Before discussing three critical policy challenges confronting Canada, I want to register my view that we also need to address our governance " our institu- tions, electoral system and fiscal relations among the three levels of government. Voter turnout, especially among young people, has been declining (although the 2006 federal election is an exception), national governments can be elected without adequate representation from all of Canada’s regions, and while the federal government is running sizeable surpluses, many provincial and local governments, which provide vital services, are cash-strapped. Parliament needs to be strength- ened, the Senate reformed, the independence and effective- ness of the civil service reasserted and the concentration of power in the hands of the prime minister and the PMO cur- tailed. Governance matters in all organizations and govern- ments are no exception. The fact that governance cannot be addressed in this exercise, which involves identifying chal- lenges whose solutions are quantifiable, underlines the limits of this worthwhile exercise. In public policy, as in life, some of the most important things can not be quantified or measured.

While it may not be easy to measure good or bad gov- ernance, the arithmetic of the rising costs of health care and the extent to which these costs are crowding out other crit- ical government priorities can be calculated easily. Canadian governments cannot sustain the increases in health care costs, which are growing at a faster rate than the revenue of any government in Canada. Consider Ontario. Between 1997/98 and 2002/03, government spending on health care increased by 41 percent while government rev- enue went up by only 31 percent. In Ontario and in other provinces, health care costs, which represented over 30 percent of government budgets in the 1980s, climbed to 40 and even 50 percent in this decade, and it is projected that in 20 years, 70 percent of provincial budgets will be devoted to health care. The aging population and technology " new treatments, procedures and drugs " will continue to drive up health costs. Like the deficit in the 1990s, the rising costs of health care are not sustainable into the future and gov- ernments have no choice but to address them.

The other problem is that spending on health care is crowding out funding for other priorities like poverty reduc- tion, education and the environment. However, it is estimat- ed that only about 25 percent of people’s health status depends on the health care system, while 50 percent is related to other factors such as income levels, education and the envi- ronment. Hence, it is shortsighted to curtail spending on other priorities that are major determinants of people’s health.

Moreover, in comparison to the other health care sys- tems in OECD countries, funding in the Canadian system is concentrated on acute care services. Doctor and hospital costs are funded, while other services that are more cost- effective and help prevent people from becoming ill are not publicly funded.

The problems with the Canadian health care system were highlighted by a recent Conference Board of Canada study, which compared 24 OECD countries and found that while the Canadian system was relatively expensive, its waiting lists were among the longest, and in terms of health status, Canada ranked only 13th of the 24 countries.

Governments should apply to the health care system the approaches taken to make other parts of Canada’s social safety net sustainable: changing the incentives in the health care system, introducing competition and allowing the private sector to play a greater role. The crowding out of other priorities can be addressed by changing the way that health care is funded. While the majority of health care funding would still come from government revenue, deriving some of the money from linking use of the sys- tem to the amount paid, based on abil- ity to pay, would help to address the crowding-out effect. When medicare was created in the 1960s, there was a proposal to make some or all health care services a taxable benefit. Ideas like these need to be revisited.

One of the main reasons for changing the health care system and its financing is to allow governments to invest in other priorities that determine health status. These investments include preventative services, the environment, education and especially poverty. In terms of the environment, emissions of sulphur oxides and carbon dioxides affect people’s health; and Canada has a poor record in these areas relative to other countries, like Sweden. The emissions of sulphur oxides per unit of GDP in Sweden are .4, while Canada’s are a whopping 3.1. Although Canada ostensibly supports the Kyoto Accord, there is no coherent, comprehensive and effective environmental policy that shows how Canada would meet its Kyoto commitments. Developing and implementing an effective environmen- tal strategy that would tackle major environmental issues, such as harmful emissions, would help to improve the long-term health of Canadians.

