The Economy: from Canadianization of the Economy to Global Competition and Innovation

Over the past 50 years, Canada’s economy has become one of the fastest growing economies in the developed world. It is currently experiencing increased Gross Domestic Product (GDP) growth, increased employment rates, and a booming housing market, with manufacturing, wholesale trade, retail trade, and housing starts serving as significant contributors to economic growth. However, many economists remain skeptical about the future longevity of these positive economic trends. Accordingly, technological innovation and increased globalization have created new policy challenges for the Canadian Government to address. How should Canada adjust to the economic reality of technological innovation?  How do we protect Canadian businesses in such a way to make them resilient and internationally competitive? How do we help the provincial governments deal with increased health care spending as the 75+ population begin to spike in 2020? Panelists at The Canada’s Policy Transformations Conference hosted by the University of Toronto’s School of Public Policy and Governance took aim at these highly pertinent questions.

Dr. Michelle Alexopoulos, Professor at the Department of Economics at the University of Toronto, opened the panel discussing ways in which Canadian policy makers must adjust to the economic reality of technological innovation. She spoke more specifically about strategies to maintain labor demand in the face of rapidly developing technologies designed to increase mechanization and implement cost-saving processes. These are currently troubling times for economists attempting to predict the future of Canada’s economy, as the influx of rapidly developing technology represents threats to the demand for human labor. However, Canada has always historically adapted their economic, education, and employment policies to push through such periods of uncertainty, and the results have been favorable to say the least. She advocated for four main policy strategies to continue this trend.

  • Encourage innovation and new investment here in Canada by implementing research and development credits
  • Invest in state-of-the-art technologies
  • Invest in education
  • Help displaced workers suffering through technological unemployment find work

Dr. Alexopolous argues that these strategies used in conjunction with one another will help future-proof Canada’s economy, and help maintain the job growth we’ve experienced thus far.

Dr. Mark Manger, Director of the Masters of Global Affairs at the Munk School, was up next to discuss Canada’s policies regarding free trade. He asserts that Canada’s businesses should not be treated like “children” and that they will be able to withstand competition from foreign businesses. He also argues that this competition will make these businesses stronger, tougher, and better able to succeed in today’s increasingly competitive economy. This underestimation of Canada’s ability to withstand competition has undermined Canada’s objective to further develop into an economic world powerhouse, and has led to Canada having some of the highest barriers to trade and foreign investment, which impedes Canada’s ability to progress economically.

Lastly, Dr. Kevin Milligan from the Vancouver School of Economics, ended the panel talking about “Canada’s Radical Fiscal Policy”. He immediately captured the audience’s attention by charismatically stating, “We have created for ourselves a radically decentralized fiscal federation,”. He noted that roughly 78% of spending in Canada happens at the sub-national levels of government, significantly higher than the OECD average of 31%. Thus, according to Milligan, Canada is a radically decentralized outlier.

What are the economic roots of this radical decentralization? According to Milligan, economic efficiency, and not the Canadian constitution as many are led to believe.

This efficiency comes from a combination of two factors. Firstly, Canada’s system of intergovernmental transfers allows efficient spending at the provincial and municipal level because these levels of government understand how to efficiently fund service provision for education, parks, and recreation, etc. They also know how to set their own efficient tax rates according to their accurate understanding of their citizens’ purchasing behaviours. Ultimately, Milligan argues that Canada’s system of intergovernmental grants is required to achieve both efficient spending and efficient taxation.

Secondly, he states that Canada’s system of tax collection produces efficiency by avoiding the duplication of services, while maintaining provincial autonomy.  Agreements between the Federal and Provincial Governments are such that most provinces allow the federal government to collect province-established General Sales Tax (GST), Corporate Sales Tax (CST), and Provincial Income Tax (PIT) on their behalf. In short, Canada’s system of centralized tax administration is efficient because it avoids the need for independent tax administration systems in each province and allows provinces to make autonomous decisions about the type and level of taxes they would ideally want to receive.

Looking at debt, he concluded that the Federal Government is in good financial shape, and will fully pay off its debt by 2060 (assuming that the current trajectory of the Feds’ debt/GDP ratio continues), but that the financial outlooks of the Provincial Governments are not as rosy. He attributes the looming spike in provincial spending to the increased health spending that is predicted to occur as the 75+ population will begin to substantially rise in 2020. His solution? Swap provincial corporate income tax (CIT) for federal GST. He argued, “The net result would give provinces primary control over a tax that can be used to fund future health needs that can be efficiently collected even when set differently across provinces.”

In conclusion, all three panelists left me feeling optimistic about the future of Canada’s economy. The strategies proposed by all three professors seem both practical and highly effective, and should mitigate well-deserved critiques from economists worried about Canada’s ability to sustain its economic growth. The future is sure to be filled with policy challenges in regards to developing technologies, trade protectionism, and fiscal decentralization, but with academic thinkers like the day’s three panelists, the future of Canada’s economy is in good hands.

Jasper Paredes is a 2019 Master of Public Policy Candidate at the University of Toronto’s School of Public Policy & Governance, and holds a Bachelor of Health Studies degree in Health Policy from York University. His main policy interests include health policy, economic policy, and social policy. When he is not in the library, you can most likely find him playing soccer, drinking coffee at local cafes, or checking his fantasy basketball lineup.