Stephen Harper represents the first time a G7 nation has elected an economist as their national leader, to Yukonomist’s knowledge.
Critics of the dismal science might even joke it is his master’s degree in economics, rather than his political outlook, that has kept the skittish Canadian public from giving him a majority government in the past few elections.
Despite this, Harper’s economic platform is disappointing from an economist’s point of view. It may be sound on the deficit front, but is sadly lacking on productivity. And it is higher productivity that will give us the additional income, and tax revenues, to deal with many of the issues that challenge us in the coming years.
The Conservatives, like all the national opposition parties, promise to abolish the deficit. Timelines vary between the parties, with the Conservative party announcing its plan to balance the books in 2014-15, a year earlier than previously planned. Since the forecast deficit for that year was $300 million, a rounding error on a budget with about $245 billion in program expenses, this is not big news.
While it is good news that sound fiscal policy has become a Canadian consensus, having a balanced budget is in many ways a defensive strategy. If you run an unsustainable deficit or have a large debt, then you can be forced to make harsh cuts to government programs. Ask Greece, Estonia, Ireland or Portugal. But a balanced budget by itself will not deliver the tax revenues to fund growing health and education budgets.
For that, you need sustained economic growth. This can come from rising numbers of young people joining the workforce. Or it can come from productivity, which means higher output per hour of work. Demographics gave us a huge boost over the last 50 years, but with our aging population we will soon be forced to rely on productivity.
Productivity growth is a slow and boring process, but one where small differences can add up to big numbers. Say the average worker got one per cent more productive per year, a fairly common outcome for many countries. Over the next 40 years, incomes would go up 50 per cent. Sounds good. But if the average worker got two per cent more productive per year, the economy would grow 120 per cent over that period.
That would generate a lot more tax money for health care, education and our other priorities.
This is why politicians are actually right when they talk about education being the most important economic policy; more highly educated populations tend to be more productive. But there are a lot more productivity-friendly policies they could be talking about.
A review of the Conservative economic platform through this lens is disappointing. There are a few minor productivity-enhancing policies, but fellow economists will be disappointed at Harper’s lack of leadership on productivity.
One of the positive things in the Conservative platform is loans to help immigrants get their credentials recognized or to upgrade their skills to Canadian levels. If this allows an engineer from Estonia to work as a highly productive engineer in Canada rather than a manual labourer, that’s a good thing.
Another is free trade with the EU and India, as well as Canada’s recent deals with Panama, Jordan and six other minor countries. The Conservatives also previously announced killing tariffs on imported machinery. Free trade enhances productivity by increasing competition, and taxing equipment that makes your workers more productive doesn’t make much sense at all.
The Conservatives also mention thinning the Canadian border to the US to allow easier cross-border access for people, goods and services. This would hopefully counteract at least some of the thickening we have seen since the 9/11 attacks. It is unhelpful when the border makes it harder for US businesses to buy Canadian parts, or for Canadians to do business in the world’s largest market.
But the platform is vague on how hard they will push harmonization with the US, or what they would offer the Americans to get a deal.
The Conservatives also announced a regulatory gimmick. They claim they will eliminate a government regulation for every new one they introduce. It sounds good, but is belied by how their platform further complicates the tax code. Any Conservatives hoping their government would simplify the tax code and stop the proliferation of targeted tax-and-spend programs will be disappointed. The groups showered with tax largesse are amazingly diverse, including corporate equipment purchasers, volunteer firefighters, East Coast small boat owners, home renovators, adults who work out and taxpayers whose children enjoy art camps. Your tax form will get longer under Harper.
They are also maintaining the corporate tax cuts enacted earlier this year, which take the corporate income tax rate to 15 per cent and cost the treasury about $6 billion a year. In a micro-economic sense, this increases the return on investment and should encourage more business activity. It should also help attract investment from other countries. At $6 billion, however, it is quite expensive. With a big deficit and our rates already lower than US equivalents, one wonders if this year was a good year to cut corporate taxes.
Especially when there are many cheaper ways to encourage higher productivity.
One major missed opportunity is supply management, which benefits a small number of Canadian farmers at the expense of everyone else. It also protects the politically well-connected parts of the agriculture sector from the full benefits of global competition, which is likely to result in higher costs per unit of output.
In recent decades, Canadian agricultural productivity has lagged. The policy is also directly contradictory to Conservative moves on free trade, especially since Canadian farm protectionism is a major obstacle in many of our trade negotiations.
We also don’t see any moves to liberalize Canada’s restrictions on foreign investment in protected sectors that make up a big part of the economy.
Telecom is an example, where Canada’s cellphone prices are very high by global standards. This prevents many businesses from adopting productivity-enhancing wireless tools. Yet Canada’s investment restrictions protect the big three incumbents from foreign discounters such as Wind Mobile.
The Conservative’s anti-competitive, made-in-Canada procurement policies for shipbuilding and the costly F-35 fighter jet almost guarantee that the Coast Guard and air force will end up paying more for their equipment than they need to. Possibly billions more.
The tariff on non-North American-made cars will also remain, costing everyone in Whitehorse who buys a Kia a few hundred bucks and taking some of the efficiency pressure off Canadian car plants.
The Tories also lavish various subsidies on mining, energy, fishing and forestry sectors. The web of subsidies is so complex it is hard to unravel. Some programs may be helpful. Others undoubtedly subsidize low-productivity activities. That’s nice for the recipients, but is a weight on average productivity nationally.
The theme across all of these activities is that well-connected industries and labour groups get a special deal unavailable to the ordinary folks.
That may be how it has always been, but it’s disappointing from a prime minister who is both an economist and an alleged champion of “ordinary Canadians.”
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.