Canada

   

Economic Policies

#9
Key Findings
Showing considerable progress in recent years, Canada’s market-oriented policy regime receives high rankings in international comparison (rank 9). Its score on this measure has gained 0.2 points since 2014.

Following years of slow growth, the economy has gathered speed, in part due to increased government infrastructural spending and other stimulus measures. However, deficits have been consistently fallen below targeted amounts, and the net debt-to-GDP level is expected to remain stable at a level low by international standards.

Job creation has been strong, and unemployment has reached a post-2008 low. Employment rates remain a concern particularly among the indigenous population. Skills shortages and U.S. market access are deemed problematic, but the labor market is flexible overall

Despite income-tax progressivity, inequality has risen in recent decades. Corporate taxes have been reduced in recent years. An effort to raise taxes on high-income small businesses proved controversial, and taxes were ultimately cut.

Economy

#2

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
9
Canada has implemented market-oriented economic policies that have enhanced the country’s competitiveness and attractiveness as a location to do business. Yet these policies appear not to have had a positive impact on productivity growth, which continues to be quite weak. There are still areas where Canada’s economic framework is not as conducive as it might be to productivity growth. One factor is the country’s dependence on natural resources, which account for roughly 20% of GDP. Falling oil prices, for instance, significantly reduced the country’s export revenue and contributed to a decline in economic activity in 2015.

Following years of slow or stagnating economic growth, Canada’s economy has recently gained speed. The Bank of Canada, in its Fall 2017 Monetary Policy Report, projected real GDP growth of 3.1% in 2017, up from 1.5% in 2016. Real GDI growth was projected to be even higher at 4.0% in 2017, up from 0.8% in 2016, because of improved terms of trade. Yet, it is unclear how much of this upturn can be attributed to the Liberal government’s policy of increased government spending on infrastructure and other programs to stimulate the economy. While these policy initiatives were praised by both the IMF and the OECD, fiscal stimuli cannot be expected to foster economic development in the long run.

Other weaknesses in Canada’s regulatory framework from a competitiveness perspective include interprovincial barriers to trade and labor mobility, and marketing boards, which have the right to control output through production quotas. These issues were not highlighted in the policy agenda of either the current Liberal government or the previous Conservative government.

Household debt remains high. The current ratio of household debt to disposable income in Canada is above 167% and continues to increase in part due to rising mortgages. Although the federal government has repeatedly tightened mortgage lending rules over recent years and provincial governments enacted legislation to curb foreign real estate investment, housing markets in Canada’s largest cities, Vancouver and Toronto, remain unbalanced. A possible correction in the housing market would pose a significant risk, and there appears to be ample room for additional measures to mitigate speculative investment activity, and improve coordination between federal and provincial regulators.

A final concern is a lack of talent and innovative ability. In the World Economic Forum’s most recent Global Competitiveness Report, Canada ranks below many of its OECD peers for quantity of education, technological readiness, business sophistication and capacity to innovate. The extent to which the federal government can address these issues, however, is limited. Education policy is under provincial jurisdiction and, historically, government-led attempts to actively promote technological innovation have largely been unsuccessful.

Citations:
OECD Economic Surveys: Canada June 2016, http://www.oecd.org/eco/surveys/Canada-overview-OECD-economic-survey-2016.pdf
Canada: 2016 Article IV Consultations, International Monetary Fund, June 2016, https://www.imf.org/external/pubs/ft/scr/2016/cr16146.pdf
World Economic Forum, The Global Competitiveness Report 2017–2018.
Bank of Canada, Monetary Policy Report, October 2017 https://www.bankofcanada.ca/wp-content/uploads/2017/10/mpr-2017-10-25.pdf

Labor Markets

#12

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
The unemployment rate in Canada is primarily driven by the business cycle, which reflects aggregate demand conditions. Labor market policies and programs such as unemployment insurance and training programs have limited effect on overall unemployment, although these policies and programs are important for income support and the upgrading of skills. Overall, labor market regulation is Canada is relatively light, and there are few labor market rigidities that impede the operation of the labor market. The most significant of these may be regional employment-insurance benefits that may somewhat reduce the outflow of labor from regions with high unemployment rates, even though labor mobility in Canada, both inter- and intra-provincially, is generally high.

