Dear Prime Minister,
Yesterday, the Board of Directors of the Business Council on National Issues (BCNI), known as the Policy Committee, met in Ottawa to discuss the state of the Canadian and global economies. Knowing that you and your Cabinet colleagues are scheduled to convene at a retreat in the coming weeks to consider the future direction of Canadian economic policy, we are pleased to share the following views with you in the hope that you will find them timely and constructive.
When we wrote to you on the subject of economic and fiscal priorities in September, 1998, it was a time of much uncertainty in the global economy and capital markets. You will remember that we urged great prudence. In particular, we advocated more rapid reduction in public debt combined with a cap on new discretionary spending to leave room for significant reductions in personal income tax rates.
The global financial crisis of 1997 and 1998 has abated to some degree. Indeed, growth in the first quarter of this year was stronger than expected in some industrialized economies. But the global economy remains fragile and unbalanced and is likely to continue underperforming in the year ahead. Economic prospects are dimmer due to a rapid decline in global trade growth and to a dangerous escalation in protectionism.*
At the same time, economic growth remains strong in the United States. The modest improvements in the global outlook combined with seemingly irrepressible growth in American consumer demand and rising inflation risks could lead to tighter monetary conditions. Higher interest rates in the United States of course would have an impact on Canada and Canadian government finances. Given the very significant risks Canada faces, we continue to recommend prudence in fiscal management.
This means the government cannot meet all of the demands that its improving fiscal position has provoked. You recently expressed your goal as that of “preparing Canada to be the best country in the world”. This is a goal that we share, and the key challenge for you and your government is to determine which of the competing priorities will be most effective in achieving that goal.
Canada has done a good job of getting many of the macroeconomic fundamentals right. Low inflation and interest rates, balanced budgets and surpluses, a declining ratio of public debt to Gross Domestic Product and greater openness to trade and investment are all helping the economy to grow.
But we are not alone in seeking to be the best in the world, and that is why the BCNI recently launched the Canada Global Leadership Initiative. No matter how you measure it, the Canadian standard of living has failed to keep pace with that of the United States. To overcome the barriers to greater investment and growth in Canada, we need to develop a better understanding of what really matters when it comes to creating more and better jobs and a higher standard of living for all Canadians.
In the global, knowledge-based economy, policies intended to enhance economic growth and competitiveness are not in conflict with social progress. In the years ahead, investment and jobs increasingly will flow to where companies can find the skilled people they need to be competitive and to grow. Skilled individuals, for their part, will go where they see the greatest opportunities both for professional development and for the highest quality of life.
In that respect, good schools and hospitals and safe streets and safety nets are all important. But the cost of sustaining that social infrastructure matters too. If Canadian companies cannot afford to pay internationally competitive salaries and if individuals feel they are not getting value for their taxes, economic growth suffers. A rising standard of living and improving quality of life flow from our ability to be more productive — and only rising productivity and the higher incomes that go with it will enable Canada to sustain high-quality social programs such as health care as the baby boom generation heads for retirement.
In this regard, we strongly commend the recent work of the Standing Committee on Finance of the House of Commons. As stated in its report, Productivity with a Purpose: Improving the Standard of Living of Canadians, “Social cohesion results from productivity enhancement and economic growth, and does not cause it. In other words, we must first bake the pie before we cut it up and distribute the slices. The bigger the pie, the more slices we can cut, or the larger the slices might be.”
It is this desire to enhance the competitiveness and growth needed to support a healthy society that has driven the BCNI’s emphasis on the need for significant, broadly-based reductions in Canada’s personal income tax rates. Canada’s personal income tax burden is the highest in the G-7 and has become not just a drag on the standard of living of Canadian families but also a critical disadvantage for companies trying to recruit, retain and develop the talent they need to succeed as global enterprises.
There have been suggestions that the talk of a “brain drain” to the United States is exaggerated. While there are problems in measuring the numbers of people who are leaving, the real issue has more to do with quality than quantity. In business as in government, leadership is critical to success. Canadian companies feel they are losing too many of their current and future leaders, and this is having a clear impact on their ability to maintain and expand their activities in Canada.
The BCNI is investigating in greater detail both the scale and impact of the brain drain as part of the Canada Global Leadership Initiative. However, we feel that the extent to which business leaders have emphasized the urgency of personal rather than corporate tax cuts speaks volumes about the significance of this issue to the competitiveness and future growth of the private sector in Canada.
It is important to add that while we believe significant reductions in both personal and corporate tax rates are necessary, we are the first to say that tax cuts alone are not sufficient. We do not seek to remake Canada in the American mould. As we said in our submission to the Finance Committee, simply cutting taxes to match United States levels is not good enough. As the smaller market, Canada must be clearly better than the United States to compete equally for investment and jobs, and we have to be better in a distinctively Canadian way. We have to build on our advantages while eliminating critical disadvantages such as excessive tax rates.
As the Finance Committee put it: “The goal is not to become more like Americans or Germans or Japanese. The goal is to achieve our potential and to deliver the highest standard of living possible, now and in the future. And whether or not our productivity performance is slightly better or worse than we thought it was, it is clear that we can do better. Enhancing productivity is all about having more resources to satisfy the wants and needs of Canadians. Improved productivity provides them with more disposable income. It provides government with more resources without having to impose higher taxes. And it enables government to achieve more with the resources at its disposal.”
While we feel that the modest tax reductions announced in this year’s budget will help to encourage economic growth, they do not go far enough. What is really missing if we want to encourage greater investment and job creation is the kind of commitment to tax reduction that your government has been willing to make to health care.
Social and economic goals go hand in hand, but it is economic growth that makes social progress possible. Canada has put in place many of the right macroeconomic conditions for growth. Now it must build on those conditions with policies that can make a real difference in developing and retaining our human capital. These policies must persuade Canadians and their enterprises to pursue their dreams from a Canadian home base and help to improve productivity and foster innovation across the public, private and non-profit sectors.
We will be sharing the results of the Canada Global Leadership Initiative in the months ahead as our work with leading minds in Canada and around the globe bears fruit. In the meantime, we wish you and your Cabinet colleagues every success as you meet to consider the future course of your government. Prime Minister, we look forward to working constructively with you and your government as together we advance toward our shared goal of making Canada the finest country in the world in which to work, invest, live and grow.
On behalf of the Board of Directors
Business Council on National Issues
David P. O’Brien
President and Chief Executive
John E. Cleghorn
Jean C. Monty
James F. Shepard