"SELF-LEVIATION" ISN'T WORKING: THE GOVERNMENT NEEDS A NEW GROWTH AND JOB STRATEGY
this week the Minister of Finance held his seventh National Policy Retreat with business, academic and other “experts” to discuss job creation and economic growth, particularly “issues” related to “skill shortages, labor mobility, internal trade and promoting investment in Canada.” These are important issues. It would be even more helpful if he would now meet with his provincial counterparts since these issues fall under provincial jurisdiction.
The government has stated over and over that economic growth and job creation have been, still are, and always will be its number one priority. This will no doubt be a theme in the Speech from the Throne expected sometime in October. The government is hoping that economic growth will recover from its current anemic level, and that the unemployment rate will fall below 7 per cent before the 2015 election.
This would not be much of an achievement and hardly anything to brag about. The reality is that the economy has been in a growth decline since 2010 and job creation has been dismal. In 2009, real GDP declined by 2.9 per cent and then bounced back in 2010 to 3.3 percent. Since then, growth as been decelerating: to 2.4 per cent in 2011; to 1.7 per cent in 2012; and, to a forecast rate of around 1.6 per cent in 2013. Growth is forecast to increase in 2014 to around 2.5 per cent but economists have been forecasting a turnaround for the past three years and it just hasn’t happened. Why should it happen in 2014 when the global economy is so weak?
In promoting its job creation record, the government makes the claim that the economy has recovered all the jobs lost during the recession. Not bad when compared to some other G-7 counties, but certainly not good enough for Canadians. In February 2008, the unemployment rate hit a low of 5.9 per cent; in July 2013 it was 7.2 per cent. In February 2008, the labor force participation rate hit a high of 67.8 per cent; in July of 2013 it had fallen to 66.5 per cent, clearly indicating that many Canadians had simply withdrawn from the labor force because of a lack of job opportunities. It also means that the “real” unemployment rate, which includes discouraged workers, is much higher than 7.2 per cent. Finally, in February 2008, the ratio of persons employed, aged 15 and over, to the population of Canadians, aged 15 and over (referred to as the employment ratio), reached a high of 63.8 per cent; by July 2013 it had fallen to 61.7 per cent. In other words the economy was not growing fast enough to create enough jobs for a growing adult population.
What policies are required to deal with this “jobless” problem? The government’s answer seems to be that the unemployment problem is primarily structural not cyclical. In other words, since the recession “new” labor market rigidities have emerged or older rigidities have worsened. This interpretation of the unemployment problem is revealed in the government’s focus on skills shortages and a new program announced in the 2013 budget, which has yet to be agreed with the provinces.
There is in fact no empirical evidence that structural problems in labor markets have worsened over the past few years. No doubt skill shortages and labor market mobility are important problems. But they have been part of the Canadian labor market for decades and they cannot account for the lack of job creation in Canada for the past four years and the current high unemployment rate.
The Prime Minister recently announced that he would prorogue Parliament and focus the next session on economic growth. This was also the focus of the last session. Yet the Minister of Finance in his press briefing prior to his National Policy Retreat indicated that their would be no new significant spending measures and that the focus would continue to be on eliminating the deficit in 2015-16.
Eliminating the deficit is not a job creation strategy. In 2009, the G-20 countries became temporary Keynesians for 12 months and then they quickly reverted to the “self-levitation theory” of economic growth. According to this theory, if governments were to adopt policies to quickly eliminate the temporary stimulus deficits, this would “crowd in” private sector investment activity and lead to stronger economic growth. Unfortunately, this didn’t happen and we were left with a lot of “dead money” according to the former governor of the Bank of Canada. The growth business investment has been falling for the past three years. This was bad theory, without analysis, that led to bad policy. Stimulus will work if you give it a chance.
The Canadian economy is in a growth slump because everyone is cutting back in Canada. Households are not spending, businesses are not investing, and the government sector, particularly the federal government, is not spending. The foreign sector is also a drag on growth. We need more demand in the economy. We can’t rely on self-levitation.
This is not going to happen. Mr. Flaherty’s only goal in his political life is to eliminate the deficit in 2015-16. If he can claim that this will happen, (which he will since the final results will not be known until the fall of 2016 after the election) then he will announce in the 2015 budget that the government will change the income tax act to allow income splitting for families with children under age 18; the extension of the fitness tax credit to adults; and, an increase in the tax free savings contribution to $10,000. None of this will contribute to economic growth or job creation. Indeed income splitting could make things worse by reducing labor force participation and long-run economic growth
Canada needs a realistic growth and jobs strategy. The government’s current strategy is based on the hope that the EURO area will quickly recover from its 18-month recession; that the US will find an agreement on a budget that will reverse sequestration and raise the debt ceiling; that emerging markets will become revitalized; that President Obama will agree to the XL pipeline; and that there will be a Canada-EU free trade deal. All of these are outside the control of the Prime Minister and that is not a good basis for a growth and jobs strategy. The chances that all, or even some, of these happening are very low.
What is required is growth and jobs strategy based on domestic policy decisions and controlled by the government. Such a strategy might include the following:
• A loosening of federal fiscal restraint and postponement of the date for elimination of the deficit. This would be consistent with recommendations of the G-20 that countries in sustainable fiscal situations should use this fiscal room to strengthen economic demand. Canada certainly meets this condition;
• A commitment to undertake sufficient fiscal stimulus, combined with continued monetary policy support until the unemployment rate is below 6 per cent. This could involve a new infrastructure program focused on education, research, early childcare learning, and municipal infrastructure, to be financed by long-term borrowing;
• Actions to reduce the high marginal effective tax rates, which currently penalize low- and middle-income Canadians. This would increase labor force participation and economic growth. It may require a change in tax mix in favor of savings and investment; and,
• A major simplification of the income tax system to secure savings of $5-6 billion annually to finance new initiatives. This would reduce market distortions and contribute to higher productivity growth.
None of these proposals will be in the Speech from the Throne but they should be part of the public debate leading up to the next election. We need a domestic growth and jobs strategy, which recognizes that global uncertainties are going to continue for many years, and that there are policy actions that can be taken in Canada to strengthen growth and job creation.