TORONTO–Think of Finance Minister Bill Morneau’s 2019 budget as a Christmas tree. Underneath was an array of carefully-wrapped presents for a large and diverse extended family, each intended to meet the desires or needs of the various family members, young and old. The fact that many of those presents were paid for with credit cards was largely ignored as people happily unwrapped their presents.
This is what budget speeches have become—a time to boast of past accomplishments and offer the promise of more to come. Morneau certainly used his budget speech to this effect, boasting “our economy is doing very well,” one where “the middle class is strong and growing, with an economy that works for everyone—not just the wealthiest.”
Yet even Morneau had to acknowledge that Canadians are worried about the future. As an Angus Reid poll highlighted the day before the budget, 40 per cent of Canadians say they expect the economy to worsen over the next 12 months (24 per cent expected it to improve and 39 per cent to stay the same). Moreover, 34 per cent of Canadians said their standard of living was worse than a year ago, compared to 17 per cent who said it was better.
So here’s the problem with Morneau’s budget speech. It wasn’t used, though it should have been, as an opportunity to talk about the real and serious economic challenges facing the country—with candid talk to Canadians about our weaknesses we face that threaten our ability to sustain our quality of life, pay for the things we desire as a society, meet the needs of an aging population or improve living standards—in other words to continue to put presents under the tree.
Our biggest economic challenge is to improve our productivity growth rate, which was flat last year, but which is increasingly important in generating the wealth we need to pay for the kind of society we want. But in Morneau’s budget speech, it was not mentioned. This budget was not focussed on the real long-term challenges we face but rather to gloss over them.
Productivity is the amount of wealth generated for each hour worked. It is driven by innovation, in the things we make and how we make and deliver them. New jobs and wealth come largely from new ideas and their successful commercialization.
Productivity in recent years has been largely flat, which is a factor in stagnant workplace incomes, growing inequality and rising public and private debt to sustain living standards. According to the most recent Statistics Canada data, the top 10 per cent of income earners in Canada earned 23.3 per cent of total income while the bottom 40 per cent earned 20.4 per cent.
Productivity matters even more in an aging society since it is increasingly important in determining the potential growth rate of the economy, the speed limit on how fast we can grow without triggering a surge in inflation that forces the Bank of Canada to apply the economic brakes. The potential growth rate is determined by the rate of growth in productivity and the rate of growth in the hours worked by the labour force.
In an aging society, the growth rate in hours worked slows so that the rate of growth in productivity becomes even more important in how much wealth we create. The Bank of Canada estimates Canada’s potential growth rate as running between 1.8 and 1.9 per cent a year between 2018 and 2021, but that assumes an improved rate of productivity growth. A low potential growth rate squeezes government revenues needed to finance education, health care and other public goods we value. The budget assumes annual economic growth of less than 2 per cent from 2018 to 2023.
Morneau also didn’t talk about our ongoing current account deficit with the rest of the world—the difference between what we export in goods and services and what we earn on our investments abroad and what we import from abroad and pay out to foreigners investing in Canada (including interest on money we borrow from abroad and the profits of foreign multinationals in Canada). This is all about our relationship with the global economy and our ability to pay our way without diminishing our standard of living.
Last year—the 10th consecutive year with a current account deficit—our deficit totalled $58.7-billion, including a $47.1-billion deficit in goods and services and a $6.8-billion deficit in investment income. The deficit in investment income would be even higher were it not for the foreign investments made by major Canadian pension plans including the Canada Pension Plan and various provincial public sector pension plans and private sector asset management firms.
To finance our current account deficits we can sell off Canadian assets to foreigners or increase our foreign debt, or rely on a declining exchange rate for our dollar to improve competitiveness, which makes us poorer. Budget 2019 assumes a dollar below US80 cents through to 2023, a sign of weakness.
The Trudeau government has not been asleep at the switch—it has put money into infrastructure, innovation and training, and offset inequality to some extent through its child benefit and improvements in support for seniors. But its boastfulness breeds complacency and when we look at the big challenges—such as poor productivity performance and our current account deficit—the failure to put such challenges at the centre of public debate means they don’t get the attention they need and deserve.
Morneau’s Budget 2019—while it contained a few useful proposals such as those on training—will be remembered more as an election pamphlet than as a serious contribution to Canada’s most pressing and urgent challenges. A missed opportunity to do something necessary and useful.
David Crane can be reached at email@example.com.
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