Powering a Strong Recovery: An Economic Growth Plan for Canada

Laying the foundation for a safe and sustainable recovery requires a focus on three pillars of the economy: people, capital and ideas.

the COVID-19 pandemic is a once-in-a-lifetime FOR CANADIANS, health and economic emergency that has exacerbated longstanding structural weaknesses in our economy. Policymakers therefore face a dual challenge of considerable magnitude: They must lay the foundations for a safe and sustainable recovery while at the same time putting in place a long-term plan for economic growth and prosperity.

Early in the pandemic, we saw how close cooperation between Canada’s public and private sectors could overcome complex and urgent problems. The federal government’s Plan to Mobilize Industry harnessed the strength of the country’s industrial base and the resourcefulness of Canadian companies in responding to the sudden need for large quantities of critical health and safety supplies such as personal protective equipment, sanitization products and diagnostic equipment.

In our view, a similar ‘all hands on deck’ approach is required to deal with our longer-term economic challenges. We believe that a credible plan for economic growth rests on three main pillars: people, capital and ideas. In this article we will take a closer look at what needs to happen within each area.

PILLAR 1: PEOPLE

Canada has one of the best post-secondary attainment rates in the G7 and an immigration system that is among the world’s most successful. We need to double down on these strengths. A long-term strategy for human capital development is essential to building resilience in our labour markets and expanding our productive capacity. Investing in human capital and attracting talented newcomers to our shores are among the smartest possible policy responses to the unceasing forces of disruption, dislocation and skills-based change. Following are three key principles for achieving this.

Rapid technoDEVELOPING A MORE AGILE, ADAPTABLE WORKFORCE. logical change, an uncertain and volatile environment for exports, the rise of the gig economy and ongoing demographic shifts have combined to create a new reality for Canadian employers. Building an agile and resilient workforce — one with the right mix of skills to respond to the evolving technical and creative demands of the global marketplace — requires continued investment and adaptation by Canadian businesses. It also requires strong partnerships with government and postsecondary institutions.

In our view, the federal government should work with provincial and territorial governments to develop a comprehensive skills agenda that prepares displaced workers for new careers, expands work-integrated learning opportunities for students and post-secondary graduates and helps Canadians continuously hone their skills to stay relevant and improve their employability as technology and society evolve. The specific elements of that agenda should include:

1. Expanded training and paid placements to help unemployed individuals pivot to well-paid and more secure opportunities in the digital economy. A pilot project led by Dr. Arvind Gupta of the University of Toronto, Palette, is a promising example of what could work. Palette is an upskilling platform that connects workers from disrupted industries with fast-growing companies that are struggling to fill high-demand jobs.

2. Leadership development for the digital economy. As the economy evolves, there is an ever-increasing need for new leadership competencies, including innovation management training, mentorship programs and exchanges and internships for new and mid-career managers. Whether they work for established companies or start-ups, managers need opportunities to learn from firms that have effectively managed innovation and growth.

3. A broad-based and fundamental review of the Employment Insurance (EI) system. When EI was introduced in 1940, it was intended to be a joint responsibility of employers, workers and government. Today “there are virtually no mechanisms to facilitate and secure input from business and labour,” the late Donna Wood wrote in a 2017 paper for the Mowat Centre. There needs to be a much greater emphasis in the EI system on skills training and labour market adjustment. Currently Canada is one of the lowest spenders on labour market adjustment programs in the industrialized world.

If it was HELPING YOUNG CANADIANS BUILD REWARDING CAREERS. challenging before the pandemic for young people to transition from school to work, COVID-19 has made it vastly more difficult. The good news is that there is already broad support for one of the solutions: Students, employers and post-secondary educators agree on the need for more experiential and workintegrated learning opportunities such as apprenticeships, coops and internships.

The Business + Higher Education Roundtable (BHER), which the Business Council of Canada launched in 2015, brings together the leaders of Canada’s largest companies and post-secondary institutions to advance and strengthen opportunities for young people to transition to the labour market. These include expanding the work-integrated learning ecosystem. One of its current priorities is to find ways to connect students with companies that are dealing with myriad COVIDrelated challenges.

As policymakers look to expand work-integrated learning programs, they will also need to focus on students with vocational inclinations and young people for whom a conventional four-year university degree is not the right option. Labour shortages in the skilled trades represent a significant barrier to investment and economic activity in many parts of the country, and the demand is projected to increase as Baby Boomers retire. Here, too, we need to expand training opportunities for new labour-market entrants. We cannot sacrifice a generation of talent because of the economic carnage caused by COVID-19.

Alongside immiINCREASING PARTICIPATION IN THE LABOUR FORCE. gration, the other obvious way to grow Canada’s workforce is to increase labour force participation — the share of the adult population that is working or looking for work. Overall, Canada performs well internationally in terms of labour force participation, in part because of growth in the percentage of women in the labour market.

