Canada’s economy faces many important medium-term policy challenges. To meet them, our government’s priorities and policy choices matter a great deal. Given that a new government will be formed following the next federal election, in order to help us identify these policy challenges and choices, Policy Options reached out to well-respected economists and policy leaders from across the country and asked them to respond to the following question:
Regardless of political stripe, Canadians will elect a new federal government in 2015. As it takes office, what economic issue do you think should be made a priority, and what should the new government do about it?
Focus on lower-income families
A new federal government should focus on raising the real incomes and quality of life of lower- to middle-income families. This involves much more than narrowing the income gap. Incomes at the bottom of the income range are extremely low and falling in real terms. At the same time, incomes in the middle-income range have been stagnating.
There isn’t a magic bullet that will raise incomes at the bottom of the income distribution. The federal government certainly has an important role to play. But many of the relevant policies, such as those in education and training, are provincial domains. An unprecedented degree of federal-provincial cooperation will therefore be required to make this possible. It must truly be a national, rather than simply a federal, project.
To support families transiting through poverty we need better provincial social assistance policies and an improved federal employment insurance system. Income support must be adequate without creating disincentives to gainful employment.
Improving education for Aboriginal people, who form a disproportionate share of Canada’s poor, must be a national priority. There were promising elements in the recent First Nations education act, but such an effort must also involve provinces, and it must be based on more extensive consultation with Aboriginal communities. The high tendency for recent immigrants to fall into poverty must be addressed through better selection and integration processes — again, both federally and provincially.
The federal and provincial governments need to work with businesses and Canadian schools, colleges and universities to better match people’s skills with opportunities that will raise income in Canada. Finally, higher wages will be contingent upon turning around our dismal productivity record. Expanding trade, breaking internal barriers to trade, fixing inefficient regulation, and encouraging businesses to invest and train more should also be near the top of the list.
Don Drummond is the Matthews Fellow in Global Public Policy and adjunct professor at the School of Policy Studies at Queen’s University.
Resolve the fiscal imbalance
Thomas J. Courchene
A newly minted federal government should address the federal-provincial fiscal imbalance.
While a federal balanced budget is almost within reach, the aggregate provincial deficits for 2013 were about $20 billion. This gap is likely to increase in the future, because provinces face several open-ended expenditures, particularly health-related. In contrast, Ottawa has scaled down its open-ended programs — increasing the age for accessing Old Age Security, reducing the growth of its health transfer from 6 percent to the nominal GDP growth rate — and this year it is pocketing nearly $4 billion from employment insurance.
Consider the two inverse solutions: first, increasing federal transfers to provinces, and second, transferring a provincial program to Ottawa. In 2004, provinces tried the latter. They offered Ottawa pharmacare, but were refused. This nonetheless remains a viable option — especially since Ottawa decides when generics can replace brand-name drugs.
When Ottawa is next tempted to reduce the GST, to transfer money downward, it should instead transfer the proceeds to the provinces. And if a broader carbon tax is ever implemented, rather than being devolved to the provinces, it should be a federal tax with proceeds transferred to provinces on an equal per capita basis, since the burden of ambient CO2 emissions affects all Canadians equally.
To my proposals, Ottawa would likely counter that its “open federalism” approach means not operating in areas of provincial jurisdiction. However, I would argue that this response is lacking, because in today’s Canada many of the critical drivers underpinning our socio-economic future are now within provincial jurisdiction, and it is crucial to our shared success that they function effectively.
Thomas J. Courchene is a professor emeritus in the Department of Economics and the School of Policy Studies, Queen’s University, and senior scholar at the IRPP.
Adjust Canada’s lopsided public finances
Although there are few incentives for federal politicians to tackle the problem of Canada’s lopsided public finances, it will warrant greater attention in the next half decade. With steadily aging populations and labour forces growing more slowly than in the past (assuming they grow at all), several provincial governments will struggle fiscally. As noted in a recent report from the Parliamentary Budget Officer, while the national government “has fiscal room to meet all the challenges of ageing demographics under current policy,” the same is not true of the provinces collectively.
Quebec’s net public debt stands at 51 percent of GDP, with Ontario at 41 percent, and three of the four Atlantic provinces fast approaching the 40 percent mark. With health care costs expected to outstrip revenue growth and provincial governments on the hook for most of these expenses, some provinces are finding it increasingly difficult to pay for education, social assistance, infrastructure and other services. At the same time, Ottawa’s strong balance sheet and unrivalled ability to raise revenues will contrast with the precarious finances of most of the provinces.