It would also be more cost-effective to invest less government money in acute care health services and devote more resources to reducing poverty. For a country as prosperous as Canada, our poverty rates, especially among chil- dren, are alarming. A 2005 UNICEF study, ”œChild Poverty in Rich Countries,” found that almost 15 per- cent of Canadian children are poor and, out of 26 developed countries, Canada ranked 19th in child poverty. Besides the human tragedies and lost potential that are represented by such statistics, poverty is also a leading cause of health problems. Consider the contrast between Canada and Sweden. While Canada’s child poverty rate is almost 15 percent, Sweden’s is just over 4 percent. While Canada ranks 19th of 26 coun- tries in terms of child poverty, Sweden is 4th. With respect to health care, Sweden spends less than Canada does, but has one of the highest ratings in terms of the overall health of its popu- lation. Devoting more resources to social programs that alleviate poverty would lead to a healthier population and a less expensive health care system.

In addressing child poverty, Canada has the model of the National Child Benefit, introduced in the 1990s, which was the first new social program in 30 years. The program addresses child poverty by creating a minimal level of income and benefits for Canadian families with children, and it provides incentives for people to move from welfare to work. It is effi- cient, since its main components are delivered through the tax system. It is a model of federal-provincial co opera- tion. Although the federal government administers the program, outside of Quebec, it is integrated with provincial programs; as a result, it is a focused, strategic program with clear lines of accountability. Also, it is based on the principle of targeting funding to chil- dren based on their need. Addressing child poverty will require co ordina- tion of the federal and provincial gov- ernments and the National Child Benefit points the way to how to achieve this goal.

Thus, governments will have to tackle the rate of increase in health care funding, since the current trajectory is not sustainable and Canada needs more invest- ment in the long-term determinants of health.

The second challenge is to promote innovation and enhance productivity. In a global, knowledge-based econ- omy, innovation is essential to success and a key factor in enhancing productivity. Inno- vation involves coming up with new ideas about how to do things better or faster, using these ideas to create new prod- ucts, services or businesses, and having a skilled workforce that can use the ideas and aggressively pursue markets for the new products, services and knowledge. Governments can support innovation by investing in research, by promoting the commercialization of research, by enhancing the skills of its workforce and by having a compet- itive tax regime. Innovation and the government policies that support it are also critical to productivity, which in turn affects a country’s standard of living and the resources it has to invest in other priorities such as social programs.

Canada’s record in research and development (R&D) lags behind other OECD countries and, since 2001, Canadian spending on R&D as a pro- portion of GDP has been decreasing.

Canadian governments need to invest more in R&D for several reasons. Just as railways, canals and roads provided the main arteries for economic development in the 19th and 20th centuries, laboratories, synchro- trons, and other research infrastructure are the foundation for economic devel- opment in the 21st century. Just as gov- ernments provided the majority of the funding for major infrastructure proj- ects in previous centuries, govern- ments, even in avowedly free-enterprise countries like the United States, are the principal funding source for major research facilities.

Also, the government has to play a larger role in funding research in Canada than it does in the United States. Canadian companies do less research than their American counter- parts because small and medium-sized businesses dominate the Canadian economy and it is more difficult for enterprises of this size to support research. Also, the high level of inte- gration between the Canadian and American economies means that less research is done by transnational com- panies on the Canadian side of the border. Major American-based corpo- rations with branch plants in Canada usually do their R&D at their head offices south of the border.

Promoting innovation and addressing productivity will also require investment in human capital. More investment in graduate educa- tion is required. Over the next decade, as more university faculty members retire, Canada will not have enough graduate students in the system to replace them. Also, countries with suc- cessful records in innovation have higher percentages of researchers in their labour force. For instance, Finland, which has a stellar record on innovation, has about 15 researchers per 1,000 people in the labour force. Canada has less than half that number.

Also, when the Conference Board of Canada compared the number of researchers relative to the overall work- force, Canada ranked 9th out of 12 countries studied. More generally, investment needs to be made in ensur- ing that Canada’s educational systems are first class and in upgrading the skills of Canadians on an ongoing basis.

