Economic recovery represents opportunity for ‘great Canadian restart’: RBC report

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The COVID-19 pandemic caused one of the worst recessions in history, but the recovery represents an opportunity for a “great Canadian restart,” Royal Bank of Canada research department argues in a new report .

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“It’s a natural moment now for policy-makers coming out of the pandemic … to look beyond recovery to re-evaluate the policy framework and what Canada is aiming to achieve in the context of this new shifting global economy,” Cynthia Leach, the report’s author, said in an interview.

Canada’s economy averaged annual growth of 2.1 per cent between 2010 and 2019, about the same as the previous decade, and down from an average of 2.4 per cent between 2000 and 2009, according to Statistics Canada data. The slowdown reflects an ageing population, but also lacklustre business investment and productivity growth, which have hobbled the country’s ability to generate wealth from a shrinking pool of workers.

The pandemic might have made things worse. In October, the Bank of Canada cut its estimate of “potential” growth – the rate at which it thinks the economy can expand without generating excessive inflation – to 1.6 per cent because the recession took such a heavy toll on investment. That’s why policy-makers such as Finance Minister Chrystia Freeland, who is scheduled to release an economic update on Dec. 14, should prioritize spending that will bolster the country’s economic capacity over the longer term, said Leach.

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Before their re-election in September, the Liberals unveiled a hefty federal budget that allocated more than $100 billion in spending to guide the economic recovery. However, critics, including David Dodge, the former Bank of Canada governor, said too little of the spending was directed at initiatives that would make the economy more competitive. Instead, Freeland focused on redistribution, expanding the deficit to bolster COVID emergency benefits and fund various pet projects that will have little impact on the trajectory of the economy.

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Leach’s report offers a path that policy-makers could take if they want to boost the country’s potential growth rate. Leach selected six “pillars” for a growth-oriented policy agenda, including an approach to innovation that favours firms that have a realistic opportunity to scale.

Despite “above average” government support in recent years, Canadian businesses consistently invest less in research and development than their international peers, suggesting current approaches to industrial policy need to be rethought, the report said. The transition to a green economy is an obvious place to focus, and Canada could become a leader if governments concentrated their spending on programs that reduce carbon emissions, as well as clarify their climate policies so regulatory uncertainty doesn’t act as a barrier to investment, the report said.

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Another pillar is the digital economy. Data assets are becoming more important as services move online. Canada should forge trade agreements that address barriers to international trade in digital services, and it should guard against homegrown intellectual property being vacuumed up by international technology behemoths, the report said.

Taxes play an important role in competitiveness, yet the federal government hasn’t reviewed tax policy since 1967. Leach called on Parliament to conduct a new review, with a focus on reducing breaks for special interests so personal rates could be lowered to make Canada more attractive to international talent.

“It’s not going to be easy,” Leach said. “We’re going to have to get a bunch of things right.”

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