Canada

   

Economic Policies

#12
Key Findings
With a number of notable strengths, Canada’s market-oriented policy regime receives high rankings in international comparison (rank 12). Its score on this measure is unchanged relative to its 2014 level.

Growth is moderate, with real rates slowing to about 1.5% in 2019. The slowdowns are due to reduction in business investment and exports, and a decline in energy-sector investment. Deficits are moderate, and the net debt-to-GDP ratio is low by international standards and falling. However, household debt levels remain high, and rising healthcare 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. Labor-market regulation is relatively light, although regional unemployment benefits and high urban living costs may reduce labor mobility.

Despite income-tax progressivity, inequality has risen in recent decades. Corporate taxes have been reduced in recent years, but there has been no effort to keep up with U.S. tax cuts. New provisions seek to block multinational corporations’ use of tax havens. Research output is good, but investment levels trail the world average.

Economy

#8

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
8
In its fall 2019 Monetary Policy Report, the Bank of Canada projected real GDP growth of 1.7% in 2020, a slight increase from 1.5% in 2019. Real gross domestic income (GDI) growth, which takes changes in terms of trade into account, slowed in 2019 to a growth of 1.6%, down from last year’s 2%. Projections for 2020 are slightly lower, at 1.5%. This slowdown of growth can be attributed to a reduction in business investment and exports due to global uncertainty, combined with a decline of investment in the energy sector stemming from transportation constraints. These constraints are expected to ease as pipeline and rail capacity gradually expand.

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 described in the 2020 World Bank Doing Business Report, which ranked Canada 23rd out of 190 countries for the overall ease of doing business, down from eighth place out of 181 countries in 2009.

A key challenge for Canada involves the coordination of regulatory policy across federal and provincial jurisdictions, exacerbated by the presence of interprovincial barriers to trade and labor mobility. In many areas, effecting change requires cooperation between different levels of government, which frequently impedes progress.

Another factor is the country’s dependence on natural resources, which account for roughly 20% of GDP. Aside from the risks associated with the high levels of 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. This factor may be mitigated by the current Liberal government’s new Bill C-69 (the Environmental Assessment Act), which is aimed at reducing uncertainty in large-scale projects. The effectiveness of the bill has yet to be demonstrated, however.

Another issue affecting Canada’s competitiveness is the role played by marketing boards, which set production quotas. While these issues came to the fore during the recent NAFTA renegotiations, no major party has made a commitment to significantly reduce these barriers.

Household debt levels remain high. The current ratio of household debt to disposable income in Canada is above 177%, and housing affordability continues to decline. Although the federal government has repeatedly tightened mortgage-lending rules in recent years, and provincial governments have enacted legislation to curb real-estate investment by foreign entities, housing markets in Canada’s largest cities of Vancouver and Toronto remain unbalanced. A possible correction in the housing market would pose a significant risk. There appears to be room for additional measures to mitigate speculative investment activity, and to improve coordination between federal and provincial regulators.

A final concern focuses on the need for talent and innovative ability. In the World Economic Forum’s most recent Global Competitiveness Report, Canada continues to receive low rankings with regard to the quality of education, technological readiness, business sophistication and the capacity to innovate. The federal budgets in 2018 and 2019 attempted to stimulate innovation through the development of “innovation superclusters,” but these clusters have not yet made a major impact.

Citations:
The World Bank, Doing Business 2019, https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.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 2019.

Bank of Canada, Monetary Policy Report, October 2019, https://www.bankofcanada.ca/wp-content/uploads/2019/07/mpr-2019-07-10.pdf

Labor Markets

#13

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 rigidities that impede the operation of the labor market. The most significant of these may be regional employment-insurance benefits. Together with the high cost of living in growing metropolitan areas, these benefits reduce the outflow of labor from regions with high unemployment rates, which could explain Canada’s large drop in the ranking of internal labor-market mobility in the most recent World Economic Forums Global Competitiveness report.

