Thank you very much, and thank you to the committee for the opportunity to appear and discuss how the government can help boost productivity.
This is a critical priority. Since the end of the Second World War, roughly 80% of the rise in the standard of living of Canadians has come from greater productivity. It fuels the economic growth that creates jobs and generates the income that lifts living standards, and it's this income that provides the tax base to pay for social priorities. However, Canada has a pressing productivity problem. Over several decades, labour productivity in Canada has slowed significantly, and in conjunction with an aging population, this is dragging down the country's potential pace of economic growth and creates significant restrictions on income growth and tax revenues. We need to do better.
What can the government do to foster better productivity growth? The most basic recommendation is running sound and stable macroeconomic policy. This includes public investments in key economic and social areas, such as infrastructure, health, and skills development. However, the spending and investment must be balanced with the need to keep taxes competitive and stable. Canada also requires prudent regulatory oversight, but the regulatory burden should be kept appropriate and stable.
Sound fiscal policy is about running balanced budgets over the economic cycle. On this point I would stress that the finances of the Government of Canada are in good shape. The country can afford deficits for a few years. Ultimately, however, sound fiscal policy means returning to balance. I would also emphasize that putting weight on the debt-to-GDP ratio as a fiscal anchor is inappropriate, because the government does not have control on the denominator, GDP.
Beyond sound macroeconomic policy, there are targeted options that might enhance Canada's productivity, which the Conference Board of Canada has identified in its research. To boost firm-level productivity, the focus should be on supporting fast-growing small and medium-sized businesses. Canada is a very easy place to launch a business, but many businesses have difficulty scaling up. In recent years, venture capital has been increased, but a strong case can be made that we need to put a greater priority on later-stage funding. More research is needed to understand truly what the barriers are to our fast-growing SMEs.
Capital investment can be a catalyst to greater productivity, but Canadian firms have been reluctant to invest in recent years. Productivity is picking up this year, but the pace of investment is still weaker than it ought to be.
An area for improvement is commercialization. Canada has very generous R and D tax credits, but is weak on commercializing that research. One suggestion for improvement is more funding for programs that bring researchers together with industry, like the grants from NSERC. We might consider more initial direct funding or loans for approved R and D projects, then complement that later with indirect support through tax credits. This is an approach that has been used in a number of other high-productivity countries, but the programs have to be structured properly.
Government procurement, if used strategically, can be leveraged to sustain growth in fast-growing SMEs. It can help encourage investment and growth. It can also help firms succeed in international markets. Trade agreements and policies that create more international trade boost productivity because firms face greater competition, and firms that face more competition tend to be more productive.
One factor constraining business investment is shortages of high-skilled labour, while at the same time there are still pools of underutilized labour in Canada. This raises the question as to how to improve labour market outcomes. The labour market is being transformed by an aging population, globalization, and technical change, so I think the first step is upscaling the labour force. This starts at birth and runs the entire life cycle of individuals. Canada should invest more in early childhood education. An imperative is to get the basics right, and that means improving literacy, numeracy, math, and critical skills.
There are groups of the population within Canada who are facing barriers to success. We desperately need better education outcomes for aboriginal and first nations people. This requires more funding to support indigenous learners. There are barriers that women face in the labour market. Women represent over half of post-secondary graduates, but they are under-represented in the STEM fields. Our research shows that experiential learning can be very impactful with skills development and entry into the labour market.
We need to expand funding for co-ops and apprenticeships, but again a gender lens is useful. Women are less likely to pursue apprenticeships than men, and this needs to be addressed to fully unlock opportunities.
In order to make progress in reducing the gender wage gap and the immigrant wage gap, funding should be made available to measure progress towards diversity targets, and diversity initiatives should have clear benchmarks. When feasible, progress should be reported publicly. Also, learners with disabilities need greater support, such as adequate accommodation, to achieve education success and workplace learning opportunities.
One major factor holding back firm productivity is weak innovation leadership skills and scale-up management skills. We may indeed have enough venture capital money, but venture capital is often about the mentoring of businesses and the development of the leadership and management skills to grow the businesses. As a result, we need to expand business education, and we also need that to be part of education programs across the board in some form.
Beyond the upscaling, the impact of demographics means that we need to raise immigration levels over time, but we need to do a better job of integrating newcomers into the economy. I would be happy to talk about policy options in that area in the Qs and As.
The bottom line is that the federal government influences productivity growth through a vast number of channels. Getting the basics right means running sound and stable macroeconomic policy. The more sophisticated dimension to raising productivity is through targeted programs and initiatives.
The government has been clear that it wants to fuel inclusive growth. The constructive way to tackle this issue is to remove the barriers to success. Allowing Canadians and newcomers to realize their potential will ultimately raise living standards, which is the true goal.