Dear friends,

On Saturday we said goodbye to Canada’s 18^th Prime Minister – the Right Honourable Brian Mulroney.

I’m struggling to imagine where we would be today if it hadn’t been for his courageous leadership on consequential issues such as free trade, tax reform and the environment. It is in no way an exaggeration to say that Brian Mulroney created much of the foundation on which our country’s modern prosperity rests.

I was honoured to have known him, and as I reflect on his legacy, here are just a few things I learned from him:

• As a country, we can succeed when we are bold, take risks and embrace an ambitious vision for our future.
• Our many trade agreements – beginning with the Canada-U.S. Free Trade Agreement – have demonstrated that Canadian companies can compete with the best in the world.
• We are stronger as a country when we put aside our differences and work together towards common goals.
• Leadership is about having the courage to do what’s right for the long term … even if it’s unpopular in the short term.

In the coming weeks we will see a new federal budget that I hope will include similarly daring policies aimed at capitalizing on Canada’s strengths and cultivating economic growth.

Kind regards,

Goldy Hyder
President and CEO
Business Council of Canada

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When the text of the United States-Mexico-Canada Agreement (USMCA) was finalized in December 2019, no one could have predicted that there would soon follow both a global pandemic and a dramatic geopolitical shift back to great power conflict. These twin shocks to the international trading system have had a destabilizing impact on every continent.

Yet, North America proved particularly resilient. This must be attributed, to some degree, to how the USMCA has allowed our three countries to collectively harness our national advantages. North American business leaders relied heavily on the USMCA as they reshored value and supply chains, reinvesting in manufacturing and our industrial base. Since it came into force, the USMCA has offered a greater measure of certainty, stability, and predictability for those seeking to invest in North America—something that is lacking in other regions of the world. That is why a swift and successful review of the USMCA before mid- 2026 is so critical to the continued resilience of the North American economy.

If the future of the agreement is called into question by political disputes or divisions in or between any of our three countries, it would undermine the very thing which safeguarded our prosperity at a crucial inflection point in modern history. We would discourage the capital investment, foreign and domestic, that is desperately needed to avoid recession.

There are those who argue the review process is an opportune time to look at ways to modernize the USMCA. They suggest carefully tailored, bespoke alterations can be made without resorting to extensive renegotiations. This is optimistic. Pulling on even a single thread could quickly unravel all that we have sewn together. It is not a risk worth taking.

The safest and surest course is to simply review the agreement as written, without adding unnecessary complications or amendments. It will only have been six years since the USMCA came into force–too short a time for a comprehensive evaluation of the deal, especially when many of those years have witnessed once-in-a-generation global events.

Canadian, American, and Mexican business leaders have been working closely together to ensure the USMCA is reviewed positively. We are engaging with a broad spectrum of civil society, including labor, to build a data-driven case to demonstrate how the USMCA benefits all North Americans– and all that would be lost if the agreement is not extended.

Business leaders are also actively advocating for our governments to honor the terms of the USMCA by ensuring it is both fully implemented and fairly enforced. Our three governments must take seriously complaints that domestic policies or programs run afoul of either the letter or spirit of the agreement and take steps to ensure they are compliant.

Realizing the full potential of the USMCA also requires us to ensure North America has the necessary infrastructure in place. This includes both an integrated transportation network to support continental supply and value chains and trade-enabling infrastructure to allow goods and services produced in North America to be exported to global markets.

The USMCA was not negotiated simply to promote trade and investment within our shared continental borders, but to ensure that North America develops into an economic and industrial engine that can supply goods and services to countries around the world. It was designed to improve both our competitiveness as well as our ability to compete globally.

Finally, we must recognize some of our foreign competitors have turned their backs on the consensus which has governed the global economy since the end of the Cold War. They moved away from multilateralism and globalization, and in some severe cases have sought to weaponize trade and disrupt the North American economy by various means.

With growing geopolitical tensions in Europe, Asia, and the Middle East, North American economic security is perhaps at greater risk today than any other time in the past half century. In this environment, the USMCA has proven itself to be more than a mere trade agreement, it is a bulwark against global instability. We must ensure it holds firm.

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The federal government has a spending problem. Not only has it proven unable to reign in current spending, it appears poised to announce new spending in next month’s budget. This raises the perennial question of how it intends to pay for it all. 