We cannot sacrifice a generation of talent because of the economic carnage caused by COVID-19.

In 2019, just over 82 per cent of Canadians aged 25 to 64 were in the labour force — an all-time high. But that statistic masks some significant underlying disparities. Women and Canadians from a wide range of marginalized backgrounds typically have access to fewer labour market opportunities than men. While the paradigm is slowly changing, women devote more time to caregiving tasks than men, resulting in occupational segregation and a predisposition for more women to have occupations that are subject to employment risks such as automation in the service sector. In fact, a survey completed by Randstad in 2019 found that 30 per cent of employed Canadian women expect they will lose their jobs within a decade due to advances in automation and artificial intelligence.

The impact of COVID-19 on women has been devastating. In April 2020, women’s participation in the labour force fell to its lowest level in three decades: 55.5 per cent compared to 61.5 per cent a year earlier. Although it has recovered to some extent since then, the pandemic has dealt a heavy and potentially lasting blow to several sectors in which women play an outsized role, including retail, accommodation and food services. This will only amplify gender disparities in the labour force.

The pandemic has also brought into sharp focus the employment equity challenges facing racialized Canadians and Indigenous peoples. Heading into the health crisis, the unemployment rate among Indigenous peoples — the fastest-growing segment of Canada’s labour market — was roughly twice as high as the rate for the population as a whole. Lower rates of educational attainment, substandard living conditions and health factors are among the many complex issues that need to be addressed in order to grow and sustain Canada’s Indigenous workforce.

For the sake of fairness as well as economic growth, Canada must strive to increase labour force participation rates across all segments of the population. We can start by expanding access to affordable childcare, which enables more women to participate in the labour market and is also an important source of employment for women — an economic driver in and of itself. Initiatives such as the federal government’s recently launched Black Entrepreneurship Program and the business-led Blacknorth pledge are promising examples of the work that will be required to end systemic racism and expand employment opportunities for marginalized groups. Governments and employers must stay focused on the need to create more inclusive and accessible workplaces.

PILLAR 2: CAPITAL

Canada’s economy cannot grow — and Canadians cannot look forward to improvements in their standard of living — without higher levels of private-sector investment. Unfortunately, business investment as a share of GDP is weaker in Canada than in many other advanced economies — a worrying sign from a competitiveness standpoint. While the number of factors that influence business investment in Canada is long and complex, three priority areas could help unlock future capital spending.

Most discussions about the A NEW APPROACH TO INFRASTRUCTURE. need for high-quality public infrastructure focus on conventional assets such as roads, bridges, water treatment facilities, community centres and the like. While important, such projects are insufficient to ensure the country’s economic competitiveness going forward.

The COVID-19 pandemic has driven Canada’s governments deep into the red, so it is more important than ever to focus on projects that will modernize our economy and make us more productive as a country, such as advanced digital connectivity, major transportation and urban transit networks, and low-carbon electricity grids.

As a country that relies heavily on trade, Canada should also be investing strategically in infrastructure that improves our ability to deliver goods and resources to global markets. This requires enhancements to gateway transportation infrastructure to the U.S., as well as east and west across the country and into global markets. Tax incentives and a recapitalization of the National Trade Corridors Fund — a successful, merit-based program that is now fully subscribed — are two important levers that can unlock private and public sector investment in trade-enabling infrastructure.

A dual-track approach that encourages innovation and creates the right environment for further investments in critical digital infrastructure can also enable economic opportunity and raise living standards. For example, additional investments in 5G connectivity and broadband coverage would have far-reaching benefits in areas ranging from agriculture and healthcare to energy management and transportation.

Another challenge for Canada will be to leverage the private capital necessary to support new investments. The Canada Infrastructure Bank (CIB) was created in 2017 to leverage private

capital and project management expertise in order to advance the federal government’s infrastructure strategy. The bank was seeded with $35 billion and given a mandate to work with private and institutional co-investors in support of revenue-generating projects. Although only a handful of deals have been announced so far, few would question the need for such an agency to catalyze important investments.

Another way to generate the capital necessary for new infrastructure is to engage in ‘asset recycling’ — either selling or leasing existing public assets to the private sector and using the proceeds to finance new projects without raising additional public debt. Australia’s recent experience offers a number of useful lessons: By creating a two-year window during which states were encouraged to sell off assets, Australia’s national government helped unlock more than $17 billion in new infrastructure developments, including new port, highway and freight infrastructure and light rail systems.

Economists and policy exENHANCING INTERPROVINCIAL TRADE. perts have for decades lamented the existence of interprovincial trade barriers. Yet the pace at which they are being dismantled can only be described as ‘glacial’. According to Statistics Canada, restrictions on trade and labour mobility between provinces have an impact equivalent to a 6.9 per cent tariff.