Specific labor market programs are available to increase the workforce participation of Indigenous Canadians, whose employment rates are persistently below those of non-indigenous Canadians. Thus far, however, these programs seem to be ineffective; the unemployment rate for Indigenous Canadians, particularly for Inuit and members of First Nations living on reserves, remains very high, with little sign of improvement.

Many observers have expressed concern that the Canadian labor market is currently experiencing more weakness than is implied by the official unemployment rate, which is around 6% after having declined over the past year to reach a new low since 2008. In 2017, job creation exceeded the expectations of forecasters and is projected to continue to rise over the next year. The long-term unemployment rate shot up during the 2008 to 2009 recession and has remained high since, but is low by international standards.

The federal government has recognized both the need to improve the economic environment such that businesses hire new workers and the need for more effective workplace training, but many of its measures did not have the desired effect. Despite a decade of job losses, Canadian manufacturing firms still indicate that skills shortages and lack of policies around market access to the United States remain an issue.

The 2016 budget reduced taxes for middle-income earners. There have also been changes to unemployment insurance, particularly for those in regions most affected by the declining oil and gas sector. There is discussion of changing the previously controversial temporary-foreign-worker program, which may relieve labor shortages in particular industries, including fisheries and manufacturing.

Overall, the Canadian labor market is very flexible, particularly for a developed country. According to the 2017-2018 Global Competitiveness Report, out of 137 countries, Canada ranked seventh for labor market efficiency and third for efficient use of talent.

Citations:
2016 Federal Budget “Growing the Middle Class,” posted at http://www.budget.gc.ca/2016/docs/plan/budget2016-en.pdf

Centre for the Study of Living Standards, Ottawa. Press Release June 20, 2012, Aboriginal Labour Market Performance in Canada Deteriorates Since 2007, http://www.csls.ca/PressReleaseJune 202012.pdf

Curry, Bill, “Ottawa poised to ease rules for temporary foreign worker program,” The Globe and Mail, August 21, 2016, Accessed September 28, 2016, http://www.theglobeandmail.com/news/politics/ottawa-expected-to-introduce-new-rules-for-temporary-foreign-worker-program/article31365448/

OECD (2017). How does Canada compare? Employment Outlook 2017. https://www.oecd.org/canada/Employment-Outlook-Canada-EN.pdf

Roland Tusz, Erika Rodriques, and Matthew Calver (2015) “Interprovincial Migration in Canada: Implications for Output and Productivity Growth, 1987-2014,” CSLS Research Report 2015-19, November. http://www.csls.ca/reports/csls2015-19.pdf

Statistics Canada. Table 282-0087 – Labour force survey estimates, by sex and age group, seasonally adjusted and unadjusted. CANSIM (database). Accessed October 4, 2017.

World Economic Forum (2017). The Global Competitiveness Report 2017-2018. http://reports.weforum.org/global-competitiveness-index-2017-2018/

Taxes

#11

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
8
Canada has seen a substantial rise in income inequality over the past few decades. Mirroring trends in the United States and other Western economies, the share of total income going to the top 1% of earners has increased dramatically since 1980. Moreover, there has been a technology- and trade-driven polarization of labor demand, with the earnings of male workers stagnating.

The income-tax system is reasonably progressive and continues to be useful in equalizing after-tax incomes in the lower income brackets. Some experts have argued that the multitude of overlapping tax expenditures benefit high income individuals at the expense of low-income households. According to the Conference Board of Canada, there are now almost 200 tax breaks for federal income-taxpayers, resulting in an estimated CAD 100 billion of foregone tax revenue annually. In an effort to create a more equitable tax system, the 2016 budget increased the federal marginal tax rate for top earners, decreased taxes for middle-income earners, and eliminated the Family Tax Credit, an income splitting regime introduced by the former Conservative government. For individuals with earnings above CAD 200,000 annually, the combined federal/provincial marginal tax rate now exceeds 50% in more than half the provinces but is still well below the top income-tax bracket in similar countries (notably the United States).