While past debates over fiscal imbalance have rarely proved productive, there can be no denying the fiscal squeeze that’s descending on a number of subnational jurisdictions. While a lack of spending discipline and ill-considered policies — for example, Ontario’s “green energy” obsession — help to explain sickly public finances in some provinces, it is doubtful that wiser premiers and provincial finance ministers will be able to turn things around within the confines of existing taxation and transfer arrangements. Either the provinces will need a bigger slice of the Canadian tax pie, or Ottawa must devise other ways to shoulder more of the fiscal burden stemming from population aging and the related slowdown in Canada’s potential economic growth rate.
Jock Finlayson is the executive vice-president and chief policy officer at the Business Council of British Columbia. He is a member of the IRPP’s board of directors.
Revoir les arrangements financiers intergouvernementaux
Au cours de la dernière décennie, le développement sans précédent du secteur des hydrocarbures au pays a profondément transformé l’équilibre des forces entre les provinces, tant au plan politique qu’économique. Cette évolution a creusé le déséquilibre fiscal horizontal entre provinces productrices et non productrices d’hydrocarbures, mettant sous pression le système existant de transferts fédéraux aux provinces, la péréquation au premier chef. L’effondrement récent du prix du pétrole exercera à son tour des pressions (différentes) sur le système, dont nous ne prendrons la pleine mesure qu’au cours des prochains mois.
Face à ces défis, le système actuel, hérité d’une série de réformes et de modifications ad hoc au cours des dernières décennies, apparaît dépassé. La fédération canadienne a besoin d’institutions du 21e siècle pour régir ses relations financières intergouvernementales. C’est un enjeu majeur qui soulève des questions épineuses auxquelles les partis politiques fédéraux devront fournir des réponses :
- L’unilatéralisme fédéral en la matière sera-t-il encore l’approche privilégiée, ou le temps est-il venu pour les deux ordres de gouvernement de reprendre un dialogue sérieux et constructif? Dans une fédération du 21e siècle, l’absence de conférences fédérales-provinciales régulières dignes de ce nom est-elle souhaitable ?
- La réforme du Sénat sera-t-elle abordée en tenant compte du rôle clé que cette institution pourrait jouer en tant que vecteur de la représentation provinciale dans les affaires de la fédération ?
- Les transferts fédéraux seront-ils revus afin d’éliminer leurs dispositions arbitraires (par exemple les plafonds à la péréquation) et de les immuniser contre les aléas de la politique partisane et les soubresauts de l’économie ?
Le prochain mandat sera l’occasion de souligner les 150 ans de la Confédération. Afin d’assurer leur pérennité, il importe que les institutions mises en place pour régir les relations intergouvernementales s’adaptent au contexte d’aujourd’hui. Les chefs de parti actuels auront tout intérêt à retourner aux sources afin de doter le pays pour 2017 d’arrangements financiers intergouvernementaux vraiment à la hauteur de la vision des Pères de la Confédération.
Marcelin Joanis est professeur agrégé à Polytechnique Montréal, chercheur au CÉRIUM et fellow au CIRANO.
Get aggregate supply policies right
The public services we value most are provided by provincial governments (health care, education and social assistance) and municipal governments (water, sewage, transit). The federal government mainly transfers income from rich to poor, negotiates international agreements and regulates markets. In doing these things we expect it to manage its finances sensibly and contribute to the stability of the economy.
For quite some time federal governments have done well in meeting their financial responsibilities. In some ways they have gone too far, and they now wring their hands about small budget imbalances. Yet the amount of government debt, measured against our collective income, is not only low but is falling. Trying the balance the budget come hell or high water is sometimes harmful and often unnecessary. The tax-and-transfer system is effective at shifting income from rich to poor and works automatically to soften the effects of economic slowdowns. Some modifications could be considered to federal transfers, but the basic design is correct and few would argue major changes are required.