Canadians rightly protested when President Donaldtrump imposed duties on Canadian steel and aluminum, yet we tolerate the significant limitations that our own governments place on goods and services moving between provinces and territories. The Bank of Canada has estimated that removing interprovincial trade barriers could add 0.1 to 0.2 percentage points to potential annual output. A recent Bank of Montreal study concluded that the positive impact from free interprovincial trade “would cumulate over a decade to add as much as two per cent to national GDP, or nearly $50 billion.” That is more than twice Canada’s annual exports to China, our second-largest trading partner.

If we allow tax rates to rise above KEEPING OUR TAXES COMPETITIVE. those of our major trading partners, companies and investors will have more incentives to build and grow elsewhere, and highly mobile skilled workers will relocate to jurisdictions where they can keep more of what they earn. Conversely, a competitive tax system acts as a magnet for both capital and skilled workers.

Economic recovery from this unique crisis will be uneven and challenging, so now is not the time for tax increases. In the post-pandemic period, countries around the world will be competing harder than ever to attract capital, and those with money to invest will have many options. Canada cannot afford to be seen as a high-tax jurisdiction.

Currently, Canada’s tax-to-gdp ratio — the overall level of taxation relative to the size of our economy — is slightly below the OECD average. But as a share of GDP, Canada’s taxes on corporate profits and payroll taxes are both significantly higher than the OECD average. Germany, the U.S., the UK, France, Australia, Sweden and Denmark all collect less than Canada in corporate taxes as a share of GDP.

Similarly, Canada’s taxes on personal income are higher, as a share of GDP, than such countries as Germany, the U.S., France, the UK, Japan, Korea and Australia. The average top marginal personal income tax rate in Canada — federal and provincial rates combined — is 53.5 per cent. That compares with 47.5 per cent in Korea and Germany, 47 per cent in Australia and the UK, 46 per cent in the U.S. and 33 per cent in New Zealand.

How, short of significant cuts to personal and corporate tax rates, can Canada make its tax system more globally competitive? One way would be to gradually shift the focus towards consumption taxes, as is the trend in most advanced economies. Another would be to modernize and simplify the system, eliminating inefficient tax expenditures while reducing compliance costs. An analysis by the World Bank in 2019 ranked Canada 19th globally for the ease of paying business taxes, well behind countries such as Ireland, Denmark and New Zealand.

PILLAR 3: IDEAS

More than ever, Canada’s success depends on harnessing our intellectual capital. Innovation drives productivity growth, which in turn raises living standards. Yet our innovation ecosystem is weak and out of balance. True, Canada performs relatively well at the beginning of the innovation chain, as measured by public investments in basic research and the number of business startups. But we rank poorly when it comes to scaling up innovative companies and developing globally competitive firms. Following are three principles we need to commit to.

The impact of COVID-19 on women has been devastating.

For CanaGETTING BETTER AT COMMERCIALIZING OUR RESEARCH. dians to reap the benefits of our collective investments in innovation, we must become better at transforming knowledge and intellectual capital into commercial products and services. Historically we have undervalued our intellectual property (IP) as a source of economic wealth and have given it away to foreign firms too easily.

Part of the problem is that Canada’s public spending on R&D is not a significant driver of domestic economic growth. Funding distributed by the three granting councils to universities, research institutions and public labs should serve to strengthen Canada’s innovative capacity and productivity. It should support a broader innovation ecosystem and help close the gap between public benefits and private costs.

The case for such spending is weakened, however, when intellectual property developed in Canada, with the help of public dollars, winds up being acquired by foreign companies, resulting in most of the commercial benefits of that IP being realized in other countries.

The challenge is to create a more robust innovation ecosystem that contributes to growth, productivity and higher living standards. Traditional supply-side incentives — such as grants for academic research or tax-based subsidies for R&D — increase the economy’s capacity for innovation but do not address the demand side of the equation. In other words, our innovation policies don’t do enough to accelerate the diffusion and adoption of new technologies, to create new markets and to translate scientific strengths into economic performance.

Governments can stimulate demand for leading-edge innovations in several ways, including through the strategic use of public procurement. But among the other tools at their disposal, policymakers should consider the adoption of a mission- or challenge-driven approach to innovation, creating new markets and accelerating the commercialization of Canadian goods and services.

In the U.S., mission-oriented organizations such as DARPA (the Defense Advanced Research Projects Agency, created in 1958 in response to the Soviet Union’s launch of Sputnik) and ARPA-E (the Advanced Research Projects Agency-energy, established in 2009) operate as public sector intermediaries between science and industry to pursue breakthrough research. As observed in a recent paper published by the Public Policy Forum: “DARPA’S mandate is ‘high-risk, high-reward’ initiatives. Its list of failures is no doubt longer than its successes, but its net effect on U.S. innovation and commercialization is profound.”