There is no double taxation at both the corporate and individual level. In terms of tax competitiveness, Canada fares well. Statutory corporate-tax rates at the federal level and within the provinces have been reduced significantly in recent years. The marginal effective tax rate on investment has fallen and is now the lowest among G7 countries and below the OECD average. Capital taxes have been largely eliminated.

In July 2017, continuing its “tax fairness agenda,” the government introduced plans to increase the effective small business tax rate. The aim is to target high-income earners who shift their income to a Canadian-controlled Private Corporation (CPCC) to take advantage of a lower tax rate and incentives intended for small businesses. The proposed policy proved very controversial due to its potentially negative effect on small business growth and entrepreneurship, and was largely withdrawn. The federal government actually lowered the statutory tax rate for small businesses in the fall of 2017.

Citations:
The Conference Board of Canada, “Reinventing the Canadian Tax System: The Case for Comprehensive Tax Reform.” March 23, 2012.

2016 Federal Budget “Growing the Middle Class,” posted at http://www.budget.gc.ca/2016/docs/plan/budget2016-en.pdf

Milligan, Kevin. “Why small business taxation does need fixing.” MacLeans, September 10, 2015. Retrieved October 5, 2017 from http://www.macleans.ca/economy/economicanalysis/why-small-business-taxation-does-need-fixing/

Michael Wolfson, “Professionals and Private Corporations,” May 2015. University of Ottawa working paper.

Zimonjic, Peter. “Trudeau pledges to push through tax fairness agenda and defends own family’s use of tax rules.” CBC, September 19, 2017. Retrieved October 5, 2017 from http://www.cbc.ca/news/politics/trudeau-fall-presser-tax-fairness-1.4296641

Budgets

#25

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
Canada’s government is in a relatively strong fiscal position. Its budget deficit as a proportion of GDP is low by international standards, as is its (net) public debt to GDP ratio, which is projected to remain stable over the next five years at around 31%. The fiscal situation is somewhat weaker in certain provinces, where debt ratios range from roughly 3% in Alberta to over 40% in Quebec. and Newfoundland and Labrador.

The Liberal government elected in 2015 had to abandon its campaign pledge to limit spending with “modest short-term deficits” and instead shifted its main fiscal objective to keeping the debt-to-GDP ratio on a downward trajectory.

The government’s first (2016) budget outlined five consecutive years of deficits totaling more than CAD 113 billion, with a CAD 29.4 billion deficit in the 2016-2017 fiscal year. Though the actual deficit for 2016-2017 was below that figure, at about CAD 18 billion, due to a stronger than predicted economy. The 2017-2018 projected fiscal gap of CAD 28.5 billion is poised to be below target by a similar magnitude. Indeed, the 2017 Fiscal Sustainability Report from the Parliamentary Budget Office estimates that due to strong economic growth in 2017, the government could permanently increase spending by CAD 24.5 billion and still maintain fiscal sustainability. Based on the current trajectory, federal net debt would be eliminated in just over 40 years, down from 50 years in the 2016 estimate.

Rising health care costs associated with an aging population represent a potential challenge to long-run fiscal sustainability. The 2016 Fiscal Sustainability Report from the Parliamentary Budget Office suggested that while the growth in health care spending had slowed, subnational governments, which are responsible for the lion’s share of spending, cannot meet the challenges of population aging under the current policy. A recent study by the Centre for the Study of Living Standards (Drummond and Capeluck, 2015) reached a similar conclusion.