I would like to see the next government be more vigorous in defending free markets. The current government’s crusade for a fourth national wireless carrier goes against all economic evidence. Government also needs to stop making the tax-and-transfer system less neutral with targeted tax incentives. I would like it to eliminate agricultural marketing boards, which have maintained such high prices on milk and cheese that low-income parents cannot afford to feed these staples to their children. With low interest rates and signs of an economic slowdown, deficit-financed support for infrastructure investments would be well timed. In sum, I would like to see the federal government focus on getting aggregate supply policies right. That isn’t always exciting or even popular policy-making but it is the foundation of a successful economy and establishing that foundation is, beyond all else, what we should expect of the federal government.
Ron Kneebone is a Professor of Economics and the Area Director of Economic and Social Policy at the School of Public Policy at the University of Calgary.
Address the climate policy deficit
While the federal government wrestles with how to eliminate the budget deficit, another larger deficit looms, one that has been fundamentally ignored for too long and that threatens our economy and wellbeing — the climate policy deficit.
This deficit manifests itself in two ways. First, and this needs no elaboration: Canada’s failure to reduce its greenhouse gas emissions. The Commissioner of the Environment and Sustainable Development’s 2014 report finds federal action on climate change unsatisfactory in all measures. Canada will not meet its 2020 target. Carbon-pricing policies if introduced soon would help show leadership and stay competitive with carbon-pricing developments in China and the United States.
Second, our climate is already changing, and there are negative impacts across the country, from the pine beetle devastation of BC’s forests, to extreme rainfall events that flood our cities and coastal areas, to loss of winter roads in the north. The Insurance Bureau of Canada reports extreme weather events in 2013 alone cost Canada $3.2 billion.
We are wholly unprepared for escalating climate impacts. The following three major policy changes are needed.
First, work with the provinces and the insurance industry to reform disaster relief, and assess the potential for overland flood insurance that provides incentives for property owners to reduce their flood risk.
Second, enhance the federal funding of climate adaptation investments. According to the Federation of Canadian Municipalities we have a public infrastructure deficit approaching $200 billion, and that doesn’t include climate risks. In the Building Canada Plan, disaster mitigation is just one component of the 10-year, $10-billion budget for the Provincial-Territorial Infrastructure Component. It’s a mere finger in the dike.
Finally, one of the most cost effective ways to improve ecological resilience is to protect natural areas, especially urban ones. The National Conservation Plan was announced in the 2014 budget with details to follow. While we wait, our climate deficit continues to grow.
Nancy Olewiler is a professor in the School of Public Policy at Simon Fraser University.
Think beyond GDP
Government leaders sometimes play the piano and sing the oldies but goodies. When I think of the oldies, I recall the following line from a song that Elvis made famous: “caught in a trap, [we] can’t walk out.” And sometimes, I worry that this line could be the unfortunate theme for any government that wins the upcoming federal election.
For Canada, the trap is our virtually stalled economic growth, which has regional, see-saw characteristics. And while our economy is clearly a natural preoccupation, we don’t seem to be able to move beyond our discussions about GDP, productivity, innovation or household debt. These issues are important, of course, but only as they relate to society progressing overall and reaching its potential.
Respected organizations, such as the OECD and its -Better Life Index, have been urging us to move beyond GDP as a measure of our collective well-being. They argue that we should pay more attention to wider concerns, such as growing inequalities, educational outcomes, health, social inclusiveness and community vitality.
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Governments at all levels seem to be either unaware or uninterested in these wider social issues. Instead they focus almost exclusively on their deficits, aggregate revenues and spending. Moreover, the spending-side focus is on inputs, but not the outputs they produce. Our focus should go further to state outcomes and their associated value to society. For example, health expenditures dominate our thinking (which is natural, given the aging of the boomers), but how do these expenditures improve the quality of our lives? Other issues, such as tax fairness or promoting equal opportunity, are over-shadowed by the panic induced from falling natural resource prices and government revenues. Widening governmental perspectives, as I’m suggesting, also calls for a longer-term focus and an understanding of the dynamics of change that is due to government initiatives.
But whatever economic issues we economists urge the new federal government to consider, the ultimate managers will be the public. It is we, the people, who seem to be caught in a psychological economic trap from which we can’t walk out.
Doug May is a professor of economics at Memorial University. To see how your province is doing using a version of the Better Life Index, see www.mun.ca/care/topics.
Fix the Guaranteed Income Supplement
In designing the retirement income system, Canada has gradually — and very successfully — emphasized keeping seniors out of poverty. In this process, however, we have also created disincentives to working longer and adequately saving for retirement.
