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 0.3 points since 2014.

Growth has averaged around 2% for several years, driven in part by government infrastructural spending and other stimulus measures. Deficits have been smaller than projected in recent years. The federal debt is expected to fall below a targeted 31.8% of GDP within five years. However, household debt levels remain high, and rising health care costs are endangering provincial-level fiscal sustainability.

The official unemployment rate has reached a 40-year 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. A refundable tax credit for low-income workers was introduced in 2018, and capital taxes have largely been eliminated. Research output is good, but investment levels trail the world average.

Economy

#3

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
Following years of slow or stagnating economic growth, Canada’s economy has recently gained speed. The Bank of Canada, in its fall 2018 Monetary Policy Report, projected real GDP growth of 2% in 2019, a slight decrease from 2.1% in 2018 and 3% in 2017. Real GDI growth was projected to be even higher at 4.0% in 2019, down from a breakneck 8% in 2018, because of strong business sentiment. Yet, it is unclear how much of this upturn can be attributed to the Liberal government’s policy of increased infrastructure spending and other stimulative programs. 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.

Canada has implemented market-oriented policies that have enhanced the country’s attractiveness to business. Yet, there are areas where Canada’s economic framework could be more conducive to productivity growth, as exemplified in the most recent 2018 World Bank Doing Business Report, which ranked Canada 18 out of 190 countries for the ease of doing business, down from 8 out of 181 countries in 2009. The report highlights some of the country’s weaknesses in getting electricity, contract enforcement, cross-border trade regulations and in dealing with construction permits.

A key challenge for Canada involves the coordination of regulatory policy across federal and provincial jurisdictions. In many areas, changes require different levels of government to corporate, which frequently impedes progress.
Productivity growth continues to be relatively weak as well.
Another factor is the country’s dependence on natural resources, which account for roughly 20% of GDP. Aside from risks associated with high price volatility in this sector, uncertainties regarding policies and regulations surrounding major projects (e.g., the duty to consult with Indigenous groups) have the potential to stall investment.

Other regulatory weaknesses affecting Canada’s competitiveness include interprovincial barriers to trade and labor mobility, and marketing boards, which set production quotas. While these issues came to the fore during the recent NAFTA re-negotiations, no major party has made a commitment to significantly reduce these barriers.

Household debt remains high. The current ratio of household debt to disposable income in Canada is above 169% and housing affordability continues to decline. 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 room for additional measures to mitigate speculative investment activity, and improve coordination between federal and provincial regulators.

A final concern involves the lack of talent and innovative ability. In the World Economic Forum’s most recent Global Competitiveness Report, Canada ranked 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:
The World Bank, Doing Business 2018. http://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf

OECD Economic Surveys: Canada July 2018, https://read.oecd-ilibrary.org/economics/oecd-economic-surveys-canada-2018_eco_surveys-can-2018-en#page9

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 2018 https://www.bankofcanada.ca/wp-content/uploads/2018/10/mpr-2018-10-24.pdf

Labor Markets

#15

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.

The national labor market continued to perform strongly in 2018 and is expected to do so in 2019. The official unemployment rate of around 6% is near its lowest point in 40 years. The long-term unemployment rate shot up during the 2008 to 2009 recession and has remained elevated since, but is low by international standards.
Yet, the labor force participation rates of some groups (specifically women, young Canadians and Indigenous peoples) are lower than they could be, representing a significant untapped source of potential economic growth. Unemployment rates of Indigenous Canadians, particularly those of Inuit and members of First Nations living on reserves, remain very high suggesting that existing programs fail to hit the mark. The 2018 budget announced a series of measures to increase the labor force participation rate of women and to continue efforts to reinforce the labor market participation rates of Indigenous peoples, but the effectiveness of these policies remains to be seen.

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. Labor shortage is a growing problem. The Canadian Federation of Independent Business (CFIB) reports a record number of almost 400,000 vacant private sector jobs, reflecting a continued rise in the job vacancy rate to 3%, up from 2.4 % in 2016. 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.

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

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

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

CFIB press release Aug 9 2018 https://www.cfib-fcei.ca/en/media/canadas-job-vacancies-rate-reaches-new-heights

Taxes

#8

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
Like other Western economies, Canada has seen the share of total income going to the top 1% of earners increase dramatically since 1980. Moreover, the earnings of male workers have stagnated as labor demand has polarized due to changes in technology and trade.