Citations:
Department of Finance, Government of Canada, Annual Financial Report of the Government of Canada
Fiscal Year 2015–2016m accessible at https://www.fin.gc.ca/afr-rfa/2016/index-eng.asp

Parliamentary Budget Officer, Fiscal Sustainability Report 2016, posted at http://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2016/FSR_2016/FSR_2016_EN.pdf

Parliamentary Budget Officer, Fiscal Sustainability Report 2017, posted at http://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2017/FSR%20Oct%202017/FSR_2017_FINAL_EN.pdf

Don Drummond and Evan Capeluck (2015) “Long-term Fiscal and Economic Projections for Canada and the Provinces and Territories, 2014-2038,” CSLs Research Report 2015-08. http://www.csls.ca/reports/csls2015-08.pdf

Research and Innovation

#16

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
Overall, Canada’s economic conditions and general policy environment are conducive to innovation and investments in productivity growth. The country benefits from stable macroeconomic policies, well-developed regulations that ensure competition, largely open trade in goods and capital, and an educated population.

At the same time, a 2015 report from the federal government’s Science, Technology and Innovation (STI) Council found that the country continues to tread water as a mid-level performer in STI, for years lagging behind other countries when it comes to key innovation measures like filing patents and corporate spending on research and development. In the 2017 budget, the government introduced CAD 950 million to support “innovation superclusters” similar to those in Silicon Valley to help drive innovation, R&D and economic growth. How effective government policy is in encouraging R&D investment and productivity gains remains contentious, however. Questions exist about the effectiveness of the federal government’s Scientific Research & Experimental Development (SR&ED) tax program in increasing business-sector R&D (the program has never been formally evaluated) and the impact of budget cuts for government R&D labs. Critics have also pointed to the inadequacy of government programs to facilitate technology transfers, and persuade small and medium-sized businesses to adopt best practices. Finally, increased rates of higher education participation have failed to yield increased business sector R&D and productivity.

Public policy in Canada continues to encourage a strong research capacity in the academic sector. In September 2012, the Council of Canadian Academies released an assessment of science and technology in Canada, based on a survey of over 5,000 leading international scientists, that found the country’s scientific research enterprise to be ranked fourth-highest in the world, after that of the United States, the United Kingdom and Germany.

Citations:
2017 Federal Budget “Building a Strong Middle Class; #Budget2017,” posted at http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf

Council of Canadian Academies (2012) Expert Panel Report on the State of Science and Technology in Canada, September, http://www.scienceadvice.ca/uploads /eng/assessments%20and%20publicatio ns%20and%20news%20releases/sandt_ii /stateofst2012_fullreporten.pdf

Greenspon, Jacob and Erika Rodriques (2017) “Are Trends in Patenting Reflective of Innovative Activity in Canada?” CSLS Research Report 2017-01, January http://www.csls.ca/reports/csls2017-01.pdf

Murray, Alexander (2016) “Developing an Inclusive Innovation Agenda for Canada,” report prepared for Innovation, Science and Economic Development Canada CSLS Research Report 2016-18, December http://www.csls.ca/reports/csls2016-18.pdf.

Nicholson, Peter (2013) “Paradox Lost: Explaining Canada’s Research Strength and Innovation Weakness” Council of Canadian Academies, http://www.scienceadvice.ca/uploads/eng/assessments%20and%20publications%20and%20news%20releases/synthesis/paradoxlost_en.pdf

Science, Technology and Innovation Council (2013) Canada’s Science, Technology and Innovation System: Aspiring to Global Leadership, State of the Nation, 2012, May http://www.stic-csti.ca/eic/site/st ic-csti.nsf/eng/h_00058.html

Science, Technology and Innovation Council (2015) Canada’s Innovation Challenges and Opportunities, State of the Nation, 2014, http://www.stic-csti.ca/eic/site/stic-csti.nsf/vwapj/STIC_1500_SON_Report_e_proof4.pdf/$FILE/STIC_1500_SON_Report_e_proof4.pdf

Global Financial System

#6

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
9
The Canadian government, through various departments and agencies, contributes actively to the effective regulation and supervision of the international financial architecture. The Bank of Canada has been particularly prominent in the international arena. Former Bank of Canada Governor Mark Carney, who assumed the position of Governor of the Bank of England in 2013, chairs the G-20 Financial Stability Board. Other senior Bank of Canada officials have played important roles in other international financial forums. The Office of the Superintendent of Financial Institutions (OSFI) has also been very active internationally.
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