Let’s follow the Irish on productivity
Aweek before the federal budget, the Public Policy Forum held a meeting with the hopeful title “Fixing productivity once and for all.” High productivity is key to economic well-being. The more we produce for the same effort, the higher our incomes can be. At the moment, Canada is not keeping up with productivity growth in the countries we naturally compare ourselves with. The OECD says our 2022 productivity was just 72 per cent of Americans’. Workers’ higher output per hour in the U.S. means wages can be higher there.
One speaker at the meeting was Dan O’brien, chief economist at Ireland’s Institute of International and European Affairs. His message was clear: the best way to increase productivity rates is to encourage businesses to invest in equipment and technology. A key factor in getting them to do so is a low corporate tax rate. He said this was an accepted principle supported by all political parties in Ireland.
Since the implementation of such a policy in the late 1990s, Ireland’s productivity, measured as GDP produced per hour, has become the highest in the world.
Apart from lowering corporate tax rates, Canadian governments could boost productivity by reforming regulation. To be sure, strong regulations are required to ensure such things as food safety, labour standards, environmental protection and more. But Canadian businesses spend too much time complying with regulations that often need to be updated, are unnecessary or could be streamlined to remove duplication. For instance, Health Canada is chronically late in approving new medical devices and drugs compared to other jurisdictions. Then, after new technologies are approved as safe and effective, there are still costly, unnecessary duplications in the value assessments of these technologies. Also, there are regional and individual hospitals doing assessments. Is a patient in Ontario really different from a patient in Alberta? Of course not.
According to the World Bank, over the past 14 years Canada has become a harder place in which to start a new business in. In 2010, we ranked eighth for ease of doing so. Today we are 23rd. We need a whole-of-governments effort to streamline the regulations we decide we still require and to remove the ones we don’t.
We also need to encourage greater investment by businesses in innovative, labour-enhancing training, equipment and technology. The federal budget does introduce accelerated writeoffs of such investments. That’s hardly a new idea, but it is a step in the right direction. But while the government is providing tax breaks on the one hand, it is raising taxes on many companies on the other. Increasing the capital gains tax rate on corporations is a major disincentive to the very investments we desperately need. The net result is that we have made it less attractive for many firms to invest here.
Our generally high taxes put us in the unenviable position of having to pay companies exorbitant sums to build factories in Canada. The recent massive grants to electric car battery manufacturers are the most obvious example. The Parliamentary Budget Officer estimates that our governments have announced $43.6 billion in subsidies and forgone taxes to encourage EV battery manufacturers to set up shop here.
Compare this to the $22 billion the increase in the capital gains tax is estimated to bring in. We are paying out more to the EV battery industry than all the income we will make from the capital gains tax increase. It would have been better and cheaper to lower the tax rate on all companies in all industries to encourage their continuing investment in Canada, as Ireland did.
The issue is not whether we should have corporate taxes as low as in Ireland; the issue is that taxes on Canadian businesses should be going down, not up as announced in the latest budget. This the wrong direction if the government is looking to promote improvements in Canada’s productivity.