The latest rumour in Ottawa is the government will try to solve its problem by introducing a new corporate tax—one that targets Canada’s most successful companies. Large businesses, after all, have become a popular punching bag for politicians. Who would care if their profits were further curtailed? 

As it turns out, we should all care, because we would all feel the impact. 

Political attacks on private sector companies ignore the symbiotic relationships Canadians have with companies as employees, suppliers, and investors. Viewed through those prisms, taxing corporate profits undermines the interests of Canadians. 

Take employment: the largest publicly traded companies in this country employ millions of Canadians.¹ The jobs, salaries, and benefits of those Canadian employees—which can include various forms of supplemental health and pension plans—depend on the revenues and profitability of the businesses they work for. 

Take supply chains: many, if not most, of Canada’s small- and medium-sized enterprises (SMEs) form part of the domestic supply and value chains of larger companies. Those business-to-business ties create jobs for millions more Canadians. If large companies have lower revenues, they’ll purchase fewer goods or services from Canadian suppliers.

Take investment: millions of Canadians have their retirement savings invested in publicly traded companies listed on the Toronto Stock Exchange either directly through personal shareholdings or through mutual funds. The value of those investments is based on stock prices which depend on a company’s current profitability and its future growth prospects. 

If government imposes new corporate taxes and uses those tax dollars to support new spending, it will force affected Canadian companies to scale back on growth plans, pass the cost of the taxes on through price increases, or, worse, cut existing operations. That would be bad for all their Canadian consumers, employees, suppliers, and investors.

Any of these outcomes would exacerbate the affordability crisis. Reduced profits lead to reduced operations, which means fewer goods produced and services provided. If operations and revenues decline, it will cause job cuts across supply chains. Higher unemployment and prices with lower business investments is a pretty good recipe for economic stagnation.

It would also hurt retirees. A new tax on profits would cause share prices to fall, lowering the value of investments. This, at the same time Canada is undergoing a demographic shift that is seeing more and more Baby Boomers leaving the workforce and becoming retirees who plan to rely on their investments to sustain their post-career livelihoods.

Think about this in the context of a Canadian household. Take a family who, after paying all their taxes—including income taxes, capital gains taxes, property taxes, and other consumption taxes such as the HST—still manages to have a bit of disposable income. Imagine the government then saying they have too much left over and need to pay a new tax. 

When government targets profitable companies, it doesn’t credit those companies for the jobs they create or the investment portfolios they support or the SME-sized suppliers they keep in business. Government also fails to acknowledge that because taxes are based on a percentage of revenues, when companies earn more, they already pay higher taxes.

This is, of course, also true of the HST. When the cost of goods and services is driven higher due to inflation, the amount of tax the federal government collects is higher as a percentage of those higher prices. The dirty little secret that government doesn’t advertise is that during this inflationary period, it is collecting more tax revenues than before COVID.

If government wants to focus on the bottom line, here it is: higher corporate taxes won’t help Canadians they will hurt Canadians. It will further discourage business investment in Canada and force successful Canadian companies to either constrain or cancel any growth plans. New taxes on profits will hurt consumers, employees, suppliers, and investors.

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It is politically expedient in Ottawa these days for the federal government to express disappointment that Canadian companies don’t invest more in Canada. Ottawa says it wants Canadian businesses to invest in Canada, but in the next breath, warns those same companies that returns on their investments may be capped.

This contradictory sentiment was taken to a new level last week when Industry Minister François-Philippe Champagne confirmed the government wants to encourage business investment but, at the same time, “tackle” the profits of Canadian companies and entice new foreign competitors to reduce their total market share.

It is worth asking if the government understands why companies, both Canadian and global, invest in some markets and not others. If companies want to grow, why would they do so in a jurisdiction where the government suggests it should decide how much profit companies make and how much market share they have?

Canada does not have corporate monopolies; we have global champions in competitive industries. We have multiple successful companies in every sector — including energy, banking, groceries, transportation, telecom — and none with a majority share of the national market. This is impressive when you consider Canada’s population is smaller than California’s.

Canadian companies compete against each other across the country and, in many cases, around the world. They also compete against global companies, including state-owned or those subsidized by foreign governments. In order for Canadian companies to compete and win on the world stage, they mustn’t be penalized here at home.

