Canada: Lessons Learned from Our Northern Neighbor

BHS BUSINESS HORIZON SERIES

CANADA: THE NORTHERN LIGHT A Partner in Growth and Opportunity

LESSONS LEARNED FROM OUR NORTHERN NEIGHBOR

R. Bruce Josten, Executive Vice President Government Affairs

Forward On July 31, 2012, the National Chamber Foundation (NCF), the think tank of the U.S. Chamber of Commerce, hosted a number of notable Canadian and American business leaders for an event titled “Canada: The Northern Light: A Partner in Growth and Opportunity.”

As a part of NCF’s Business Horizon Series, the program explored the decisions that Canada has made post-NAFTA to advance its economy.

The event focused especially on the issues of international trade, energy, immigration, and taxes.

R. Bruce Josten, the U.S. Chamber’s Executive Vice President, Government Affairs opened the program by highlighting some of the lessons learned from Canada’s actions. On the following pages, we are proud to feature his remarks and insights.

“Canada: The Northern Light: A Partner in Growth and Opportunity” National Chamber Foundation July 31, 2012 Lessons Learned from Our Northern Neighbor

R. Bruce Josten, Executive Vice President, Government Affairs U.S. Chamber of Commerce

Good morning and welcome to the National Chamber Foundation’s Business Horizon series on “Canada: The Northern Light.”

So, why are we conducting a conference on Canada?

I want to provide some context to that question in my remarks and suggest that our policymakers can learn much by looking north.

Canada offers us some important lessons in policy and results.

From 2001 – 2010, Canada grew faster than any other G-7 country. This growth From 2001 – 2010, was the result of a diversified economy, Canada grew faster its foundations built upon low corporate than any other G-7 taxes, prudent fiscal management, and country. financial regulation; a business climate that rewards innovation and entrepreneurship; and an open economy that welcomes foreign direct investment.

As a result of the actions it took, Canada has the distinction of being the only G-7 country to have recouped virtually all of its output and employment losses from the recent global recession.

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The Canadian federal government has posted 11 consecutive budget surpluses and some of that surplus was used to pay down Canada’s national debt. As a result, Canada entered the global recession in much better shape than most other advanced economies.

Foreign direct investment (FDI) in Canada has more than doubled in just over a decade. Foreign investors in Canada benefit from one of the lowest overall tax rates on new business investment among OECD countries and the lowest such rate in the G-7.

Simply put, with a stable fiscal environment, governments in Canada have more room to implement policies such as:

• Reductions in corporate income taxes; • Investments in infrastructure; • Research and development tax credits; and • Reductions in import tariffs.

Canada and the United States share a deep and mutually beneficial commercial relationship. More than two-thirds of the Canadian trade in goods was with the America in 2010. More than $1.7 billion in goods and services cross the Canada-U.S. border every day.

Canada and the United States share a deep and mutually beneficial commercial relationship.

We commend Canada for recently enacting modern-day copyright reforms. While those reforms represent a significant and positive step forward, we urge the Canadian government to address a number of other outstanding intellectual property (IP) issues that would provide greater protections against online theft and certainty for innovative pharmaceuticals. We look forward to continued progress on IP issues in Canada, including in the context of the Trans-Pacific Partnership.

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In May of 2012, Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway announced that the Canadian “government’s top priority is the economy—creating jobs, growth, and long-term prosperity for Canadian workers, businesses and families.”

Notably, the Harper Government announced that the “Economic Action Plan 2012” will, “following consultations with the business community—including the critically important small and mediumsized business sector— align Canada’s trade and investment objectives to ensure that Canada is branded to its greatest advantage in high-growth, priority markets.”

Mr. Fast said that he looks forward to receiving advice from these knowledgeable Canadian business leaders, all of whom are advocates of a broad and ambitious Global Commerce Strategy.

Canada has transformed itself economically over the last 20 years.

Additionally, after extensive consultations with Canadian industries, Ottawa unilaterally eliminated tariffs on 1,755 different types of machinery, equipment, and other manufacturing materials, making Canada the first tariff-free zone in the G-20 for manufacturers.

Canada has made infrastructure investments a national priority and, as a result, Canada’s public-private partnership approaches are a model for the world, according to Malcolm Bairstow, Ernst & Young’s Global Infrastructure and Construction Leader.

Canada has transformed itself economically over the last 20 years.

Canadian taxes have been reduced with the goal of improving incentives for work, savings, investment, and entrepreneurship.

Tellingly, the last three Canadian elections have all had key debates on 3

tax relief—not whether there should be tax cuts, but rather what type of tax cuts.

Government austerity has been accompanied by prosperity.

Canada’s government has grown smaller.

Total government spending as a share of the economy peaked at a little over 53% in 1993. Through a combination of spending cuts in the 1990s and spending restraint during the 2000s, it declined to a little under 40% of GDP by 2008.

Canada’s personal income tax rates have been reduced, and the income thresholds for all rates have been increased and indexed to inflation. Canada has also reduced capital gains taxes twice (the rate is now 14.5%) and cut the national sales tax to 5% from 7%.

Government austerity has been accompanied by prosperity. Canada began reforming formerly untouchable programs: welfare and the Canada Pension Plan (CPP), equivalent to Social Security in the U.S. Over three years, federal and provincial governments agreed to changes that included investing surplus contributions in market instruments such as stocks and bonds, curtailing some benefits, and increasing the contribution rate. The CPP (Social Security’s equivalent) is financially solvent and will be able to weather the retiring baby boomers.

And, while we have a different view with respect to health care than Canada, the government deserves credit for restructuring its government pension and welfare plans.

Americans can learn much by looking north.

In Canada, because of corporate tax cuts, businesses are making additional investment projects profitable on an after-tax basis. The increase in economic activity and profits is accompanied by additional hiring, increasing the taxable base of corporate income.

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By comparison, the U.S. federal rate has remained unchanged since 1986 while all of our trading partners have lowered theirs over the past 15 years, most of them multiple times. The United States is falling behind by standing still.

Another transformational play undertaken in Canada nearly simultaneously to reducing the size and cost of government while reducing tax rates is encouraging domestic exploration and extraction of Canada’s domestic energy sources.

One key factor for Canada’s more robust growth is its strong commitment to energy. Unlike the United States, Canada’s government treats its energy resources as assets that should be used for the public good.

Equally important, unlike the United States, the Canadians understood that the regulatory review process is too convoluted, too long, and too expensive. As part of the goal to ensure timely and predictable project reviews, Canada, unlike the United States, now has fixed timelines for the beginning-to-end review process, which range from 12 to 24 months depending on the type of review and it eliminated duplication of project reviews.

The federal government projects that over the course of the next ten years, that half a trillion dollars worth of new projects will start operating in Canada’s energy and mining sectors. Much of America’s vast untapped energy potential lies dormant because regulators have spent the past three years throwing sand in the gears of the permitting process for exploration and exploitation on federal lands.

Separately, TransCanada has been trying since September 2008 to get a permit to build the Keystone XL pipeline from Alberta to the Gulf Coast.

A glimpse of what all this has cost the U.S. economy can be seen by looking north to Canada. Alberta’s oil and gas industry supports more 5

than 271,000 direct jobs and hundreds of thousands of indirect jobs in sectors such as construction, manufacturing and financial services.

There are also some 960 American companies involved in Alberta energy, supplying equipment and technology, among other things.

Yet Keystone XL is only a fraction of the potential that could be released if our federal government changed its energy policy.

In a study commissioned by the American Petroleum Institute and released last year, the energy consultancy Wood MacKenzie estimates that pro-development policies could, by 2030, “support an additional 1.4 million U.S. jobs, and raise over $800 billion of cumulative Canada has recovered additional government revenue.”

all the jobs it lost in the 2009 recession

Canada has recovered all the jobs it lost in the 2009 recession, and Alberta’s oil sands are a big part of that.

The province is on track to become the world’s second-largest oil producer, after Saudi Arabia, within 10 years.

The idea here is straightforward—to make Canada the most attractive country in the world for resource investment and development, and to enhance its world-class protection of the environment for future generations of Canadians.

The U.S. Bureau of Labor statistics measured American unemployment at more than 8% last month, slightly higher than Statistics Canada’s number for Canada, but long-term unemployment—those looking for work for more than a year—in the U.S. accounts for 41% of job-seekers last month.

