Prescriptions for our Slowing Economy

Commentary, Peter Holle, Role of Government, Taxation, Uncategorized

The current economic slowdown, as challenging as it might be, gives us an opportunity to discuss some much-needed reforms we should be implementing. While change is always difficult, these prescriptions, we believe, will better prepare us to face the future.

There are three areas in which we must take action:

1. TAX AND TRANSFER PAYMENT REFORM

a) Lower Taxes on Capital
The federal government should lower corporate taxes across the board and eliminate the capital gains tax by a combination of 1) eliminating grants and subsidy programs to corporations and businesses and 2) improving the productivity of federal spending (see third section below). Corporate welfare is a $19-billion line item for the three levels of government in Canada, and it should be replaced with a neutral approach to employment creation. The reality is that we do not know who will be the next Microsoft or which company can create 20,000 jobs. But we do know who it will not be: existing companies on the verge of bankruptcy.

b) Replace Equalization with a Harmonized GST and PST
The federal government should replace the divisive and increasingly unworkable equalization program with a transfer of the GST to the provinces. The transfer would require harmonization with provincial sales taxes. This would 1) immediately boost the struggling Ontario economy, which can no longer bear carrying these transfers, 2) eliminate duplicate administrative processes that burden the business sector and 3) further boost capital spending and productivity by removing sale taxes on capital inputs.

c) Tie Healthcare Transfers to Structural Reform
Ottawa must use the massive levels of funding it allocates to the provinces for healthcare to greater effect. Structural reform is the key to dramatic productivity gains that will free resources for other uses while helping to eliminate waiting lists. To start down this path, Ottawa should tie federal dollars to the requirement that provinces switch from global-based funding to performance-based funding and invest in the effective use of IT.

2. DECONSTIPATE THE CANADIAN FEDERATION

a) Implement Interprovincial Free Trade
The government should use its trade and commerce power to further liberalize interprovincial trade. The Agreement on Internal Trade is mired in bickering, and it has failed to achieve its potential. The new Trade, Investment and Labour Mobility Agreement (TILMA) between Alberta and British Columbia provides a much better model — it automatically covers all government measures in all economic sectors unless a measure is specifically excluded, and it is enforceable, with fines up to $5-million. The federal government could extend TILMA across the country by linking it to the Canada Health and Social Transfer and to new infrastructure spending.

b) Unlock Human Capital: Encourage Immigration
When it comes to recognizing the foreign credentials of immigrants, provincial and territorial regulators must compare Canada’s education systems and work experience to parts of the world with which they are unfamiliar. Rather than have each jurisdiction try to solve this issue by itself, it makes sense that the federal government should develop a centralized knowledge base that provincial and territorial regulators could use to find detailed information on the standing of a given school in a given country as well as the practices of that country in regulating a specific profession. When we can find that information once rather than have 13 different governments look for it, we will begin to unplug the process that forces immigrant professionals to drive cabs rather than add value to our healthcare sector, for example.

3. IMPROVE FEDERAL SPENDING PRODUCTIVITY

a) Core Public Sector Reform
The federal civil service remains organized along traditional bureaucratic lines, which are highly regulated, focused on processes instead of results, with a compensation model biased toward maximizing internal spending and staffing. The federal government should adopt a less-regulated best practices model from elsewhere (i.e., Australia and New Zealand) that re-orients agency incentives toward the efficient production of outputs by, among other things, giving line departments more control over their activities and asset management.

The federal government should avoid the temptation to assist specific sectors of the economy, such as auto and forestry that must downsize in the face of permanent reductions in the demand for their products. To stimulate demand immediately and to encourage the economy to adjust to difficult market realities, the federal government should lower the taxes that suppress growth and encourage the Bank of Canada to lower interest rates. The public sector, which comprises about 40 per cent of our economy, must participate in this change process during this time of difficult private sector adjustment. Now is a good time to modernize federal transfer payment policy and to improve the productivity of public spending.

Along with 24 other Canadians Peter Holle was asked by the Canada West Foundation to provide his opinion of initiatives that should be undertaken to respond to the slowing Canadian economy. To see the entire discussion in 25 perspectives visit the Canada West Foundation at www.cwf.ca.