To be clear, Canadian companies are succeeding internationally. Travel to any major city and you will see Canadian brands on buildings and billboards. From Mumbai to Monterrey, from Houston to Hanoi, our businesses are growing. And as they grow, they become more integrated into the value and supply chain networks that criss-cross the globe.

If government wants Canadian-headquartered companies to invest more of their global revenues here, it should focus on providing a coherent economic growth strategy and eliminate regulatory barriers to investment. After all, we describe investment capital as liquid because, like water, it flows along the path of least resistance.

Therefore, when federal officials talk of the need for greater competition, they must realize they need to compete better with foreign governments intent on attracting capital. This shouldn’t be a surprise. As ministers lead trade missions to high-growth markets, including those in the Indo-Pacific, they see firsthand how host governments solicit Canadian investment.

And, contrary to what some believe, this isn’t just about bigger companies. What incentive is there for small to medium-sized companies, entrepreneurs and innovators to scale up, commercialize, or incorporate in Canada if the government imposes a ceiling on success? Today’s modest startups are tomorrow’s multinationals.

If the government truly wants to encourage more business-led growth in Canada, it needs to focus on improving the competitiveness of the country’s investment climate. To be clear, this is not about subsidies, but rather sensible public policy that offers both greater regulatory efficiency and a more vibrant innovation ecosystem.

The government should start by streamlining the process to approve major projects to strengthen energy security and trade-enabling infrastructure. Budget 2023 contained a promise to unveil a concrete plan to expedite approvals and permitting by the end of last year, and yet no plan has been proposed, let alone put in place.

A second step would be to put in place a tax framework that promotes, not punishes, business investment. Government should stop threatening profitable companies with the potential imposition of additional taxes on their after-tax revenues. Without profits there are no companies and without companies there are no jobs. It’s that simple.

Instead, Ottawa should follow through on reforming the Scientific Research & Experimental Development (SR&ED) tax credits and deliver on its long-promised tax credits for energy transition projects such as carbon capture, utilization and storage (CCUS). If implemented, investments would soon follow.

Deputy Prime Minister and Finance Minister Chrystia Freeland said she believes in Canadian headquartered companies, but they, in turn, need to believe in Canada. Canadian businesses DO believe in Canada and in Canadians. What they have a harder time believing is the government wants to attract, not attack, successful companies.

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Spies don’t often speak publicly. So, when they do, it’s important to listen.

It’s even more important when they are leaders of the ‘Five Eyes’ intelligence partnership, who gathered for their first-ever public meeting to share a common message.

That’s why I travelled — at the invitation of the Canadian Security Intelligence Service — to Stanford University last October to learn from what the chiefs of the Five Eyes’ domestic security agencies had to say.

Their message was as clear as it was unprecedented: to protect our countries from growing security threats, businesses and security agencies must work closer than ever before to strengthen the resiliency of our economies.

Canada’s business community couldn’t agree more. And it appears that the government of Canada may agree too.

In an era of growing geopolitical conflict, in which supply chains, infrastructure networks, and technological innovation increasingly determine strategic advantage, government is no longer the only — even the primary — target of our foreign adversaries.

Cyberattacks put all Canadians at risk

In virtually every sector and region of our country, Canadian businesses now regularly find themselves in the crosshairs of malicious state actors seeking to advance their national interests in ways that can, and do, undermine Canada’s national security.

Spies don’t often speak publicly. So, when they do, it’s important to listen.

It’s even more important when they are leaders of the ‘Five Eyes’ intelligence partnership, who gathered for their first-ever public meeting to share a common message.

That’s why I travelled — at the invitation of the Canadian Security Intelligence Service — to Stanford University last October to learn from what the chiefs of the Five Eyes’ domestic security agencies had to say.

Their message was as clear as it was unprecedented: to protect our countries from growing security threats, businesses and security agencies must work closer than ever before to strengthen the resiliency of our economies.

Canada’s business community couldn’t agree more. And it appears that the government of Canada may agree too.

In an era of growing geopolitical conflict, in which supply chains, infrastructure networks, and technological innovation increasingly determine strategic advantage, government is no longer the only — even the primary — target of our foreign adversaries.

