Fiscal prudence and economic competitiveness
Robert Asselin’s testimony to the House of Commons’ Standing Committee on Finance’s pre-budget consultations in advance of the 2023 Budget.
Merci monsieur le Président.
Mon nom est Robert Asselin.
I’m Senior Vice President Policy at the Business Council of Canada. We represent the heads of 175 businesses employing over 2 million Canadians.
On behalf of my organisation, I want to convey two simple messages to you today.
The first relates to fiscal policy in perilous times.
We are in the midst of the riskiest economic policy landscape we’ve seen in decades. Inflation remains stubbornly high, and the risks of policy mistakes is increasing. This requires a change of direction on fiscal policy. As the recent events in the United Kingdom have shown us, misalignment between the government of Canada and the central bank could cause unease in the bond market and raise the cost of borrowing inadvertently. Put simply, the more expansionary fiscal policy continues to be, the more difficult it will be for the central bank to do its job and bring inflation back to its mandated target range.
It is generally accepted that as long as economic growth outpaces interest rates increases, the burden of servicing debt will fall over time. In the current economic environment, we can no longer assume this will be the case. When interest rates go up faster than growth, there is simply no easy way out: debt financing becomes much more burdensome for taxpayers. Therefore, as former Bank of Canada Governor David Dodge has rightly suggested, we are of the view the government should adopt a new fiscal anchor based on debt servicing costs. It should commit to ensuring its debt service costs do not exceed 10% of annual government revenues going forward.
The second message I wanted to convey to you is on our economic competitiveness.
Monsieur le président, nous devons regarder l’avenir sans complaisance. Depuis trop longtemps, nous avons négligé notre compétitivité économique. Bien que le gouvernement ait annoncé certaines mesures qui aideront notre économie au cours des deux récents budgets, nous sommes encore loin du compte. Le gouvernement fédéral n’a toujours pas de plan cohérent de croissance à long terme et de politique industrielle moderne qui rendra le Canada plus compétitif.
The world’s largest economy – and Canada’s largest trading partner – now has a clear and bold industrial strategy for the first time since the Cold War. As such, Canadian policymakers need to acknowledge the real threat that the recent adoption of the Inflation Reduction Act (IRA) and the CHIPS and Science Act in the United States poses to our economic competitiveness. We are already hearing of projects moving to the U.S. to take advantage of the IRA.
To stay competitive, Canada needs an industrial strategy of its own with several key components. Although I don’t have time to go through every component in this testimony, let me briefly emphasize on three essential ones.
In a recent survey of our members, 80% reported having difficulty finding the skilled workers they need to grow and compete globally. As a result of these shortages, 67% had canceled or delayed major projects. Some 30% were forced to relocate work outside of Canada. With an aging workforce and a declining labour participation rate, Canada’s future prosperity depends on changes to our immigration system to significantly increase the annual number of economic-class applicants who are granted permanent resident status.
Canadians must demonstrate to the world that we can successfully complete major projects and build the infrastructure that is required to access global markets. For such projects to go ahead, however, investors need regulatory predictability and a clear understanding of the “rules of the road.” We noted with interest the Finance Minister’s recent speech at the Brookings Institution in which she committed the government to fast-track “the energy and mining projects our allies need to heat their homes and to manufacture electric vehicles.” We look forward to seeing more details on this important and welcome initiative.
The new direction of U.S. industrial policy reflects a broader government intervention beyond R&D to support technological development from idea to market. In Canada, our capacity to undertake industrial research at scale is almost non-existent and our technology transfer mechanisms have not kept pace with developments in knowledge creation. We still rely too heavily on incremental innovation or safe bets. Canada must become more competitive on technological innovation, and science must be translated into productivity growth and future prosperity.
Merci de votre attention.
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