How to put Canada’s post-pandemic recovery on the right track

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Paz GomezSocial engineers are eager for Canadians to buy into the same madness touted across the globe for post-pandemic recovery: more government spending. Now is precisely when technocrats must take a back seat and let markets take the wheel.

On Nov. 30, Finance Minister Chrystia Freeland presented the 2020 Fall Economic Statement to Parliament. The report highlights Canada’s economic toll due to COVID-19 and outlines legislative proposals for economic recovery.

These include stale, ready-made measures found in any bureaucrat’s top drawer, such as collecting tax on e-commerce, expanding credit facilities for business and “economic inclusion” for women. These are short-term solutions at best, and they undermine economic growth and resilience in the long run.

With the 2020-21 federal budget deficit expected to reach $343 billion, with millions of impacted businesses and entire industries in disarray, the Canadian economy is as weak as it was in the 1930s. Rapid recovery needs more than top-down government planning and tweaking.

Rather, Canada needs to look deep at the structural issues hindering growth. Four areas that would yield much larger surpluses – now and in the coming years – are interprovincial trade, taxation, immigration and innovation.

Open interprovincial trade

This is a no-brainer. The International Monetary Fund has detailed how, if Canada removes internal trade barriers, it can boost economic productivity and increase gross domestic product (GDP) per capita by four per cent.

The best part is provinces don’t depend on the federal government. They can either unilaterally reduce barriers or celebrate trade agreements between them, focusing on regulatory harmonization or labour mobility to begin with. The New West Partnership set up in April 2020 between British Columbia, Alberta, Saskatchewan and Manitoba is a leading example.

By opening up interprovincial trade, Canada’s GDP can grow by nearly $50 billion over a decade, according to a 2018 Bank of Montreal study. This more than doubles Canada’s annual exports to China, the country’s second-largest trading partner.

Streamline taxation

The pandemic has dramatically accelerated retail e-commerce. According to a study of Brand Spark International, over 4.5 million Canadian households bought groceries online from March to June 2020, and e-commerce penetration grew by more than 50 per cent in most of the assessed product categories.

Under current financial conditions, piling sales taxes on e-commerce would hold back its growth and amount to a punishment for the extra business. Rising prices would lessen the incentives for consumers to purchase online and stay at home.

The Organization for Economic Co-operation and Development (OECD) Regulatory Restrictiveness FDI Index consistently ranks Canada as one of the most unfavourable countries for foreign direct investment. The World Bank also placed Canada well behind its OECD partners in the ease of paying taxes, estimating companies spend 131 hours a year preparing and paying their taxes.

Rather than create new taxes or increase existing ones, Canada should streamline filing and make it simpler for businesses to service the inflow of customers.

Facilitate targeted immigration

An aging population and a slow-to-adapt workforce are two challenges affecting Canada. While the government, higher education and firms should keep investing in human capital, we need high-skilled immigrants who embrace Canadian values. Fortunately, there is strong demand abroad for the opportunity.

Despite Canada being one of the top destinations for college students and talented migrants, the pandemic has made mobility more difficult. At the same time, online education and remote work have become commonplace.

Ensuring foreign students of select programs can stay in Canada amid the pandemic, and retaining them long-term is one way. Universities should increase partnerships with private industry to boost the skill sets in demand.

A recent study by Statistics Canada found that immigrant workers contribute enormously to business productivity and the exchange of knowledge and ideas. Since Canada can’t fill the gap of high-skilled workers and low productivity by itself in the short term, targeted immigration is a vital source for sustained economic growth.

Disruptive innovation

The Fortune Global 500 ranking of corporate revenue listed only 13 Canadian companies in 2020. Scaling Canadian firms to a global reach is a persistent challenge and throwing easy money at them is not enough. Instead, it favours complacency.

As former Bank of Canada deputy governor Paul Jenkins said, “The most durable source of funding is sustained economic growth, not a reliance on low interest rates.”

Canada needs more entrepreneurship and innovation, which are the engines of wealth creation. Embracing new industries, such as blockchain technology, and reducing legal costs for startups can create hubs for growth.

There’s no mystery to this path, as our neighbours in California’s Silicon Valley can attest. The government should stay out of the way, and focus on ensuring businesses a safe environment to invest, expand, innovate and create good jobs.

Contrary to the prevailing view, central planning from the federal government is the lazy, unimaginative path for an uncertain recovery.

The COVID-19 pandemic and lockdowns have decimated the economy. Canada must reinvent large swaths of it and no government recipe is stronger than profit-driven enterprise.

Paz Gómez is a research associate with the Frontier Centre for Public Policy.

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