Cyberattacks put all Canadians at risk

In virtually every sector and region of our country, Canadian businesses now regularly find themselves in the crosshairs of malicious state actors seeking to advance their national interests in ways that can, and do, undermine Canada’s national security.

This should concern all Canadians.

The threats aren’t abstract, nor do they exist in a vacuum. Attacks target the infrastructure needed to heat and power our homes. They target supply chains that provide our families with low-cost food and medicine. They target commercially valuable information that creates good jobs and helps pay our bills. In short, economic security threats put Canadians’ very safety, security, and prosperity at risk.

To be sure, businesses and governments invest billions each year to keep Canadians safe from these and related attacks. But, if we want to be truly effective in countering increasingly sophisticated and pervasive threats to our way of life, then we must replace our independent efforts with collective action.

As the security chiefs made clear in October, leaders from business and government must commit to moving forward in true collaboration, contributing increased resources, attention, and expertise to the challenge.

Christopher Wray, Director of the Federal Bureau of Investigation, spoke of the FBI being “in the midst of a paradigm shift” in the way in which his agency “engages with the private sector.”

Currently, CSIS’s hands are tied

The FBI has an entire office dedicated to working with the private sector, with an assistant director who meets daily with Director Wray.

Every FBI field office — all 56 of them — have a private sector co-ordinator who interacts with businesses scattered across the U.S.

Perhaps the most telling sign of the FBI’s transformative approach to partnership is the agency’s cyber squads. They aren’t just working with businesses to harden their infrastructure, but also conducting joint operations to disrupt adversaries before they strike.

CSIS Director David Vigneault has publicly advocated for this level of collaboration in Canada. But right now, he lacks the necessary powers.

Unlike the domestic security agencies of Canada’s Five Eyes partners, which possess modern authorities allowing them to engage in meaningful, two-way communication with their business communities, CSIS’s nearly 40-year-old governing legislation prohibits the agency from sharing all but the most generalized information with the private sector.

Without being able to engage in a dialogue with businesses, CSIS is effectively prevented from fostering the partnerships needed to protect Canadians.

For this reason, the business community was encouraged when the government launched consultations late last year contemplating the granting of new information sharing authorities to CSIS.

CSIS needs same powers as other ‘Five Eyes’ agencies

With the consultations closing this past Friday, business leaders urge the government to move quickly to grant CSIS the same powers that other Five Eyes security agencies possess to improve businesses’ awareness and resiliency against malicious attacks.

With new authorities, CSIS could communicate more specific and tangible information with companies. This would give business leaders a clearer understanding of the threat and the protective measures that could be taken to better safeguard their employees, customers, as well as the communities in which they operate.

The use of these new authorities would also benefit the government by helping CSIS build greater trust with the private sector. This would encourage business leaders to share more with Ottawa about the threats they’re seeing, which would better inform policy as well as improve CSIS’s ability to investigate, analyze and respond to threats.

Of course, the granting of new information sharing powers must be consistent with the values we share in our democracy, including respect for a free and fair marketplace as well as the protection of individuals’ rights and freedoms.

Here again, Canada can look to the examples set by our Five Eyes allies who have sought to respond to an increasingly hostile world in a fashion that best reflects what democracies stand for.

Canada’s business community is ready to step up and partner with CSIS to protect Canadians. We hope the government seizes this opportunity by giving CSIS the legislatives powers to reciprocate. As Director Vigneault noted in October: “We’re all partners in this work. Our future security and prosperity are directly affected by the actions that we’re going to take together.”

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From:  Michael Gullo and Heather Exner-Pirot
To: Ministerial Working Group on Regulatory Efficiency for Clean Growth Projects
Date: January 25, 2024 
Re: Improving Canada’s competitiveness

Canadian workers, industry and the federal government share a common goal of a strong economy and a healthy environment. This includes building infrastructure to support a low carbon energy system, as well as increasing Canada’s responsibly produced energy and mineral exports to global markets.

To achieve our goals we will need to attract far greater private investment in major projects. By some estimates, Canada needs to invest roughly $2 trillion to achieve net zero emissions by 2050. Today’s level of investments is well off the mark. As the federal government itself has articulated, we are currently seeing annual investment of about $15-$25 billion, when we need to achieve upwards of $125-$140 billion.

