The Future of Public Finance in Canada

The Future of Public Finance in Canada A Public Policy Forum roundtable summary report September 2012

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The Public Policy Forum is an independent, not-for-profit organization dedicated to improving the quality of government in Canada through enhanced dialogue among the public, private and voluntary sectors. The Forum’s members, drawn from business, federal, provincial and territorial governments, the voluntary sector and organized labour, share a belief that an efficient and effective public service is important in ensuring Canada’s competitiveness abroad and quality of life at home.

Established in 1987, the Forum has earned a reputation as a trusted, nonpartisan facilitator, capable of bringing together a wide range of stakeholders in productive dialogue. Its research program provides a neutral base to inform collective decision making. By promoting information sharing and greater links between governments and other sectors, the Forum helps ensure public policy in our country is dynamic, coordinated and responsive to future challenges and opportunities. Š 2012, Public Policy Forum 1405-130 Albert St. Ottawa, ON K1P 5G4 Tel: (613) 238-7160 Fax: (613) 238-7990 www.ppforum.ca ISBN: 978-1-927009-35-2

Table of Contents Our Partner ................................................................................................................................................... 1 Background ................................................................................................................................................... 2 The need to build trust and facilitate dialogue on important policy issues ................................................. 3 Is there a “crisis” in Canadian public finance? .............................................................................................. 4 Shortages in Canada’s labour force ...................................................................................................... 4 The interplay between macro-economic and micro-economic trends ................................................ 4 Next Steps ..................................................................................................................................................... 5 Determining how to build trust, openness and collaboration...................................................................... 5 Defining the role of government .................................................................................................................. 5 Selecting the right policy mix ........................................................................................................................ 6 Reforming Canada’s tax framework ............................................................................................................. 7 Appendix: List of participants ....................................................................................................................... 8

Our Partner Founded in 1908, the Certified General Accountants Association of Canada (CGA-Canada) serves 75,000 Certified General Accountants and students in Canada and more than 100 countries. Respected accounting and financial management professionals, CGAs work in industry, finance, government and public practice. CGA-Canada establishes the designation’s certification requirements and professional standards, offers professional development, conducts research and advocacy, and represents CGAs nationally and internationally. www.cga.org/canada

Background Canada emerged from the 2008 global economic crisis in a stable position relative to most other Western countries. Buoyed by ten years of federal surpluses, a strong financial regulatory framework and a comparatively low debt-to-GDP ratio, Canada’s prudent fiscal approach received praise from much of the world, including from the World Economic Forum, OECD and IMF. However, Canada still faces significant medium- and long-term challenges. With an aging population, labour shortages and growing levels of inequality, a greater burden is being placed on government finances. Despite having a diversified economy, Canada’s reliance on international trade makes our situation uncertain and vulnerable to global economic shifts.

And, due to rising distrust in our public institutions among Canadians and other global citizens, it is becoming increasingly difficult for government leaders to have open discussions on how these challenges can be solved.

In response to these issues, Canada’s Public Policy Forum convened 20 leaders from the public, private, non-profit and academic sectors on June 19, 2012 to explore the future state of public finance in Canada. Our objective was to share insight into a number of policy questions and to consider how they might be addressed. Participants discussed the following issues: 

What are the main challenges facing Canadian public finance?

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What are the roles of governments in terms of public finance management and expenditure, and how are they changing?

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How should we collectively respond to our most pressing public finance issues?

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What policy mix will help Canada build on existing successes?

Structured as an intimate roundtable discussion, our expert participants explored the growing significance of these questions in the context of changing regional, national and international environments. Our intention was not to try to resolve these questions in one discussion.

Instead, participants were invited to identify and help frame the issues that policymakers should consider exploring in more detail. This brief report outlines a series of crises facing Canadian public finance, highlights where change may be needed and offers insight into how we might collectively respond to our country’s most complex policy challenges.

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The need to build trust and facilitate dialogue on important policy issues For over 25 years, the public’s confidence in government and its ability to effectively respond to our country’s challenges has been declining. According to roundtable participants, growing partisanship in Canada’s political environment, coupled with the public’s ability to quickly respond to unpopular policies via the internet, have led to a growing reluctance or inability on the part of government to communicate openly on controversial issues. Today, more Canadians have a high level of distrust in our public institutions, spurring concerns that this trend could undermine social cohesion in our country..

Rebuilding trust in our public institutions and in public debate will be essential if Canadians are to have the national policy discussions that are required to address the challenges we collectively face.

Is there a “crisis” in Canadian public finance?

By most measures, Canada’s fiscal position ranks relatively well compared to other developed countries. In 2012, all federal, provincial and territorial governments laid out specific plans to balance their budget, a goal most will achieve before the end of this decade. Further, Canadian governments will be cutting spending over the next decade as well as decreasing accessibility to expensive programs, such as OAS and Employment Insurance. Together, these changes represent some effort on the part of our policymakers towards long-term fiscal sustainability.

However, participants suggested that more fundamental changes may be necessary.

Canada currently faces a series of interconnected issues that threaten to strain our economy and reduce the role of government over the coming decade. Some examples that were identified during the discussion include: 1.

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low productivity demographic changes environmental issues (i.e. climate change) focusing resources on securing Canadian global interests (i.e. increasing our trade relationships and reaping the benefits of globalization) 5. growing inequality Although these issues are not new to Canadian policymakers, shifting global economic forces have made them more acute and consequential to our public institutions. If left unresolved, these crises could deplete government’s financial resources and limit its ability to respond effectively with social services. Participants agreed that each crisis should be dealt with individually while recognizing that they interact on as part of larger social, economic and

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political trends. In an attempt to better frame the challenges we collectively face, participants outlined a few key “drivers” that are contributing to each crisis. They include: 

persistent shortages in Canada’s labour force that limit the private sector’s economic potential;

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an inability to accommodate macro-economic shifts that are derived, in part, by global market fluctuations;

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the complex interplay between macro-economic and micro-economic trends and their effects on businesses and households, and;

Shortages in Canada’s labour force The Canadian economy currently faces a shortage of skilled workers in industries that are quickly expanding. The contraction in Canada’s labour force, due in part to the significant number of retiring baby boomers, threatens to reduce our country’s national income, stymie growth and decrease government revenue at a time when more resources will be required to fund Canadian social programs. With labour shortages becoming as common in Southern Ontario and Atlantic Canada as they are in the West, this challenge has become truly “panCanadian.”

Given that some economists expect the Canadian economy to grow by only 1.5% after 2015-16, policymakers should explore how they can better support Canada’s labour force by improving key policies in areas that include:     

attracting skilled immigrants; encouraging education and life-long learning; creating incentives for older workers to remain in the labour force; increasing capital investments, and; importing labour without moving it.

Accommodating macro-economic shifts Many economists agree that certain macro-economic trends are inherent in the Canadian economy. For example, over the past two-hundred years our country has experienced significant declines in manufacturing on six separate occasions: twice in the 19th century, three times in the 20th century and once in the 21st century. According to one participant, the most recent manufacturing cycle might have begun in the 1980s, when the sector dramatically

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expanded when gas prices were low, before contracting in the first decade of the 21st century as prices rose.

There is reason to believe, however, that future fluctuations in the Canadian economy might not follow traditional patterns. On average, Canada’s labour force is older and less mobile than previous generations. The shrinking size and adaptability of the labour force suggests that the difference between today and past cycles is the degree to which certain sectors – particularly manufacturing – may recover from economic retrenchments.

Further, periods of economic uncertainty often lead to rising levels of inequality. A manufacturing plant that is forced to lay off 500 employees at the same time that a law firm is hiring 500 lawyers may appear to leave the labour force unchanged. However, the resulting aggregate economic stability often masks the dramatic increase in social inequality.

As policymakers seek to reduce the deleterious effects of macro-economic shifts, participants noted that our public institutions may need to develop better metrics and policy instruments.

Further discussion could also focus on whether and how public-private partnerships could be better developed to ensure that middle income families don’t slide back into lower income brackets.

The interplay between macro-economic and micro-economic trends As governments began intervening in their economies during the global recession, significant changes began to occur at the micro-economic level. Large macro-economic shifts that affected taxation, regulation and monetary policy significantly impacted whether and how leaders decided to spend money or expand their operations. Further, unsustainable micro-economic trends, including high-levels of household debt and rising real estate prices, are due in part to larger policies governing interest rates and mortgage terms.

Interestingly, the effects of macro-economic policy on the micro-economic sphere have become so pronounced that policymakers are increasingly concerned that they could have national implications.

This causal relationship between national-global trends on one side and business-household trends on the other suggests that policymakers may need a broader approach that includes sector-specific analyses and considers how micro- and macro-economic trends interact.

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Next Steps Canada faces an unprecedented set of challenges that threaten to constrain our governments’ ability to finance public programs. Unlike some past crises, today’s economic concerns are both global and multi-sectoral, leading participants to comment that traditional remedies may not provide the assistance needed for today’s challenges. In light of this unique and complex environment, specific attention is needed to determine which tools policymakers might use to help make government finances sustainable over the medium- and long-term.

In keeping with this, participants identified four areas where further discussion might be required: 1. Determining how to build trust, openness and collaboration Further discussion should seek to address public concerns around accountability and transparency. Moving away from the current distrustful environment will require improved communication between government and citizens to ensure that both motivations and limitations are better understood.

Improving dialogue among governments, businesses, non-profit organizations and citizens will also help ensure that appropriate policies and metrics are considered. As one participant noted, the absence of coordination among sectors has meant that government policies are often outof-step with the needs of private and non-profit organizations.

Although facilitating open policy discussions with the public can be challenging, participants agreed that it is vital for restoring public trust in our leaders and institutions. In the past, governments have been reluctant to appoint royal commissions or similar bodies on issues such as taxes or productivity since it is seen to bind them to the recommendations put forward.

However, governments’ growing use of public engagement, academic policy forums, federal advisory panels and independent committees (such as Ontario’s Jobs and Prosperity Council) suggests that public sector leaders recognize the need for a more open policy process.

Additional strategies to improve communication, coordination and collaboration between all parties should be explored and advanced. For example, one participant recommended that placing government accounting information in publicly-accessible databases and allowing users to submit specialized queries could increase transparency and provide a vital service to future generations.

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2. Defining the role of government Concerns over consistent deficit spending and growing public sector debt are beginning to limit the tools that governments have at their disposal. Faced with fewer resources and more challenges that span traditional jurisdictions, Canadians may need to rethink the roles and priorities that their governments can be expected to fulfill in the future. In this current age of austerity, leaders are beginning to revisit the classic axiom that perhaps “government should only do, what only government can do.”

Indeed, there are areas where more government involvement would be beneficial. Canada’s public institutions are well positioned to focus their resources in ways that anticipate mediumand long-term challenges, connect stakeholders and develop contingency plans. Further, government’s unique ability to spur trade and drive growth means that further efforts in these areas could generate benefits for all Canadians.

There are also areas where a smaller government presence could yield greater results. Limiting government involvement in areas where private and non-profit leaders have a greater competitive advantage would be an effective way to reduce unnecessary spending. Further, removing archaic rules, modernizing regulation, and making taxation and monetary policy more efficient will better position Canadian leaders to expand their operations, attract talent and compete in the global marketplace.

As policymakers begin to “rethink” the role of our public institutions, there may be opportunities for governments to work collaboratively with private and non-profit leaders in ways that better utilize resources and expertise on specific issues. Increasingly, economic, social and political trends are blurring the traditional lines between government and nongovernment responsibilities. In this more inter-dependent environment, multi-sector collaboration places all leaders in a better position to solve complex policy challenges and to realize Canadians’ shared goal of developing a sustainable framework that bolsters trade and drives growth.

3. Selecting the right policy mix Further discussion is needed on the types of policies that might be used to address the five crises Canada currently faces – low productivity, demographic changes, environmental damage, limited resources and inequality.

Resolving Canada’s fiscal and economic challenges will require policy tools that are both effective and efficient. The recent debate over whether leaders should focus on austerity or growth may present a false dichotomy of the options that are available. Instead, a more valuable dialogue might focus on which policy mix will enable Canadians to take advantage of 6

the eventual revival of the global economy. Participants agreed that the forthcoming period of recovery presents Canada with a “tremendous opportunity” for widespread growth and that policy should seek to enable governments and businesses to develop, align and leverage their resources.

Ensuring that existing government programs are sustainable will also be important. For example, government leaders will eventually need to re-evaluate the current status of public sector pensions. Increasing costs, combined with strict accounting standards, have made it imperative that reform is put on the table.

Further, tax reform, life-long learning programs and creating incentives for people to work longer are all potential solutions for mitigating costs on government programs. However, further examination is required to determine how these tools could be improved, where they might be applied, and whether public sector collaboration with private and non-profit organizations might lead to better results.

4. Reforming Canada’s tax framework As policymakers begin to consider different strategies for addressing the issues outlined above, one potential tool they may wish to consider is tax reform. According to participants, the current tax framework is replete with inconsistencies which make it an inefficient tool for raising revenue. In order to improve the current state of public finance in our country, policymakers should consider modernizing taxes, regulations and monetary policy in ways that continue to support government services while improving Canada’s global competitiveness.

Although the general public would likely embrace a tax system that is fairer, simpler and more efficient, initiating a public dialogue on the subject will be a challenge. Governments have been reluctant to openly discuss altering our tax framework due, in part, to the desire to avoid a national debate on a potentially controversial topic. Nevertheless, meaningful tax reform will require leadership and participation from our public leaders to help frame the process, engage the public, and implement reforms that make public finance in Canada more sustainable over the medium- and long-term.

For more information on The Future of Public Finance in Canada study, please contact: Paul Ledwell Executive Vice-President Canada’s Public Policy Forum paul.ledwell@ppforum.ca 613-238-7858, ext. 228

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Appendix.

The Future of Public Finance in Canada A Public Policy Forum Roundtable Discussion June 19, 2012 11:45 a.m. – 2:30 p.m.

Public Policy Forum Boardroom 1405-130 Albert Street Ottawa

List of Participants

David Dodge Chancellor, Queen’s University Former Governor, Bank of Canada

Barrie McKenna National Business Correspondent The Globe and Mail

Peter Hall Vice President & Chief Economist Export Development Canada

James McLean Research Associate Public Policy Forum

Glen Hodgson Senior Vice-President & Chief Economist The Conference Board of Canada

David Mitchell President & CEO Public Policy Forum

Sharon Kozicki Chief – Canadian Economic Analysis Bank of Canada

Catherine Parker Manager, Federal Government Affairs The Certified General Accountants Association of Canada

Paul Ledwell Executive Vice-President Public Policy Forum

André Plourde Dean, Faculty of Public Affairs Carleton University

Guy Legault President & CEO Canadian Payments Association

Carole Presseault Vice-President, Government & Regulatory Affairs Certified General Accountants Association of Canada

David Macdonald Senior Economist Canadian Centre for Policy Alternatives

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Christopher Ragan Associate Professor, Macroeconomics and Economic Policy McGill University

Annette Ryan Chief Economist & Director General Industry Canada

James Ralston Comptroller General of Canada Treasury Board Secretariat of Canada

Rick Stewart Assistant Secretary to the Cabinet Privy Council Office

James Richardson Senior Government Relations Advisor Certified General Accountants Association of Canada

Stanley Winer Canada Research Chair in Public Policy Carleton University

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