The income-tax system is reasonably progressive and continues to be useful in equalizing after-tax incomes for lower income brackets. 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. Some experts have argued that the multitude of overlapping tax expenditures benefit high income individuals at the expense of low-income households. In 2016, the government 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 and the United States. The 2018 budget introduced the Canada Workers Benefit (CWB) as a refundable tax credit intended to supplement the earnings of low-income workers and improve work incentives for low-income Canadians. The move was welcomed by experts, as the CWB has higher benefits and is more easily accessible than its predecessor, the Working Income Tax Benefit, which was widely considered ineffective.

In terms of tax competitiveness, Canada fares well. There is no double taxation at the corporate or individual level. 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. Though some experts say that there is further room for improvement. Capital taxes have been largely eliminated. A 2018 U.S. tax cut, which implemented a series of corporate tax relief measures, is a concern, as it could trigger a loss of tax revenue and investment. The development has put some pressure on the government to respond, but the Trudeau administration has taken its time to respond and perhaps wisely so.

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

Department of Finance, Government of Canada, “Introducing the Canada Workers Benefit”. posted at https://www.fin.gc.ca/n18/docs/18-008_5-eng.pdf

Budgets

#22

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.

For the current fiscal year, 2018 – 2019, the Parliamentary Budget Office projects a budgetary deficit of $19.4 billion or 0.8% of GDP up from $19.0 billion in 2017 – 2018. Deficits in recent years have fallen short of the government’s fiscal gap projections due to a stronger than expected economy. The PBO considers it likely that the federal debt-to-GDP ratio will drop below the government’s target of 31.8% within the next five years. In its most recent 2018 fiscal sustainability report, the PBO estimates that the federal government could permanently increase spending or reduce taxes by 1.4% of GDP ($29 billion in current CAD) while maintaining net debt at its current (2017) level of 31.1% of GDP over the long term. The same cannot be said for long-run provincial fiscal sustainability, however, primarily due to rising health care costs. The same report indicates that, while the growth in health care spending had slowed, subnational governments, which are responsible for the lion’s share of spending, will be unable to meet the challenges of population aging under the current policy.

Recent changes to the Financial Administration Act require the government to seek parliamentary approval to borrow in debt markets. In November 2017, the Borrowing Authority Act came into force which sets a maximum amount on the government’s total stock of market debt and on borrowing by agent enterprise Crown corporations, and requires the government to report to parliament on the status of borrowing.

Citations:
Department of Finance, Government of Canada, Annual Financial Report of the Government of Canada
Fiscal Year 2017–2018 accessible at https://www.fin.gc.ca/afr-rfa/2018/index-eng.asp

Parliamentary Budget Officer, Fiscal Sustainability Report 2018, posted at https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2018/FSR%20Sept%202018/FSR_2018_25SEP2018_EN_2.pdf

Parliamentary Budget Officer, Economic and Fiscal Outlook - October 2018 - Revised Oct. 31, 2018, posted at https://pbo-dpb.gc.ca/en/blog/news/EFO_Oct_2018

Research, Innovation and Infrastructure

#15

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
Canada’s economic and policy environment is conducive to innovation and investments in productivity growth. Despite this, a 2015 report from the federal government’s Science, Technology and Innovation Council found that the country continues to lag behind other countries when it comes to key innovation measures like filing patents, and corporate spending on research and development. In 2017, the government announced CAD 950 million funding support for “innovation superclusters” to help drive innovation, R&D and economic growth. In addition, a Strategic Innovation Fund with a budget of CAD 1.26 billion over five years was created to allocate to firms across Canada’s industrial and technological sectors.

How effective government policy is in encouraging R&D investment and productivity gains remains, however, contentious. Neither the federal government’s Scientific Research & Experimental Development program (a tax program to increase business-sector R&D) nor the impact of budget cuts for government R&D labs have ever been formally evaluated. 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. In 2018, a new assessment was released, indicating that Canada remained in high standing for research output, but was behind the world average for R&D investment.

Citations:
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

Council of Canadian Academies (2018) Competing in a Global Innovation Economy: The Current State of R&D in Canada, Ottawa (ON): Expert Panel on the State of Science and Technology and Industrial Research and Development in Canada. http://new-report.scienceadvice.ca/assets/report/Competing_in_a_Global_Innovation_Economy_FullReport_EN.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.

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

#4

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 System
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. The former Bank of Canada Governor and current Government of the Bank of England, Mark Carney, 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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