The key to unlocking much higher levels of investment in Canada is a more nimble and efficient system for approving and regulating major projects. As we, and others like Grant Bishop and Grant Sprague in a recent C.D. Howe Institute paper, have noted previously, Canada’s permitting system is slow and burdensome. It is holding back the country’s potential.

According to Natural Resources Canada’s annual inventory of major projects (those planned and being constructed), between 2015-2023 the real value of major projects in constant 2015 dollars fell 33.52 percent (-$231.3 billion); the number of projects decreased by 10.04 percent, the average project value dropped 6.1 percent, and the total number of completed projects declined by of 36.36 percent.

Far from building for a cleaner, more prosperous future, we are falling behind.

In Budget 2023, the government made the commitment to “by the end of 2023 … outline a concrete plan to improve the efficiency of the impact assessment and permitting processes for major projects, which will include clarifying and reducing timelines, mitigating inefficiencies, and improving engagement and partnerships;” a plan that has yet to be introduced.  
We acknowledge the complexity introduced by the Supreme Court’s Impact Assessment Act ruling that found aspects of the legislation unconstitutional.

Even so, action is needed now. A lack of policy predictability is discouraging new investment and hurting Canada’s competitiveness. An unpredictable regulatory environment effectively delays final investment decisions and compromises Canada’s ability to transition to a low carbon economy.

In September the Prime Minister appointed you to a special cabinet working group to ensure “an efficient regulatory framework to support the development of clean growth projects.”

As you carry out this urgent task, we offer some recommendations based on what Canada’s leading companies and pre-eminent entrepreneurs have told us would spur them to invest in Canada at scale again.

1. Publicly support, rather than discourage, investment. Investors need clear, positive signals that countries and regions want their business.

To convince investors and proponents that their regulator shares a common interest in moving projects forward in a timely manner, the federal government should issue a policy statement to clearly convey that there is a “bias to yes;” a commitment that it will become the practice in Canada to review, approve and build projects that are in the national interest (e.g. those advancing energy security, the energy transition or Indigenous reconciliation) in a timely manner.

2. Deliver on the principle of “one project and one assessment.” The Supreme Court decision makes a clear case for recognizing provincial jurisdiction for most natural resource and infrastructure projects. Canada should clearly articulate, as soon as possible, what projects and decision-making authorities it will now defer to the provinces, and how it will work collaboratively with provincial governments to address requirements driven by federal statute. This should include a “Clerk-to-Clerk Table” between the Clerk of the Privy Council and the Executive Council of provinces and territories to instill disciplined coordination.  

The government should make permanent its interim guidance following the Supreme Court decision that paused the minister’s ability to designate projects for federal review.

3. Take politics out of the project review and approval process. One of the greatest sources of risk to building in Canada is the threat of a major project meeting all legal and regulatory requirements, but still getting vetoed at the end of the day by politicians. This happened most recently on December 4, 2023, when the federal and Nova Scotia governments vetoed an oil and gas exploration licence to Inceptio Limited that had been granted by the regulator.

It has happened enough times that investors and proponents are concerned about the possibility of delays or vetoes for any given project. The risk and cost of this has deterred many would-be proponents from advancing projects. The government needs to set clear requirements and then allow projects that meet all of them to move forward.

In recent years, Canada has not enjoyed a political environment that is conducive to attracting the level of investment we need to achieve our goals.

Federal, provincial and territorial governments need to work more collaboratively, and urgently, to create the conditions required for Canadians to prosper. The business community wants to be a partner in achieving those common objectives.

Your leadership is required to set the tone and get on a pathway for this to be achieved. It is in that spirit that we offer this advice.

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The Canadian and Quebec governments have issued a flurry of headline-grabbing announcements to attract foreign companies to the battery industry. We’ve lost count of the billions of dollars in direct subsidies paid.

Speaking before the Metropolitan Montreal Chamber of Commerce last week, Prime Minister Justin Trudeau said, “Building healthy industries moving towards carbon neutrality will yield much more than taking this money to reduce the debt.”

There is something deeply simplistic and unhealthy about this economic model, of a public cheque book bent on attracting foreign companies. Obviously, this isn’t about banning or discouraging foreign investment—it’s a necessary thing in a mid-sized economy such as ours—but to go from there to considering it as a sort of magic potion for long-term economic growth is a wide river to cross.