The national labor market continued its strong performance in 2019, with Canada’s unemployment rate reaching a 40-year low of 5.9%. The increase was due to higher than normal employment figures in the service industry, offsetting stagnation in the energy industry. The long-term unemployment rate shot up during the 2008 to 2009 recession and has remained elevated since, but is low by international standards. Nevertheless, the labor-force participation rates of some groups (specifically women, young Canadians and Indigenous peoples) are lower than they could be, with these groups representing a significant untapped source of potential economic growth. Unemployment rates among Indigenous Canadians, particularly those of Inuit and First Nations members living on reserves, remain very high, suggesting that existing employment-support programs are insufficient. While 2018 did see an increase in the labor-force participation rate for women, and a 1% decrease in the unemployment rate among off-reserve Indigenous peoples, both of these rates remain far from the corresponding rates among white male. The 2019 budget attempted to build on the previous year’s budget in this area by including a series of measures designed to increase labor-force participation and employment rates for these groups.

The federal government has recognized both the need to improve the economic environment (for instance, by encouraging businesses to hire new workers) and the need for more effective workplace training, but many of its measures in this area have not had the desired effect. Labor shortages are a growing problem. The 2019 budget attempts to address this issue with the introduction of the Canada Training Credit, which people can apply toward fees at training services, colleges, universities and other eligible institutions providing occupational skills.

Overall, the Canadian labor market is very flexible, particularly for a developed country. In the 2019 Global Competitiveness Report, Canada’s labor market was ranked eighth out of 141 countries overall, and sixth with regard to the current labor force’s skill levels. While these rankings are quite good relative to other OECD countries, it still represents a decline from the previous year’s ranking of seventh place.

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/

World Bank. Doing Business Report 2020 https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf

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

Taxes

#9

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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. The 2019 budget introduced a $200,000 cap on stock-option exemptions, a policy move that aligned Canada’s treatment of stock options with that of the United States. For individuals with earnings above CAD 200,000 annually, the combined federal/provincial marginal tax rate 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 2019, the Multilateral Instrument was introduced through Bill C-82. This instrument, developed by the OECD, is designed to prevent tax-base erosion and profit-shifting by multinational corporations’ use of tax havens.

Canada fares well in terms of tax competitiveness. 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 G-7 countries, and is below the OECD average. Capital taxes have been largely eliminated. A 2018 U.S. tax cut, which implemented a series of corporate-tax reduction measures, is a concern, as it could trigger a loss of tax revenue and investment. The Trudeau administration did not offer the same tax cuts as the United States, but instead offered more investment into the Strategic Innovation Fund, and created a new External Advisory Committee on Regulatory Competitiveness in order to reduce the red tape that many businesses claim slows down investment.

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

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

#32

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
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 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Canada’s government is in a relatively strong fiscal position. For the current fiscal year of 2019 – 2020, the Parliamentary Budget Officer projects a budget deficit of CAD 17.7 billion, which represents a roughly CAD 4 billion increase from last years’ deficit. Still, Canada’s 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 drop below 29% in the next five years.

In its most recent 2018 fiscal sustainability report, the Parliamentary Budget Office (PBO) estimates that the federal government could permanently increase spending or reduce taxes by 1.4% of GDP (CAD 29 billion in current dollars) 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, where debt ratios range from roughly 3% in Alberta to over 40% in Quebec, Newfoundland and Labrador. The PBO considers current fiscal policy in the provinces to be unsustainable, primarily due to rising healthcare costs.

The current Trudeau administration was elected with a promise to increase the deficit by almost CAD 10 billion in order to fund its campaign promises. This increased budget deficit would drastically change forecasts, but the Trudeau administration says it will keep the debt-to-GDP ratio below the fiscal-anchor level of 31%.

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

#18

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 investment in productivity growth. Moreover, the country benefits from a large talent pool; its population has the OECD’s highest level of educational attainment with regard to the proportion of the population with a post-secondary education. The number of researchers per capita in Canada is on a par with that of other developed countries.

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 such as patent filings and corporate R&D spending. Similarly, a recent report from the Council of Canadian academics warns that although Canada remains a leading global contributor to research, its standing is at risk due to a sustained slide in private and public R&D investment. Indeed, as a share of gross domestic product, R&D expenditures have steadily declined in Canada since 2001, with the ratio now standing at 1.7%, well below the OECD average. The same report bemoaned that there are significant barriers between innovation and wealth creation in Canada, resulting in a deficit of technology startups growing to scale in Canada and a consequent loss of economic benefits.

In 2017, the government announced that it would provide CAD 950 million funding in support for “innovation superclusters,” with the goal of encouraging 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, with the funding to be allocated to firms across Canada’s industrial and technological sectors. The 2019 budget added very little to the aforementioned programs. The question of how effective government policy is in encouraging R&D investment and productivity gains remains a contentious one.

Citations:
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

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

#7

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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