Sign up for A Stronger Canada for The Trump Era to receive the latest analysis on Canada-U.S. relations from Policy Options, as soon as it’s published.
The Trump 2.0 administration’s tariff threats – unprecedented since the Second World War – and other fundamentally disruptive U.S. policy shifts make it essential for Canada to pursue a sweeping strategic and tactical policy reset to boost economic, environmental, infrastructure and research resiliency.
Success demands looking far beyond trade retaliation measures. It requires applying a long-term lens and systemic approach to a broad range of areas, including the urgent need to decisively address accelerating climate change, declining natural and physical public assets, and serious weaknesses in the funding of universities and research.
Three core tenets should guide Canada’s strategy of revitalization and resiliency – an emphasis on long-term thinking, a focus on systems approaches and large-scale new investments in natural public capital, infrastructure, people and research.
Key principles
Canada must do more than simply address this emergency stage of the Trump administration’s trade assault and other major current U.S. challenges. Long-term policymaking during fundamental shocks comprises crisis management but also demands planning for the transition from the crisis and preventing future crises.
Ottawa and the provinces must adopt measures to reduce our future vulnerability to seismic U.S. policy shifts and other crises.
This starts with avoiding the kind of policy errors made after the pandemic. When COVID-19’s emergency phase ended, massive fiscal and monetary stimulus continued far too long and government support for consumption and other spending dominated needed boosts to supply and investment.
Second, effective long-term policy incorporates systems approaches to reflect the complexity and adaptivity of Canada’s economy. This means considering and weighing the short-term positive effects of new policies against any negative medium- or long-term consequences.
It means recognizing the economy’s interconnections with the environment, health care and many other systems, and carefully assessing whether short-term stabilizing economic initiatives will have longer-term destabilizing repercussions for these sectors.
The third essential principle is to reverse the great abdication by all levels of government from investing in public assets and from focusing on program design and implementation. For far too long, the emphasis has been on announcements and political messaging rather than good policy development and execution.
Canada – and other G7 countries such as the United States, Germany and the U.K. – has fundamentally underinvested in its public natural, man-made and human assets. Decades of inadequate funding of this public capital has been a key reason for slower economic growth, anemic increases in living standards and more unequal income and wealth distribution.
Serious deficiencies in Canadian policy design, implementation and adjustment must be rectified. Fiscal discipline, including rigorous program development and execution, is crucial to maximize the benefits of public capital spending, minimize its costs and build public confidence.
This means addressing the long list of costly and ineffective federal programs, the excessive growth in public sector employment and the undue reliance upon, and lack of oversight of, consultants. It includes streamlining regulations, improving reporting and undertaking better collection and use of data in many areas where better outcomes can be achieved without spending more.
Investing in public capital
The centrepiece of Canada’s policy reset must be large-scale investments in natural, man-made and human capital. These investments require outcomes-driven approaches to ensure that this increased capital spending is effective. More funding is essential, but it is not sufficient without better design, implementation and review.
Greater investment in public capital has strong cyclical timing merits. U.S. trade risks combined with huge uncertainty for Canadian business and consumer spending reinforce the merits of large-scale increases in public capital investment, especially given Canada’s significant demand slack and low interest rates.
Natural public capital – wetlands, rivers, lakes and forests – provides benefits such as water filtration and storage, clean air and climate regulation. These assets are crucial to mitigate increasingly catastrophic events from climate change such as severe flooding and extreme heat.
Investing in preserving and restoring natural capital enhances environmental resilience and public health benefits, and means fewer future government outlays to address catastrophic weather impacts.
Forty years later, we’re due for another big rethink about Canada’s future
This will help boost growth, incomes and productivity while reducing economic, financial and fiscal risks. Investing in natural capital will help reverse Canada’s chronic underspending on climate-change adaptation, which continues to be a fraction of its expenditures on mitigation.
Other vital policy changes involve public sector valuation and accounting for natural assets and their ecosystem services. Failure to recognize the financial worth of natural capital has enabled decades of degradation, overuse and pollution from the inadequate costs for doing so. It has obscured the need for, and benefits of, major investments to sustain public natural assets.
Only a small minority of municipalities do some form of reporting of natural assets. Far more needs to be done at all three levels of government, including improved disclosures aligned with forthcoming international accounting standards for valuing and reporting natural assets.
Despite increased funding by both the Harper and Trudeau governments, and the creation of the Canadian Infrastructure Bank, the need for greater infrastructure investment has been abundantly clear for many years.
Significant capital spending is required for new infrastructure and to rectify the poor quality of too much of Canada’s existing infrastructure, especially in transportation and water systems.
Responding to the Trump 2.0 crisis should include massive investment in renewing existing transit, rail, roads, water systems, hospitals and schools, and building long overdue new infrastructure such as a high-speed rail network linking Quebec City and Toronto.
A properly designed and implemented program would boost long-term growth, jobs and productivity while creating new Canadian markets for sectors adversely affected by U.S. tariffs directly (e.g., steel, aluminum) and indirectly (e.g., construction).
But we must go beyond large-scale new capital spending. The new national advisory council on infrastructure is helpful, but it’s vital to have a permanent independent entity with a broader mandate to foster co-ordination among governments and utilize the lessons from domestic and international successes and failures.
Canada is long overdue to address the imbalance between municipalities being responsible for more than half of Canada’s infrastructure yet having the weakest revenue base to fund capital programs. In addition, the dismal record of too many major infrastructure projects being well over budget and delivered far later than scheduled can and must be reversed.
Greater investment in digital infrastructure is another important focus. Policy and fiscal initiatives should be aimed at helping innovative companies to achieve scale. These initiatives should include government procurement reform, increased support for higher education, building data centres and tax incentives for innovation investment.
Canadian universities have leading roles in driving innovation and R&D, as well as training the highly skilled workforce for the growth industries resulting from these activities. In an era of increasing technology applications and advances in artificial intelligence, digitization, medical progress and quantum mechanics, these benefits are powerful advantages.
Yet, provincial funding – the largest source of university income – has seen its relative share decline notably over the past five years. Ontario, whose universities account for nearly 40 per cent of Canadian post-secondary R&D, spends less than 65 per cent of the national average for provinces in funding per university student.
Inadequate university funding is all the more problematic given the Trump 2.0 cuts to U.S. university and medical research, science agencies and regulators. These cuts provide an opportunity for Canada to attract U.S. star and promising academics and practitioners. It should not be squandered because of insufficient funding and short-term thinking.
Recognizing the Trump 2.0 crisis as an opportunity for a fundamental Canadian policy reset is central to effectively address the U.S. trade and other policy shocks. Canada’s challenge will be in delivering it.
Large-scale investments in natural, man-made and human capital have compelling structural and cyclical economic merits. Combined with genuine fiscal discipline and better program design and implementation, they should be the core features of Canada’s long-term thinking and systems approaches to dealing with the new U.S. reality.
Do you have something to say about the article you just read? Be part of the Policy Options discussion, and send in your own submission, or a letter to the editor.