On the one hand, in an employment market characterized by labor shortages, we’re just moving jobs from one company to another, largely to the detriment of SMEs.

On the other, you might wonder if it’s a good idea to put all our eggs in a sector where North American competitiveness in the future is far from being assured. Right now, our production costs remain stubbornly high, and China has a considerable head start over us in supply chain terms. Though there are sectors where we are better positioned: water and energy, artificial intelligence and robotics, biotechnology, aerospace, agri-food, infrastructure, and advanced materials.

Dangerous idea

The idea that government subsidies to foreign companies in themselves will make Quebec and Canada more innovative economies is dangerous. The Americans, Germans, South Koreans, Israelis, and Dutch, to name only a few, have long understood the fundamental contribution of their public research institutions and the importance of coordination in their innovation ecosystems.

Innovation builds on the strength of an ecosystem fueled by the kind of research and development (R&D) that is transferable to Quebec and Canadian companies. In simple terms, we must concentrate on the way (the mechanisms and incentives) we translate intellectual capital and public R&D into more private R&D and ultimately into more innovation and economic growth.

Finally, these “investments” do not in fact create innovation or Quebec and Canadian intellectual property. We’re essentially importing technology from elsewhere that will only yield very small net economic returns for Quebec and Canada. We must instead prioritize local industrial research in our own innovative and productivity-enhancing industries.

To do this, we must create and build bridges and collaborative institutions between the public and private sectors.

It’s at the basis of the ARPA model in the United States, which has been rolled out in defense (DARPA), energy (ARPA-E), biomedical research (BARDA), and, more recently, health (ARPA-H). To this list we can safely add NASA (aerospace), which works roughly along the same lines. It’s the basis of the Max Planck and Fraunhofer model in Germany. It’s the basis of LabEx in France. It’s the basis of the TNO model in the Netherlands, a country half the size of New Brunswick that is the second largest agricultural exporter in the world.

Canada and Quebec need, as a key element of their sectoral industrial strategy, a modern incarnation of what were once known as corporate labs in its innovative industries— places where industrial research, conducted in collaboration with governments, universities, and businesses, leads to real and wide-scale innovation in the economy.

Converting ideas and knowledge into products, services and intellectual property is still a formidable challenge. Making industrial policy out of subsidies to foreign companies and believing that our universities are “innovators” is a recipe for economic stagnation. A modern industrial policy requires an institutional infrastructure to support modern applications of science and technology in highly competitive and advanced local industries. Canada and Quebec have many support mechanisms that are quite peripheral overall, but few or no real generators of innovation. We do not, here in Canada, have a DARPA, a Fraunhofer, a LabEx, or a TNO.

We have to push for an economic growth model in which the intellectual property created by our public R&D funding will drive Canadian companies’ economic growth through innovation and technology adoption. Ultimately, it is that that will kickstart our progress on productivity.

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After a challenging 2023, Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland head into the new year facing significant pressure to test further the reach of the federal government’s balance sheet.

Just to stay in power, the federal government will likely need to launch a multi-billion pharmacare plan to fulfill a promise that it made to the New Democratic Party. A federal election, whenever it comes, will only stoke demands for additional spending. Adding to the pressure are structural challenges around aging, industrial policy, defence, Indigenous reconciliation, and the energy transition.

As a result, the next 12 to 18 months will see heightened debate over the state of the nation’s finances, as well as the amount of fiscal space that remains available and how best to use it.

We believe the federal government should resist any temptation to add to the fiscal framework at a time when debt has ballooned, interest rates have increased, and growth has slowed. Others will take a more sanguine view. Political actors will work hard to frame the discussion strategically to rally the public around their positions.

To help inform the coming debate, we offer a few observations that we think are worth highlighting.

Net debt

Let’s start with a reminder that there are a number of ways to measure debt and sustainability. Under the government’s preferred gauge—net debt—Canada’s fiscal position looks much better than most major economies—a fact that the current government has raised repeatedly to justify its spending.

But it has limitations.

