Fraser Forum

As the economy reopens, Canada must address its competitiveness problem

Printer-friendly version
As the economy reopens, Canada must address its competitiveness problem

Over the coming months, governments across Canada are expected to begin reopening the economy now that the COVID-19 curve has “flattened,” and the focus will shift towards designing policies that improve the economy. However, a number of problems existed in the economy prior to the recession and these still must be addressed to ensure a strong recovery and prosperity in the long-term.

In recent years, Canada’s lack of competitiveness has impeded economic prosperity. Canada fell behind other countries because of higher taxes, increasing regulations and declining business investment. We must reverse these trends quickly to improve our economy today.

Since 2015, the federal and many provincial governments increased personal income taxes on entrepreneurs, professionals and businessowners—people critical to investment, job creation and economic growth. Consequently, the combined personal income tax rate imposed on these Canadians now exceeds 50 per cent in eight provinces with the remaining provinces only slightly below 50 per cent.

These tax hikes effectively discourage business investment, startups and entrepreneurialism because of the lower returns to these activities. As a result, Canada has been at a huge disadvantage at attracting and retaining skilled workers who we rely on for innovation, employment growth and general economic prosperity.

Our current regulatory environment has also damaged Canada’s ability to compete, as our processes have become increasingly complex, inefficient and unpredictable. The federal government and several of its provincial counterparts have increased regulations, particularly in the resource sector, which has raised costs, delayed projects (including high-profile pipeline projects) and impeded growth and innovation.

Canada has fallen out of the top 20 countries on the World Bank’s Ease of Doing Business Index after placing eighth only a decade ago. Moreover, Canada now ranks 64th in the world at dealing with construction permits, behind countries such as Vietnam and Kazakhstan. Canadian governments have glossed over our ever-increasing regulatory challenges and the country is now a far less-attractive place to do business.

Higher personal income taxes, additional regulations and an increasingly uncertain business environment have reduced the incentives for Canadians and foreigners to invest. As a result, about two-third of Canada’s domestic industries including energy, manufacturing, agriculture and transportation experienced a decline in business investment since 2014. Between 2012 and 2017, investment in plant, machinery and equipment by private businesses declined 4.7 per cent and investment in intellectual property fell by 14.8 per cent.

At the same time, Canadians increased their investments abroad while foreigners continued to invest elsewhere. In fact, foreign investors made it known that Canada’s complex regulatory system is a main reason why they choose not to invest in Canada.

Business investment is crucial to our economy because it means new equipment, innovation, new products and ultimately employment for Canadians. Our inability to attract investment reflects Canada’s lack of competitiveness. Without a rebound in business investment, economic growth will remain tepid for years to come.

The federal and provincial governments must implement major policy changes to reverse these negative trends and promote long-term economic prosperity. Governments should return to competitive personal income tax rates, simplify the regulatory system and increase business investment.

Prior to this recession, Canada already faced enormous policy challenges because of deteriorating competitiveness and declining investment. These issues remain unresolved, as our focus now shifts towards improving Canadian prosperity and well-being. If we want to have a strong economy, Ottawa and the provinces must demonstrate leadership and address our competitiveness problem.

Blog Category: 

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.