Promoting innovation and addressing productivity also involves having a competitive tax system that welcomes innovative people and busi- nesses. Canada has a good record in using the tax system to encourage R&D. However, attracting highly edu- cated and skilled people means having competitive income tax rates, just as competitive corporate tax rates are nec- essary to attract and retain businesses.

There needs to be more analysis of Western European models of fund- ing social programs and more debate about using a broader range of tax tools in Canada. Because so much emphasis is placed on fairness, Canada has his- torically relied heavily on income and corporate taxes; however, since these taxes are also important to competi- tiveness, governments have been forced to lower these taxes. Western European governments rely more on consumption taxes, user fees, and public insurance plans based on employer-employee contributions that are similar to the Canada Pension Plan. By using a broader array of tax tools, Western European countries can raise more revenue to pay for a more expansive array of social programs while not jeopardizing their economic competitiveness.

Another challenge that Canada will have to confront is the aging of its pop- ulation, resulting from medical advances that have increased longevity and social changes that have reduced fertility rates. It is estimated that in 20 years, more than 20 percent of the population will be over 65 and the number of senior citi- zens relative to the working-age popula- tion will increase from 19 percent to 33 percent. The challenges associated with these demographic trends are labour shortages and the funding of programs like pensions and health care.

The public policy solutions include immigration and integrating older Canadians into the workforce. Revamping Canada’s immigration policies and tackling the difficult prob- lem of the obstacles to prosperity that confront immigrants are worthwhile endeavours. Also, it is important to implement incentives for older Canadians to remain in the workforce and to convince employers of the ben- efits of employing older Canadians.

However, there are at least two other avenues that need to be fol- lowed. The first is developing more fully the potential of the current and future workforce.

In Western and northern Canada specifically, the Aboriginal population represents an untapped source of future workers. The Aboriginal popula- tion is sizeable and young, with as many as 60 percent being under 25. Governments in these regions quite rightly see the Aboriginal population as their future workforce and are adopting a variety of strategies to ensure that young Aboriginal people get the educa- tion, training and support they need to develop their potential to the fullest.

The federal government needs to fundamentally rethink its current poli- cies, especially as they affect First Nations. More money, alone, is not the answer. There needs to be more accountability for the funds that First Nations and other Aboriginal groups receive. While it is important to respect the rights of Aboriginal people to run their own affairs, any group that receives taxpayers’ dollars has to account for their use.

The other fundamental problem is that, while the majority of Aboriginal people live off-reserve, the majority of federal dollars go to the minority living on-reserve. This has to change. Governments need to respect the decisions of Aboriginal people and funding should follow the people. The majority of Aboriginal Canadians who live in cities and other off-reserve com- munities need more support when it comes to housing, social program- ming, education and job opportuni- ties. Developing the full potential of Canada’s young Aboriginal population will require policy changes and confronting politically difficult questions. Another thorny issue that needs to be addressed is inter generational equity. If we think of ourselves as being in a global competition for young, educated people, we should ask ourselves what we have to offer. In Canada, senior citizens do better than the young. Seniors have a more comprehensive social safety net than do young families or students and many more resources are being devoted to their needs. For instance, recently released statistics from the Ontario gov- ernment show that in 2002, the govern- ment spent $1,280 on average for each person between 25 and 44, while the cost for those over 65 was $7,723 per person. The question is, will the prospect of paying higher taxes to fund programs that disproportionately bene- fit seniors help to attract and retain edu- cated young people? Or do we have to fundamentally rethink the way we finance some of our social programs?

Consider the issue of how to fund rising health care costs. More specifically, who will pay for the health care costs of aging baby boomers? If there is a link between use of the system and payments, then baby boomers will pay a significant share of their health care costs. If we use general tax revenues to pay for health care costs, we are asking our children to foot the bill. These are the same young people who are paying taxes for interest on the public debt, most of which was accumulated before they were born, and who have shouldered an increasing share of their education costs and, in some cases, graduated with significant debt. Attracting and retaining educated young people will require confronting difficult issues about intergenerational equity.