Net debt is a narrow measure that deducts state financial assets from actual debt liabilities. In Canada’s case, this includes the fast-growing assets held by the Canada Pension Plan and the Quebec Pension Plan. The fundamental idea is that it’s the best way to assess longer-term solvency since, in theory, the government can tap into these financial assets to repay its debt if needed.

The concept is somewhat notional, however, since it’s tough to see any government raiding the nation’s pension assets even in a crisis.

Net debt also is less useful in analyzing the actual trade-offs that governments are forced to make in real-time. The burden of debt repayments is what actually matters for budget making, and borrowing costs can overwhelm a country’s finances and undermine growth well before any risk of a default eventually kicks in.

Gross debt measures and actual debt servicing indicators give a more accurate picture of the fundamental constraints faced by fiscal planners. And these indicators offer much less comforting international comparisons.

Discount the trajectory

When looking at Canada’s fiscal picture, we suggest discounting the government’s medium-term projections, which always show improving debt dynamics and a downward deficit trajectory that approaches balance and then fails to materialize.

In her November fiscal update, Minister Freeland even pledged to establish a “rule” in 2026 to prevent the deficit from ever again exceeding 1 percent of GDP—which we don’t find credible based on, among other factors, the Bill Parcells’ rule.

To project where the Trudeau government’s deficits will be in the future, take guidance from former New York Giants coach Bill Parcells, who famously said that you are what your record says you are.

Between 2017 and 2022, the Trudeau government ran deficits averaging 1.4 percent of GDP when adjusted for swings in economic activity—which not coincidentally is about the deficit projection for 2023 and 2024. That’s our best base-case assumption going forward under a moderate growth and interest rate scenario.

Spending matters

Current spending is not consistent with any meaningful reduction in deficit levels. Expenditures as a share of GDP—at 17.8 percent over the next two years—are structurally the highest levels since the 1990s.

In the post-World War II era, the federal government has managed to record a deficit of less than 1 percent of GDP only twice when spending exceeded the 17 percent threshold. That was between 1996 and 1998 at the very start of a decade-long period of fiscal consolidation.

In fact, history tells us risks are asymmetrical and tilted to the upside at these spending levels. Since the end of WWII, deficits have averaged more than 4 percent in years when spending has surpassed 18 percent of GDP.

This is an intuitive outcome. There are more constraints to raising revenue than there are to increasing spending.

Spending and deficits at current levels over a sustained period of time aren’t necessarily unstable as long as economic growth is robust, but that’s not a luxury we currently have with our abysmal productivity numbers and population aging.

Today, the bigger risk may be that we enter into an era where public debt charges outpace revenue growth—a dangerous inflection for debt dynamics.

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It’s time for Canadians to get over our collective aversion to the word ‘productivity.’  

For a couple of decades now, any mention of the concept has been met with disdain, mainly because the conventional wisdom was that it meant we all had to work harder — and we were already collectively exhausted. 

But ‘productivity’ isn’t about working harder — it’s about working smarter. 

On that score, we’re in trouble, as pointed out in a new economic outlook from the public policy group at law firm Bennett Jones. 

While economists and business leaders have fretted for years about Canada’s inability to keep up with competitors and trading partners, productivity of late has been declining outright. And that has material impacts on our capacity to pay higher wages, deliver better public services, and improve the quality of life of Canadians.  

Since the beginning of 2020, our real GDP per capita — the measure of production per person in Canada, and a useful proxy for standard of living — has been shrinking by 0.5 per cent a year. In the U.S., on the other hand, GDP per capita has been expanding by 1.6 per cent a year. 

This is not about working more hours

If Canada had chugged along as the same pace as the United States since January 2020, our output per person would be 7.8 per cent higher by now, a difference that’s worth about $5,700 annually for each one of us, as contribution to GDP, and ultimately as income. 

Turning this around is not about working more hours. Canadians are on the job.  

The tight labour markets that have confronted employers over the past couple of years have loosened a bit lately, because of high interest rates and a slowdown in the economy. But over the medium term, the aging of our population means the right labour will remain hard to find, and the unemployment rate is likely to remain quite low. 

Nor can we solve our problem just by bringing in more immigrants or temporary foreign workers. We need new skilled workers to help fill labour gaps, but our immigration policy must be matched with enough infrastructure to absorb newcomers. 

The only way to lift our GDP per capita sustainably is to raise output per hour worked — our productivity. There. It is not so hard to say.  

