Macdonald-Laurier InstituteA number of high-impact yet low-cost steps can be taken with bipartisan support to improve Canada’s economic competitiveness, write Robert Asselin and Sean Speer.

By Robert Asselin and Sean Speer, May 10, 2018

Growing concerns about weak business investment in general and foreign investment in particular have recently risen to the top of the policy agenda. Statistics Canada data show that business investment has lagged since prior to the last federal election and shows no real signs of improving. Fortunately, the renewed policy debate has come to rightly focus on Canada’s economic competitiveness.

Competitiveness, by definition, is dynamic as different jurisdictions strive to give themselves a policy edge in order to attract investment and enhance productivity. Research in fact shows that competitiveness and in turn business investment are key indicators of a jurisdiction’s long-term economic prospects. These issues must therefore transcend partisanship.

There’s no silver bullet to fix such a dynamic and multifaceted issue. It requires a continuing process of reform and refinement involving various policy levers – including regulatory reform, competition policy, trade, infrastructure, education and skills, taxation and so on.

Thus far, much of the policy discussion has been focused on corporate taxation as result of tax reform in the United States. There’s compelling evidence that a jurisdiction’s corporate-tax rate and structure are key determinants of its overall economic competitiveness. This is why Canada has long had a bipartisan consensus in favour of competitive corporate taxation – including the lowering of the federal rate – under both Liberal and Conservative governments.

Canadian policy makers must of course remain mindful of maintaining competitive corporate taxation. There may be scope, for instance, for revisiting depreciation rates or enabling full expensing on a temporary or even permanent basis.

But it would be a mistake to think about competitiveness solely through a taxation lens. Competitive taxation is a necessary yet insufficient condition for enabling more business investment. Significant tax-rate reductions without offsetting tax reform or spending reductions would exacerbate the budget deficit. And in a zero-sum fiscal scenario, there’s a strong case to focus instead on non-fiscal policy levers.

It would be a mistake to think about competitiveness solely through a taxation lens.

The good news is that there are a number of high-impact yet low-cost steps that Canadian policy makers can take that will have bipartisan support and improve the country’s economic competitiveness.

Near the top of the list must be addressing the panoply of regulatory and policy impediments to build major infrastructure in Canada. The Trans Mountain delay is only the most recent and high-profile example. We now rank 34 of 35 OECD countries for the time to obtain a permit for general construction projects. Changing this will require a shared intergovernmental commitment to reduce overlap, duplication and red tape.

Our pension funds are some of the most sophisticated institutional investors and are heavily invested in infrastructure around the world. Yet we still haven’t put in place right policy the conditions to leverage private capital to build big infrastructure in our country. The Canada Infrastructure Bank is a welcome initiative but it remains to be seen how effective the new organization will be in achieving this goal.

Skills acquisition and lifelong learning are crucial in the new knowledge economy. There should be a bolder sense of purpose between the federal, the provincial governments and the private sector to collaborate and act on this issue. Streamlining occupational licensing would be a key step in this regard.

Skills acquisition and lifelong learning are crucial in the new knowledge economy

On talent acquisition, Canada is doing well in attracting top researchers and entrepreneurs in the burgeoning sectors of clean technology and artificial intelligence.

But a low Canadian dollar still makes it difficult for domestic firms to compete against the United States with regard to relative compensation levels. Better foreign-credential recognition would go a long way in bringing the best and brightest to Canada.

Improving competitiveness also means expanding competition. The 2008 Competition Policy Review Panel’s recommendations to liberalize foreign-ownership restrictions in telecommunications and other protected sectors have not, for the most part, been enacted. The federal government should revisit them in the name of attracting more foreign investment and bringing greater dynamism to the domestic market.

The upshot is enhancing Canada’s economic competitiveness will require a concerted, ongoing commitment to refine and reform a wide range of policies. This can’t be a static process or a single-election-cycle or a partisan agenda. Our long-term competitiveness and prosperity depends on it.

Robert Asselin is a senior fellow at the University of Toronto’s School of Public Policy & Governance and a former adviser to Finance Minister Bill Morneau. Sean Speer is a senior fellow at the University of Toronto’s School of Public Policy & Governance and a onetime adviser to former prime minister Stephen Harper.

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