A key reason for this is that the Guaranteed Income Supplement (GIS) — our primary instrument to fight old-age poverty — claws back 50 cents on each dollar of recipients’ other income. These rules have several negative effects. They discourage labour force participation among older workers. They change how and when people claim CPP/QPP pension benefits, and they affect the use of various savings vehicles.
The federal government should change the design of GIS to mitigate these disincentives while still leaving it as a powerful instrument to fight old-age poverty. In fact, without improving the design of the GIS, most proposals to enhance the CPP/QPP will be unfair to low-income workers (who have to contribute at the same rate as more fortunate workers) and will have little effect on their benefits because of the clawback. As some scholars suggest, one way to “neutralize” this flaw is to base GIS eligibility and payments on the CPP/QPP benefits that an individual would have received had they claimed them at age 60. Another way to make the program more neutral for working into old age is to slightly reduce the maximum benefit and clawback rate.
Any increased cost from redesigning the GIS could be recouped from fixing tax-deferred savings vehicles. Canada offers several plans: pretax plans include Registered Retirement Savings Plans, and posttax plans such as Tax Free Savings Accounts, which are particularly interesting for low income earners. Generally such schemes have not been shown to increase net savings. With public revenue losses from these tax-deferred plans forecast to increase substantially as our population ages, now is also a good time to impose stricter limits on how these funds are used.
Pierre-Carl Michaud is an associate professor at the Université du Québec à Montréal.
Miser sur le dynamisme de nos entreprises
Alors que des élections fédérales pointent à l’horizon, le moment est opportun pour discuter des principaux enjeux économiques du Canada.
Tout d’abord, nous devons miser sur le dynamisme de nos entreprises. Comment”ˆ? En privilégiant l’innovation ainsi que l’ouverture à de nouveaux marchés. Il faut mieux préparer nos entreprises, par la formation et l’information, à tirer profit des occasions d’affaires qui se présenteront grâce aux accords avec l’Union européenne et la Corée ainsi qu’au Partenariat transpacifique, dont les négociations progressent.
Le gouvernement du Canada devrait en même temps investir dans des programmes qui ont un effet de levier structurant sur la productivité, l’innovation, la commercialisation et la réduction de l’empreinte environnementale des entreprises. L’Office des technologies industrielles, notamment, pourrait soutenir des programmes ciblés sur les sociétés manufacturières innovantes du pays.
Parallèlement, l’atteinte de l’équilibre budgétaire en 2015-2016 doit demeurer une priorité avant que le gouvernement renoue avec les surplus budgétaires, quitte à laisser tomber certaines réductions d’impôt.
La question des investissements dans les infrastructures est un autre enjeu tout aussi important. Le gouvernement fédéral devrait investir davantage dans les ports et dans les pôles logistiques, de même que dans des projets porteurs en matière de transport collectif. Il est crucial que la portion du Québec dans les investissements en infrastructures liés au fonds PPP Canada corresponde à son poids démographique au pays.
Parmi les autres problèmes structurels qu’il est nécessaire d’examiner figure la situation des aéroports. À cause des différentes charges qui leur sont imposées, nos aéroports sont clairement désavantagés par rapport à ceux des États-Unis, et cette forte concurrence commence à peser de plus en plus lourd sur l’économie canadienne. Un rapport sénatorial a déjà avancé différentes pistes de solutions prometteuses qu’il faudrait considérer sérieusement dans l’intérêt de la compétitivité de notre économie.
Norma Kozhaya est vice-présidente à la recherche et économiste en chef au Conseil du patronat du Québec.
Put cities’ infrastructure and transportation needs on the agenda
Listen to the mayors of Canada’s big cities and you will hear them talk about the challenges of providing necessary infrastructure and transportation systems in response to population growth. In some cities the challenges do relate to the pace of growth; but in all cities they relate to money.
Cities derive most of their revenues from property taxes, but this tax base is not growing as quickly as the financial needs, especially in those cities where replacing old, crumbling infrastructure simply adds to the total requirements of a growing population.
Constitutionally, cities are creatures of the provincial governments, to whom they must go, cap in hand, to ask for money.
Unfortunately, Canada’s provinces have enormous fiscal challenges of their own. Their single largest budget item is also the fastest growing: health care. As the baby boomers move into retirement, these costs will rise even faster. And when it comes to decisions taken around provincial cabinet tables, health care trumps infrastructure and transit every time.