More productive workers would earn higher wages

The Bennett Jones report outlines some avenues to get there. None of them are easy, but they’re a heck of a lot better than continuing on a trajectory that will not just erode our standard of living but also our quality of life. 

We could begin with a three-way conversation that draws together government, businesses, and workers to collaborate on strategic ways to aggressively invest in a more productive labour force. 

Arming workers with all the tools they need to produce more is a perfect start — machinery, hardware, software, artificial intelligence, or whatever it takes. 

This would be paired with new investment in training on those tools, and encouragement for workers to upskill and jump on new technology when it comes along.  

More importantly, the resources of employers, workers and governments could be applied more intensely to innovation, to take on the rest of the world with new ideas and with greater ambition.  

More productive workers, in more innovative and winning firms, would earn higher wages.  

Couple that investment in capital, skills and innovation with an understanding between government and business to focus on our economy’s strengths in world markets, and we have a formula to boost growth in a big way.   

We have always been strong in the energy sector, and now, with the right investments, we are well situated to take on the energy transition.  

Technology could torque up our food sector

We have always been known for our agricultural exports, and now, we are positioned to torque that sector with technology to help meet the world’s needs for food security.  

We led the world in pioneering artificial intelligence in the early days, and now we have the expertise in our midst to push smartly for widespread application of the technology in an ethical, productivity-enhancing way. With the right workforce, AI can supplement, rather than simply replace work, and create new value.   

To support businesses and workers, governments have to look at their policy tool kits and act on the levers that will bolster the incentives for private investment and innovation. For example, the burden of taxation should shift toward consumption, and away from investment. In an uncertain world, governments also have to work with businesses to keep doors open for our exports. 

With a concerted, collective effort, we could be poised to ratchet up our economy’s capacity, bolster growth, and re-establish our standard of living as one of the best in the world. 

Absent that effort, our businesses and our workers are left guessing about the game plan, fending off regulatory processes that deter growth and slows down decisions, and mitigating threats instead of pursuing opportunities. The flow of investment capital is not even close to what is needed to transition to a low-carbon economy, to adapt to a digital world, and to lift our productivity. 

More government transfers to individuals as favoured in current fiscal plans may benefit some Canadians, but they do not readily raise our collective wealth,nor our capacity to earn more tomorrow.     

We need to talk, Canada. And yes, we need to talk, without compunction, about productivity. 

The post It’s time for Canadians to get over our collective aversion to the word ‘productivity’ appeared first on Business Council of Canada.

Dear Friends,

When I wrote to you in September, this newsletter included a short survey. We asked you to tell us what you thought the federal government’s top priority should be this fall.
 
Your responses were wide-ranging, including concerns over housing, inflation, immigration, the cost of living, taxation and fiscal policy. Based on those answers, it’s clear that economic issues are top of mind for many of you, as they are for me.
 
Our goal at the Business Council of Canada is to make our country the best place in the world in which to live, work, invest and grow. Central to that mission is ensuring that our economy is strong and beneficial to all.  
 
Over the past year we advocated for economic growth in many ways, including:

• Collaborating with former Governor of the Bank of Canada David Dodge on fiscal sustainability,
• Working with Indigenous partners on securing access to competitive capital,
• Outlining a roadmap for Canada in the energy transition, and
• Issuing a major new report on the vital link between economic and national security.

As I look ahead to the new year, made-in-Canada economic growth will be even more important as we face an increasingly volatile global landscape.
 
And as noted by Bank of Canada Governor Tiff Macklem, the next few months will be marked by further weakness in the Canadian economy.
 
But we know what it takes to get through uncertain times.
 
During the pandemic, we saw the public and private sectors working together like never before. We will need that same level of partnership and sense of urgency to tackle the current challenges in front of us.
 
This fall marked my fifth year at the Business Council of Canada, and I can say that every day has been a privilege to represent Canada’s leading and largest employers. I am inspired by their innovation, their solutions-focused leadership and their profound desire to make life better for all Canadians.
 
On behalf of the BCC team and membership, I wish you and yours a wonderful holiday season and a happy new year!

Goldy Hyder
President and CEO
Business Council of Canada

The post Strengthening the economy in 2024 appeared first on Business Council of Canada.