Canada Must Escape Threatening Spiral of Downward Mediocrity

Article excerpt

My purpose tonight is to offer a few constructive thoughts on the nature of post deficit opportunity for Canada.

Let me begin by giving a compliment to Mr. Martin. He has shown uncommon resolve as minister of finance in reducing the borrowing needs of the federal government to zero and beyond. That is what the post deficit era means. It does not mean that spending is down, or that the gross debt is reduced. But a zero deficit is an important first step. Mr. Martin deserves legitimate credit for that, which I offer unabashedly and without reservation.

It is also important to understand that the broad economic and social framework that defines Canadians' opportunity is not problem free. In the same way as complacency about the deficit would have been the wrong state of mind with which to address it, disengagement from reality relative to our structural economic problems would be a foolhardy way to maximize our economic and social opportunities.

A balance assessment of our present context would reveal that:

* Unemployment is lower than several years ago, but regionally very spotty.

* Employment Insurance rule changes have essentially increased provincial caseloads.

* GDP growth is encouraging, but the lower dollar masks some areas of less than stellar productivity performance.

* Differential tax rates with our major trading partner is a serious disincentive to career and economic location in Canada.

* There has been little improvement in the lot of those at the lowest end of the earning cycle. Unlike the United States, broad economic growth has not reached down to the lowest income segments.

* The somewhat bipolar desire for European social benefits and U.S. style tax levels is an increasing part of the political landscape. Debates over how many people want more benefits versos how many want lower taxes is interesting -- but a little irrelevant. If those who make investment decisions -- and those who have the skills and cash to leave -- believe taxes are too high, a policy framework that ignores that reality is not much policy as it is prayer.

* Whether one calculates transfers to the provinces with tax points, or without, the escalating costs of a modern, demographically-responsive health care system exceed provincial capacity without either serious and likely unaffordable increases in taxation or borrowing to finance the system we now have.

As Pierre Fortin of the Canadian Institute for Advanced Research has pointed out, there is a critical interrelationship between productivity, taxes, employment, innovation, and economic growth.

If we are far away from full employment, governments have to raise taxes to finance public services. If taxes are too high, investment, innovation and employment levels are hurt; if these are hurt, productivity growth is held back. Reduced relative productivity reduces growth in public revenue -- forcing tax rates up -- which in turn depresses real wage growth and work incentives.

Dr. Fortin describes the cycle with candour and clarity. Let me call the cycle what it really is -- a cycle of mediocrity. Our core challenge -- in this Canada of ours -- is how to break the cycle before the incentives to mediocrity overpower the will to excellence. Clearly, one cannot work only on one piece of the puzzle at a time ...

In my view, we must get serious about two aspects of the problem -- economic incentive and income security.

We cannot preach the gospel of mobile capital, trans-national investment, and technological innovation and have no core guarantee in place for those who are dispossessed or disengaged as a result of the normal dynamics of these forces. I do not view these forces as evil or malignant or conspiratorial. They are, despite what some might suggest, core economic realities which have simply become atmospheric conditions in the modern economy. …