billion in 2006-2007 for health, social services, post-secondary education, and over $11 billion for equalization, plus child care and some infrastructure spending. The federal government share of overall government spending is 37 per cent compared to 54 per cent in the U.S., and federal government transfers as a percentage of provincial and local revenues is less than 20 per cent in Canada, compared to 29 per cent in the U.S. and 45 per cent in Australia.
If anything, Ottawa’s national revenue base must be strengthened. A strong national tax policy is needed to lessen the chance that people will move to different parts of the country to avoid paying taxes. Sales taxes, for example, should be consolidated at the national level with a national goods and services tax (NGST), rather than the Harper government route of a costly reduction in the GST which eventually will be offset by an increase in provincial taxes. For the national sales tax to work, revenue-sharing accords would be entered into with the provinces, perhaps using the Australian model. In Australia, the federal government allocates the GST revenue using equalization-type criteria. In Canada, the federal government could turn over funds to the provinces according to where it is collected, and then the revenues could be equalized according to the standard equalization formula. This is essentially how the Harmonized Sales Tax (HST) works in three Atlantic provinces. (Quebec has its own form of harmonized sales tax and, unlike Newfoundland, Nova Scotia and New Brunswick, collects it for the federal government. If necessary, special accommodation could be made for this, as has been done in the past with respect to pensions.)
We must remember that the Canadian constitution imposes important responsibilities on the federal government to act with the provinces to ensure equality of individual opportunity across the country and a reasonable level of public services for all Canadians.
Shifting more and more tax room to the provinces jeopardizes tax harmonization, and prevents the federal government from using transfers to achieve national equity and efficiency objectives through national standards and national programs in a wide range of areas. The better option is to increase the transfers from the federal government to the provinces for such standards and programs and maintain national tax revenues at appropriate levels. At the same time, we should also remove all special tax incentives for oil and gas production, provisions which are unnecessary in light of the booming energy sector and rising oil and gas revenues. We absolutely must ensure adequate national revenues for the numerous pressing matters of national concern such as environmental protection, health care, early childhood education, post-secondary education, immigration settlement, clean energy initiatives, wage adjustment, wage security programs, and so forth.
Our national economy is dragged down by a myriad of inter-provincial barriers to trade. The time is long overdue for the federal government to take effective action to eliminate interprovincial barriers to trade across the nation. There should be no need for, Ontario, for example, to have to take the lead to join the recent Alberta-British Columbia deal.
A recent Conference Board survey found that one-third of all businesses surveyed said that non-tariff barriers hindered their competitiveness, and 26 per cent of them said they had lost business because of them. Each province still has, for example, its own rules for accrediting everyone from engineers to plumbers. Businesses crossing provincial borders face multiple registrations.
Until the path-breaking Alberta-British Columbia bilateral Trade, Investment and Labour Mobility Agreement in August 2006 (effective 2007), trucks used to have to unload their loads at the border and repack them according to the different regulations in the two provinces. Crossing to the state of Montana was easier. Now with the Alberta and British Columbia economies essentially open to each other, a gain of some $4.8 billion in national income is expected. Imagine what would happen if all provinces pursued open trade within Canada!
The federal government should also show firm national leadership in establishing training, certification, and apprenticeship standards, model employment standards legislation, health and safety regulations, and wage security.
National Securities Commission
Canada should have a single national securities commission. Regulations and standards, not to mention registration fees, vary considerably across the 13 provinces and territories despite the valiant efforts of the Canadian Securities Administrators, the umbrella group for all the securities commissions. Among other things, without a national security regulator, insider trading is undeterred, investigations are badly managed, and prosecutions are often either unfair or unnecessarily abandoned.
Most recently, the federal finance minister has been severely hampered in dealing with the financial crisis in the murky asset-backed commercial paper market, especially as a participant in international discussions on the critical role played by credit rating agencies. Affected pension funds such as Quebec’s Caisse de Dépôt work out deals with provincial finance ministries, and the federal government is only informed of decisions.
The IMF Report of March 2008 severely criticized the “weak” criminal enforcement of capital markets in Canada and highlighted the need for a single regulator capable of tackling the increasingly complex investigations into the sophisticated cases of financial chicanery.
On March 17, 2008, the so-called “passport system” came into force. This is a tepid step forward to more consistent regulation across Canada. Any further steps toward a single national regulator will have to address the broader financial demands of provinces that will lose significant public revenues as their provincial regulatory operations are wound up. This will involve reviewing the whole range of federal-provincial fiscal transfers from equalization to healthcare and education and so forth.
Why, in 2007, are corporate expenditures on research and development and investment in the latest equipment and technology to boost productivity among workers, so dismal? Why do energy companies, for example, that are racking up gigantic profits, put more effort into buying back stock than improving their R&D efforts, especially in green technologies?
Valuable businesses, for example our pulp and paper mills, are shutting down and throwing thousands out of work thanks to a shortsighted lack of investment in creating more efficient mills that could be reusing mill residue to produce energy, fuels or chemicals (biorefineries).
Lowering taxes on companies which engage in R&D favouring innovation and productivity is the right approach.
We should have a national sales tax that consolidates the GST and provincial sales taxes. This measure would be welcomed by small businesses. We need to have a tax system we can understand, and make every effort to reduce the administrative burdens on small businesses.
For the national sales tax to work, revenue-sharing accords would be entered into with the provinces, perhaps using the Australian model. In Australia, the federal government allocates the GST revenue using equalization-type criteria. In Canada, the federal government could turn over funds to the provinces according to where it is collected, and then the revenues could be equalized according to the standard equalization formula. This is essentially how the Harmonized Sales Tax (HST) works in three Atlantic provinces.
Why, in 2007, do we still not have effective protection for workers who lose their employment due to global forces? Denmark has something called flexicurity which effectively funds EI at 80 per cent of the lost wage while a person looks for new employment. Another option popular among EU circles is wage security, which supplements the wage of a person who has lost a higher-paying job.
We also need to review the Canada Labour Code to bring it into the 21st century, and provide more effective employee protection. In this regard, the recommendations of labour law expert and Professor Emeritus, Harry Arthurs, in his 2006 report on the Canada Labour Code merit serious consideration.
In addition to legislative amendments to the Canada Labour Code, Canada should continue to actively support developments in international law and in the transnational arena which can have a substantive impact on the employment protections available to a range of unprotected workers in both federal and provincial jurisdictions.
Most elements of the labour law system – collective bargaining, social security, workers’ compensation, job training, employment equity, and even individual employment law, arose in the context of a world in which nation states controlled their economic space, and typical employment involved long term tenure and standardized tasks.
Now, nation states no longer control their economic space. New business structures, notably, franchises, contractors, consultants in the service industries – do not easily fit under employment standards legislation, and most employees currently lack any legislative protection. Employees are increasingly highly differentiated according to their credentials, skills and knowledge.
The difficulty in the twenty-first century is that businesses have much more fluid structures. In Canada, employees work outside the national boundaries outside the reach of both federal and provincial legislation. Conversely, increasing numbers of migrant workers come to Canada on temporary work permits with few protections with respect to employment standards.