This brings us to the feds. Despite the current short-term challenge — a slowing of tax revenues driven by low world oil prices — the federal government is in a solid fiscal position. Its debt-to-GDP ratio is just over 30 percent, and it is scheduled to fall gradually but inexorably for many years into the future.
So, the challenge is to figure out a way to reallocate some of that available fiscal space in Ottawa to our big cities, to finance the infrastructure and transportation systems they so desperately need. Maybe the money could flow straight through the provinces from the feds to the cities. Maybe there could be a creative shifting of tax points. Maybe a few points of the GST could go to cities. And maybe cities could start tapping revenue sources right under their noses — such as road-congestion fees, user fees for water, and tolls for bridge crossings.
Whatever the solution, the problem is large and badly needs some serious thought. Whichever government we get in Ottawa this fall, the needs of our cities must be on the agenda.
Christopher Ragan is an associate professor in the Department of Economics at McGill University.
Reform personal income taxes
The next government will have to deal with a personal income tax system that is struggling under the weight of its own density and contradictions. This advice may not appear in the transition briefings prepared by federal public servants. Those briefings will likely mention instead the Bank of Canada’s repeated warnings that the precariousness of Canadians’ household balance sheets is now one of the greatest risks to our economy, and regular warnings to consumers to reduce their debts. I think that the link between our tax system and household balance sheets is more intertwined than we’ve acknowledged, and this is worth highlighting.
An income tax system establishes a baseline definition of income and taxes it. It includes certain allowances and adjustments — excluding some types of income, deducting others, allowing certain credits, etc. Over the years, our tax system has become riddled with loopholes that neither achieve tax fairness nor appear to have their desired policy impacts (for example, the children’s fitness tax credit).
Worse still, our tax system may also inadvertently contribute to household imbalances by creating incentives for households to rearrange their finances. While tax-sheltered savings are attractive, they come at the major public cost of foregone tax revenues equal to nearly 5 percent of the federal budget annually. Some tax-incentivized assets, like home ownership, come with hefty purchases prices and debt for most Canadians. Others, like RRSPs, have spurred financial innovations like “catch-up loans.” Most worrisome is that it’s not clear that the personal income tax system is directing the majority of the benefits to households that need help unwinding their balance sheets. Instead, most of the benefit flows to the reasonably well off: a little more than half of the assets owned by the wealthiest 20 percent of Canadians are now held in tax-preferred assets.
Policy-makers can and should use the tax system to promote certain policy goals and influence social outcomes. But successive governments have built a system that over the decades has become layered with incremental choices, each usually made for short-tem political gain. How much longer can we afford to keep this up without fundamentally reforming the whole tax system?
Jennifer Robson is an assistant professor at Kroeger College, Carleton University, where she teaches courses in public policy, policy research and political management.
Reset federal-provincial relationships
The next federal government will have an opportunity to reset its economic and fiscal relationship with the provinces.
Federal and provincial governments are critical economic players, but provincial expenses are a greater share of the economy. There is massive overlap in sources of tax revenue and key spending areas, particularly the infrastructure partnerships that are vital to future growth. Any major policy thrust will require both levels of government.
The provincial and federal governments can work together to powerful effect. Nowhere was this clearer than in their response to the 2008-09 recession, with coordinated efforts to break log jams in asset-backed capital, support for key domestic industries (including the auto sector) and stimulus through major public works.
Now relations feel more fragmented, under stress. Provinces are uncertain about equalization, capital project investments and other transfers. The federal government faces many and perhaps disjointed demands for additional investments.
But underlying this tension is a core reality — provinces are under pressure from the cost drivers associated with demographic change. The relative shares of tax room don’t match well with these spending responsibilities.
So let’s take advantage of the new mandate, under any party, to reengage with the provinces. This means offering stability in funding where possible. It may also mean orderly shifts of any available tax room. We’ve shown what we can do in a crisis, so the same should be feasible in a time of relative stability.
The government of Canada may not need to concede anything through this, least of all its fiscal discipline. This is an opportunity for both levels of government to leverage and even integrate spending commitments to maximize economic and social benefits on behalf of their citizens.
Peter Wallace is the 2014-15 Ontario Public Service Visiting Fellow at the School of Public Policy and Governance at the University of Toronto.