Last October Finance Minister John Manley, in a presentation to the House of Commons, spoke about ensuring productivity growth in Canada, and positioning ourselves as the Northern Tiger. The 2003 Federal Budget, delivered this past Tuesday, was drastically off-course in providing Canadians with incentives and mechanisms needed to enhance economic growth and improve productivity. In fact, the bulk of initiatives announced in the budget will actually hinder economic growth and productivity.

We all know the importance of economic growth. Citizens in countries with high rates of economic growth and consequently higher incomes can afford more and higher quality goods and services. Healthcare and education are clear examples of such products. Even those to the left must realize the reason Canadians enjoy a higher standard of living relative to most other countries. It is not from extracting and redistributing an ever-greater portion of people’s income pie but instead through economic growth, which increases the economic pie itself.

The best way to guarantee a better standard of living for all Canadians is to have a set of economic policies in place that creates the right incentives for individuals and businesses to invest and actively engage in productive activities. This is the engine that provides us with higher rates of economic growth and higher incomes for Canadians.

In 1991, Canada’s average after-tax income (adjusted for inflation) stood at $19,920. Citizens in the US, however, enjoyed average after-tax incomes (adjusted for inflation and price differences) that were $9,629 greater. In 2001, the gap between average Canadian and American disposable income had marginally increased to $9,684. In 10 years, Canada has not gained but instead lost ground in closing the gap in average income.

Unfortunately, the gap between average Canadian and American incomes has little chance of declining in the coming years. While US President George W. Bush is busy providing American’s with the correct initiatives, namely dramatic tax cuts, that will spur business investment and economic growth, Canadian Prime Minister Jean Chretien is dreaming up new ways to provide himself with a legacy.

The government would have you believe that re-slicing the economic pie for healthcare, childcare, transfers to aboriginals, infrastructure, and environmental projects will make Canada a more productive country. Unfortunately, while these new expenditures will let us feel good today, they will do absolutely nothing to improve the country’s economic performance. Once again the dead hand of government will hinder us, instead of the invisible hand of the market helping us.

Mountains of evidence have shown that high levels of government spending result in lower rates of economic growth, reduced productivity, and ultimately less prosperity.

Harvard economist Robert Barro found that government consumption, that is, expenditures by the government not deemed to be public investment such as education and defense had no direct effect on productivity and hence GDP growth. Most recently, another Harvard economist Alberto Alesina and his colleagues investigated the effects of large changes in government spending on business investment. They concluded that dramatic increases in government spending as a percent of GDP result in significantly lower investment as a percentage of GDP.

We all acknowledge that there are services that must be provided, financed, or regulated by government. However most studies indicate that many countries, including Canada, have surpassed the level of government spending that enhances economic growth. The level of government spending that maximizes economic growth for Canada, historically, is roughly 30.0 percent of GDP. Canadian governments currently spend about 40.0 percent of our GDP compared with American governments at roughly 31.0 percent, a difference of 9 percentage points. Little wonder why American’s enjoy higher after-tax incomes and greater prospects for economic growth then Canadians.

With an expected surplus of $8 billion heading into the Budget, it was the opportune time for the government to initiate policies that stimulate long-term economic growth. Specifically, the federal government should have provided Canadian’s with tax cuts equal to, or better yet beyond, those initiated in the US. Top and middle personal income tax rates should have been reduced and the thresholds at which they apply increased. Previously announced business tax rate reductions should have been accelerated and indeed expanded beyond the target rate of 21.0 percent. Finally, the corporate capital tax, Canada’s most damaging tax, while deemed harmful enough to warrant a gradual 5-year phase out, ought to been completely eliminated this year.

Unfortunately, the 2003 Federal Budget failed to provide these growth enhancing economic policies. For that, average Canadians will pay as our productivity and thus our incomes continue to languish beyond our southern neighbours.