Canada faces its most challenging macroeconomic environment since the Great Financial Crisis. Free trade with the U.S. is in peril. Canada’s long-standing corporate tax advantage with the U.S. is gone, exposing myriad policies hampering our cost-competitiveness. Not building pipelines reduces exports by $15 billion a year. Failing to shift growth to exports and business investment from debt-fuelled government and household spending heightens the risks from the impending end of ultra-low interest rates for a heavily-indebted nation like Canada.
Such a daunting array of challenges calls for a substantive budget to improve our trade and tax competitiveness and reassure financial markets by reining in government spending and setting a path to balancing the budget. None of these were forthcoming Tuesday. Instead, we got a lightweight budget featuring Trudeau’s obsession with gender issues, apparently not satisfied to preside over Canada’s first female-majority Cabinet after his public neutering of finance minister Bill Morneau last fall. Gender-based initiatives include more pay for female civil servants, paternity leave so men can help more in raising children, “boot camps” for women entrepreneurs, and reams of gender-based analysis that guarantees lifetime jobs for graduates in gender studies. Important as they may be, these hardly address the macroeconomic risks Canada faces.
The government’s analysis of gender issues is not even done well. Nowhere in the dozens of pages devoted to gender issues is it mentioned that the most obvious difference between men and women in the labour force is where they work. Men reside overwhelmingly in the private sector, where they account for 66.7 per cent of all workers. Conversely, the public sector is 71.8 per cent dominated by women (the budget lock-up is an exception; 16 of the 19 Finance officials attending were men).
The budget ignores the implications for wage data of a female-dominated public sector and a male-dominated private sector. Many public sector benefits don’t appear on a paycheque; hours of work are shorter, vacations are longer, sick leave benefits are greater, medical expense coverage is broader, job security is better, retirement starts earlier. Most importantly, public sector pensions are heavily subsidized by taxpayers, a benefit hidden in income data but equivalent to 20 per cent of federal civil servant pay and 10 per cent of the pay of most non-federal civil servants.
All those stats about women earning less would be different if incomes were adjusted for the non-taxable benefits women receive because so many work in the public sector. No one in government bothers making that adjustment since it reveals how the civil service has artfully constructed a compensation package to maximize non-taxable benefits and minimize its exposure to the tax system it helped design, while trying to ensnare as much private sector income as possible (last fall’s assault on small business was only the latest example).
The lack of new initiatives in this government’s third budget is not surprising. It partly reflects the miscalculation in its first budget of emptying the federal piggybank to zealously differentiate itself from the Harper government. Trapped by past fiscal profligacy, it follows other governments in Canada by increasing compulsory private sector spending on their behalf, such as provincial minimum wage hikes, oblivious to the negative impact on business cost-competitiveness.
More fundamentally, the federal government shares with a growing number of provinces a distrust or misunderstanding of the systemic processes that produce desirable results for our society, notably capitalism and market forces. Instead, they believe that only direct government actions produce tangible results. Not content to establish the rules of free trade and then step aside to let firms compete, they now promote “progressive trade” that dictates satisfying social goals. They don’t trust market mechanisms to increase everyone’s income, so they legislate radical increases in minimum wages. They don’t trust people to manage their own finances, so they mandate higher pension taxes. They don’t even really believe spending more on education and infrastructure ultimately will boost productivity, so they hand-pick innovation hubs to lead the way.
In the hallowed name of progressiveness, this steady dribble of government interventions dulls incentives and pours sand in the gears of the private sector. The result is stifled businesses, as reflected in the abysmal performance of stock markets in Canada compared with the U.S. since October 2016, the stagnation of business investment here even as money flows out of the country, and the plunge in the number of business start-ups in Canada.
The root of the problem is the faulty mindset that nothing beneficial occurs unless initiated by government. The everyday experience of Canadians proves the opposite. Almost all the big changes in our society — from the increasing participation of women in the labour force to the dazzling smartphone technology available at our fingertips — bubbled up from the millions of actions and decisions of Canadians, co-ordinated by markets, not memes. Unintended benefits were the basis of Adam Smith’s description of how markets work. Governments in Canada seem to be losing faith and understanding of this fundamental mechanism of growth and progress.
Three years into its mandate and the cupboard of big new ideas is bare, now that comprehensive tax reform is dead after last summer’s botched attempt — reducing this government to being pro clean drinking water and against tobacco. The shallowness of the Trudeau administration is becoming increasingly apparent, revealing a government based mostly on posturing not principles, rhetoric not results, symbolism not substance, vapidity not vision.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute