
The 2020s have posed unprecedented domestic and global challenges for governments in Canada and other advanced economies.
In Canada, unaffordability rates for homes sit just below four-decade highs and rents continue to skyrocket – critical problems that have eluded solutions from all three levels of government.
In health care, overcrowding continues in emergency rooms while millions of Canadians lack access to family doctors.
Globally, the polycrisis from overlapping shocks – COVID-19, wars in Ukraine and the Middle East, and catastrophic weather events – has challenged all advanced economies. In addition, there are far-reaching challenges caused by the end of ultra-easy monetary policy.
Deep-seated domestic problems and these international crises have made the role and effectiveness of governments in Canada even more important. Yet, the public sector appears to be truly overwhelmed in many areas, too reactive, and lacking effective strategy and tactics.
Compounding the polycrisis are structural weaknesses created by governments with their overall approaches and the design and implementation of specific policies.
We believe a systems approach would help prevent numerous policy missteps, including the federal government’s capital-gains hike in mid-2024. Good policy required a comprehensive and rigorous analysis of the impacts beyond the short-term revenue benefits, including the near- and long-term economic costs and risks, and the side effects for other key sectors. That did not happen.
This fundamentally different paradigm and policy lens is essential to restoring effective policy-making. It embraces a more balanced and holistic approach using a systems framework.
Core elements of a new approach
Improved policy-making starts with understanding that more uncertain outcomes and greater unintended consequences are core trends this decade given accelerating and broadening complexity and adaptivity.
These have already led to major unexpected outcomes (e.g., supply chains buckling in 2020-21) and unanticipated consequences (e.g., the surge in remote work) this decade.
Improved government policy approaches also require recognizing that economies, financial markets and other crucial sectors such as the environment are complex, adaptive systems.
Systems approaches reflect the reality that policies to achieve benefits and/or reduced costs in the short term can have negative effects in the medium and long term. Systems frameworks recognize that policies intended to improve or stabilize one system can cause significant problems in, or destabilize, other related systems.
Governmental barriers
Key factors impeding the adoption of systems approaches begin with the focus that many politicians have on short-term, simple narratives and proximate events rather than root causes. Opposing carbon taxes at the federal and provincial levels with sound bite-driven strategies without offering viable alternatives epitomizes this problem.
Focusing on communications over policy design and implementation is another critical weakness.
Federal examples include the first-time home buyer incentive program and the Canada digital adoption program, which achieved a fraction of their initial goals. Both of them suffered from poor design and made too few adjustments when results were lagging.
The increasing presence of partisan advisers in ministerial offices has made government operations much more bureaucratic as officials need to respond to proliferating requests and other work generated by these advisers.
From our perspective, it has worsened the gaps and weaknesses with inadequate policy know-how, implementation and assessment.
For its part, the central tendency of the public service to look for straightforward solutions and engage outside experts – too often by simply contracting out roles with too little oversight, cost control and co-ordination – is also a serious concern.
Too often, this misses the inevitable complex evolution of many problems. It misreads their frequently intertwined nature with other issues and the adaptive behaviour of people and organizations.
The excessive focus on single issues – despite the need to look at all factors creating problems, especially when crises occur – is a further challenge. Complex issues may require considering and testing multiple approaches, then adjusting to changing circumstances.
Public inquiries and parliamentary hearings regularly demonstrate that the public sector too often acts in silos and has trouble sharing information and co-ordinating activities internally and externally.
Equally important, risk management has frequently become risk avoidance. Routinely, inaction or minimal change is combined with an excessive focus on messaging rather than creating and implementing effective policy for the medium and long term.
A flawed approach to capital-gains policy changes
There are numerous examples of major policy errors (e.g., Ontario’s 2022 Greenbelt scandal) that occurred because governments failed to use a systems approach to carefully assess the costs as well as benefits, and to analyze the potential side effects on other key sectors.
The most recent illustration is the 2024 federal budget, which increased the rate of capital-gains inclusion from one-half to two-thirds for companies and trusts, and, with few exceptions, for individuals who have capital gains exceeding $250,000.
These fundamental changes to Canada’s tax regime – given its complexity and weaknesses – should have been part of a comprehensive, deliberate and public review. A systems approach would have carefully assessed the major risks, costs and benefits, and looked for unintended impacts beyond the short-term fix of a large boost to tax revenues.
Yet, this major change was announced without public consultation or broad-based external analysis. Its impact was complicated and broad-ranging, yet the June 25 implementation date gave far too little notice to those affected, especially when the legislation was introduced only on June 10.
Canada’s critical and longstanding need to attract and increase capital investment to remedy the ongoing and deepening Canadian productivity “emergency” was clearly not reflected in the federal analysis or communications of the capital-gains hike.
Declining overall and labour productivity from inadequate capital investment has had major costs in terms of Canadian personal incomes. Higher capital-gains taxes will reduce returns from corporate and individual investment, hindering future investment and decreasing growth and standards of living with consequent repercussions for future tax revenues as well.
Unintended side-effects include a broad base of leading tech firms, investors and entrepreneurs sharply criticizing the repercussions on start-up ventures, given their greater risks, and for Canada’s competitiveness versus the U.S. and elsewhere for location decisions.
Despite the technology sector’s adaptivity and mobile nature, there is little evidence that the government rigorously assessed the implications for technology jobs, innovation, investment and growth.
The government’s estimate is that only 0.13 per cent of Canadians (44,000 tax filers), and mainly the well-off, will be affected.
However, a longer-term analysis using 2011-21 data estimated that the capital-gains hike will affect 1.25 million taxpayers with personal capital gains during their lives, and nearly five million individuals when the capital-gains increase in corporate income taxes is included.
In health care, approximately 60 per cent of physicians have set up corporations to manage expenses and generate retirement savings. The side effects of higher capital-gains taxes for these doctors will not help address Canada’s critical shortage of family physicians, pediatricians and community-based doctors.
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Critics argue that numerous smaller rental-property owners and vacation-property owners – many of whom are middle- or lower-income – will also be affected. A large number of these individuals typically incur exceptional capital gains only upon retirement or death.
Federal characterization of the capital gains hike as crucial to fairness in funding more government spending assumes its overall expenditures are effective, efficient and sustainable.
In recent years, Ottawa has made substantial investments in digital capacity, strongly increased public-sector employment and significantly boosted spending on consultants. Yet, the public experience with both digital and in-person government services remains unsatisfactory.
It is difficult to argue that federal programs overall have proven to be efficient and effective given high-profile failures and the fundamental flaws in federal expenditure management, especially the absence of balanced and rigorous assessment.
In terms of fiscal sustainability, the 2024 budget forecast that federal spending over 2025-29 would remain near or at the 16-per-cent average of gross domestic product (GDP) of the early to mid-1990s, when Canada’s credit ratings were at serious risk – well above its average of 13 per cent of GDP for the 20 years prior to COVID-19.
Sadly, the federal capital-gains initiative illustrates well why adopting a systems framework generally for policy-making is long overdue.