The most recently available Canadian rate was less than a fifth of that, while the labor-force participation rate in Canada has exceeded that of America since May 2002, and by more than 2% since November 2009.

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Canada has taken other actionable steps to prepare for the future.

In the last decade, the province of Ontario, Canada’s largest province, dramatically improved its education system to become one of the best in the world. Its innovative strategy offers a blueprint for reform.

Ontario, Canada’s largest province, dramatically improved its education system to become one of the best in the world.

Ontario public schools follow a model embraced by top-performing hospitals, businesses and organizations worldwide. Specifically, they do five things in concert—remain focused, build relationships, persist, develop capacity, and spread quality implementation.

The McKinsey Group, the Organization for Economic Co-operation and Development, the National Center on Education and the Economy in Washington, D.C., and Harvard’s Program on Education Policy and Governance have all done recent case studies on Ontario’s education system, concluding that it is one of the most improved and highest performing in the world.

The Canadian Ministry of Education selected three priorities—literacy, math, and high school graduation—with a commitment to raise the bar for all students and close achievement gaps between all groups. There are other goals, of course, but these three are non-negotiable and take precedence because they leverage so many other learning goals.

The provincial government also developed strong two-way partnerships and collaboration, especially between administrators and teachers, and in concert with teachers’ unions. By focusing on teacher development, Ontario was also able to raise teacher accountability.

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In brief, the net result is an education system that has the characteristics of a high-performing organization: relentless focus, interactive pressure and support, a preoccupation with results and how to improve them, a culture of mutual commitment, and collaborative competition, where there is no limit to what is being attempted.

The fact that this strategy develops leaders at all levels—leaders who focus on results, as they help develop other leaders—means that sustainability is built into the whole enterprise.

Ontario isn’t perfect. Yet it proves that large-scale reform can be accomplished in school systems in fairly short periods of time.

Another area worth learning from is immigration policy. Canada has a high percentage of foreign-born residents relative to the United States.

Canadian immigration policy is centered on recruiting Canadian immigration policy is talented immigrants with centered on recruiting talented abilities the country needs. immigrants with abilities the Those individuals can apply country needs. for work visas themselves; they don’t even need to have an employer. The Canadian government awards points toward the visa, with extra points for science education, technical skills, and work experience.

The results of the system are evident in Vancouver, where American high-technology companies have large research laboratories and offices. The people working in these offices are almost all foreign graduates of American universities who could not get work visas in the U.S. They moved a few hours north to Vancouver, where they live in a city much like those on the American West Coast; except, of course, that they will pay taxes, file patents, make inventions, and hire people in Canada.

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Sixty-two percent of permanent-resident visas in Canada are based on skills, while the remainder is for family unification. In the United States, the situation is almost exactly the reverse: two-thirds of America’s immigrants enter through family unification, while only 13% of green cards are granted because of talent, merit and work.

In fact, it’s actually gotten worse over time in America. The cap on applications for H1-B visas (for highly skilled immigrants) has dropped in half over the past decade.

The U.S. cannot continue down its current path and hope to remain the world’s main economic power and global beacon of prosperity. It must reverse course. It can happen.

Canada has reversed course, cutting taxes and launching privatization efforts. The tax cuts have acted as a stimulus. Moreover, exploiting natural resources provided a growing revenue stream while privatization reduced government debt helped spur economic growth by creating a more dynamic industrial structure.

Perhaps the most promising instruction from the Canadian experience is that the country’s fiscal reforms undermine the Keynesian notion that cutting government spending harms economic growth.

Perhaps the most promising instruction from the Canadian experience is that the country’s fiscal reforms undermine the Keynesian notion that cutting government spending harms economic growth. Canada’s cuts were coincident with the beginning of a 15-year boom that only ended when the world economy dragged Canada into recession in 2009.

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Lessons Learned Canada offers U.S. policymakers a useful roadmap for:

1. Lowering taxes and raising even more tax revenues and,

2. Encouraging, rather than discouraging domestic fossil fuel production. Through this, Canada has made itself and by extension the U.S. more energy secure.

While Canada benefits from the flow of additional tax revenues and royalties and jobs, followed by even more income tax revenues, the United States stands still and falls further behind.