In a world in which ecoLEVERAGING AND PROTECTING OUR IDEAS. nomic value is increasingly derived from intangible assets, we need to create, leverage and retain more intellectual property in Canada. The reality, however, is that Canada performs poorly in terms of both patent creation and intellectual property investments as a share of GDP. Investment in IP represented 2.3 per cent of GDP in 2005 but fell to 1.7 per cent as of the third quarter of 2019. That is in sharp contrast to the situation in the U.S., where IP investment rose from 3.6 per cent of GDP in 2005 to 4.8 per cent in the fourth quarter of 2019. These numbers help to explain why there is not a single Canadian company among the world’s 200 largest private-sector spenders on R&D, according to data compiled by Bloomberg.

The field of artificial intelligence offers a dismaying example of the challenge ahead of us. Although it is often suggested that Canada has a comparative advantage in this fast-growing area, the truth is we are nowhere to be seen on patent filings. China, the U.S., Germany, France, the UK, Japan and South Korea account for almost all the patent filings in this field. Yes, Canada can lay claim to impressive R&D capability in AI, but we have yet to translate this into significant commercial outcomes and world-leading firms.

How can we turn this around? One approach would be to learn from the experience of countries that perform better than Canada in IP production. For example, the German Patent and Trade Mark Office (DPMA) is a key service provider in the field of industrial property protection. The office has the main duty to grant, register, administer and publish IP rights, including patents, utility models, designs and trademarks. The German approach, exemplified by the number of patents led by Fraunhofer Society institutes, places a high priority on patent creation and retention. DPMA acts as a proactive advisor and facilitator to build a strong IP portfolio to the benefit of German firms. In sharp contrast, Canada’s patent office role is essentially to grant IP rights and provide general IP awareness and information.

UK, BACKING CANADIAN LEADERS. The evidence from the U.S ., the

Japan, Germany and the Netherlands seems clear: The postCOVID-19 paradigm will include a more active role for the state in supporting technological innovation and shaping market outcomes within domestic borders.

In 2019, Germany’s economy minister put forward a series of proposals for a new industrial strategy, including the creation of a state investment fund that would step in to prevent foreign takeovers of leading German companies. “It is necessary to reshape Germany’s industrial policy so that industry will remain a strong core of the German economy,” Germany’s Minister for Economic Affairs and Energy said, citing digitalization, climate change and demographic change as key forces challenging German competitiveness.

Meanwhile, the European Commission has set out a framework for developing a series of cross-sectoral missions such as curing cancer, adapting to climate change, making cities greener and ensuring healthy oceans. Last January, it announced an ambitious new Green Deal with the goal of reaching climate neutrality by 2030. The plan is to invest in environmentally friendly technologies; support industry to innovate; roll out cleaner, cheaper and healthier forms of private and public transport; decarbonize the energy sector; and ensure buildings are more energy-efficient.

It’s worth asking ourselves whether a similar approach makes sense for Canada. Would an industrial strategy focused on sectors of comparative advantage — such as agri-food, energy and renewables, healthcare and life/bio sciences and advanced manufacturing — help Canadians better leverage their domestic strengths and equip them to compete for global market share?

To be sure, the federal government has in recent years announced a series of new (or redesigned) innovation-focused programs, including the Superclusters Initiative, the Strategic Innovation Fund and Innovative Solutions Canada. But given the speed at which other countries are moving, it may be time for a comprehensive review of our current toolkit.

To see how this could work in practice, consider the energy and renewables sector. The federal government could do more to position Canada as a leader in the low-carbon transition, including by promoting exports of products and technologies that would enable other countries to reduce their emissions. It could help to maximize the value of Canada’s resources while shrinking their environmental footprint. An industrial strategy that supported private sector research, the cost-effective adoption of low carbon technologies and the scaling up of promising technologies could generate significant economic and environmental benefits.

In closing

Over the coming months, the Business Council of Canada will be reaching out to policy experts, partners and stakeholders across the country to seek their input as we work to define a path forward with detailed recommendations in each of the three priority areas identified herein. Simultaneously, we will be developing recommendations on how the country can be set on a path towards achieving net-zero GHG emissions by 2050 — a goal that will require the financial capacity, skilled workforce and demonstrated commitment to innovation of Canada’s energy and resource sectors.

Only by working together, as citizens and their governments did in addressing the COVID-19 crisis, can we realize our shared objectives. We are convinced that Canadians are up to the challenge.

Robert Asselin is Senior Vice President, Policy, at the Business Council of Canada. Ross Laver is Senior Vice President, Strategy, at the Business Council of Canada. The complete report on which this article is based is available online at www.thebusinesscouncil.ca.

A competitive tax system acts as a magnet for both capital and skilled workers.