Americans can learn much by looking north. There are salient lessons to be derived by those of us in the U.S. from looking at Canada’s economic metamorphosis.

Canada’s economic reforms included furthering free trade, privatization, spending cuts, sound money, corporate tax cuts, personal tax reforms, balanced federal budgets, block grants, and decentralizing power by cutting the central government.

Those all sound like things that we ought to pursue in America. The political systems of the two countries are different, but Canada’s promarket reform lessons are universally applicable.

We can choose to emulate at least some of the approaches taken by our neighbors in reversing the path of their previously plunging economy.

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R. Bruce Josten

Executive Vice President, Government Affairs U.S. Chamber of Commerce R. Bruce Josten, executive vice president for Government Affairs, is the second ranking officer at the U.S. Chamber of Commerce and the organization’s senior government and political affairs executive.

Josten is the senior manager of six major divisions within the U.S. Chamber: Congressional and Public Affairs; Economic Policy; Environment, Technology and Regulatory Affairs; Labor, Immigration, and Employee Benefits; National Security & Emergency Preparedness; and Political Affairs and Federation Relations.

Josten is considered one of American business’ most effective strategists in the ongoing battle with the trial lawyer lobby, from product liability issues to class action and tort reform. He served as co-chair of the Coalition to Save Medicare and founded the Employers for a Healthy Economy coalition and is sought after as one of the most knowledgeable and articulate pro-business advocates in the health care debate.

Josten is the key architect of the U.S. Chamber’s resurgent position as leader of the business community’s policy and grassroots activities in the 104th through the 111th Congresses. In the 104th Congress, when House and Senate leaders sought a prominent figure in the business community to head their balanced budget coalition—the key agenda item in the battle against big government—they turned to Josten and the U.S. Chamber, calling him “uniquely qualified to lead this major campaign.” His persistent efforts resulted in the passage of the first balanced budget in 29 years and the first tax cut in 16 years.

In the 107th Congress, Josten co-founded the Tax Relief Coalition and helped enact the $1.35 trillion tax relief package, the first major tax cut in 11

a generation. As the nation confronted its first energy crisis in a quarter century, Josten helped form the Alliance for Energy and Economic Growth (Alliance), a coalition that worked to enact a comprehensive national energy strategy, including the Energy Policy Act and the Energy Independence Security Act. Josten serves as the chief spokesperson for the Alliance.

Josten continues to develop new leadership opportunities for the U.S. Chamber while fighting to protect the interests of its diverse membership from the costly excesses of big government. At the national level, he succeeded in organizing The Coalition: Americans Working for Real Change, uniting many disparate, single-issue business and citizens groups under a broad-based umbrella to combat the legislative and political activities of the AFL-CIO and its efforts to unseat pro-business members of Congress.

At the U.S. Chamber, he has invested heavily in new technologies to enhance the Grassroots and Advocacy Programs (VoteForBusiness.com), resulting in a state-of-the-art legislative mobilization machine for American business.

Josten is a frequent commentator on national legislative, political, and economic issues affecting the business community, its employees, and the economy. He is quoted regularly by The Wall Street Journal, The New York Times, The Washington Post, BusinessWeek, FORTUNE, and National Journal, among others, and he is often interviewed by the major television networks, including Meet the Press and talk radio.

Josten was recognized by Roll Call, the newspaper of Capitol Hill, as one of “The Politics Fabulous Fifty”—one of the 50 most influential Washingtonians in electing congressional candidates. In addition, he was named one of POLITICO’s “50 to Watch” as a D.C. standout “who will be a force to reckon with in the 2012 cycle.”

He graduated cum laude from Harvard with a degree in the social sciences.

Josten also serves on the Dean’s Advisory Committee of Public Affairs for The George Washington University Graduate School of Political Management and is a board member of the United States Capitol Historical Society.

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For more insights and analysis from this program go to http://ncf.uschamber.com/events/2012/canada-northern-light

The National Chamber Foundation (NCF) is the think tank affiliate of the U.S. Chamber of Commerce. NCF drives the policy debate on key topics and provides a forum where leaders advance cutting-edge issues facing the U.S. business community. NCF’s programs focus on three goals: (1) examining emerging business issues, (2) driving public debate, and (3) informing business and government leaders.

The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.

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