Thank you, Chairman, and thank you to the committee for having me participate in these pre-budget consultations. I hope that you find my comments helpful as we craft next year's federal budget.
I'm the director of fiscal studies at the Fraser Institute. We're an independent, non-partisan, economic policy think tank. The mission of the institute is to help average Canadians understand the impact of government policies on their lives and the lives of future generations.
I understand that looking at the budget is really an endeavour of looking into the future, but I want to spend a little bit of time with my opening remarks providing the context that we find ourselves in today, so looking backwards.
Despite recent headlines about positive economic growth, the reality, I believe, is that we don't have as rosy a picture as these headlines would suggest. It's important to keep in mind that we're coming off two very weak years of economic growth in 2015 and 2016, so there is a natural rebounding that has occurred so far this year. When we look at the last quarter of growth, which is the second quarter of 2017, we see that 40% of that growth came directly from the energy sector, so as the energy sector continues to rebound, that's going to drive some of the growth.
If you look at growth projections going forward, whether from the Bank of Canada or from private sector forecasters, you'll see that the expectation for Canada is for economic growth to moderate and slow considerably in the coming years despite the small blip in 2017.
One of the critical concerns I have is regarding our economic fundamentals, particularly the slowdown in business investment, which receives little attention but is a key driver of our long-term growth and prosperity.
When businesses invest in the latest technologies and production techniques, and expand their operations, it spurs economic growth and raises living standards for workers because it makes them more productive, which in turn allows them to command higher incomes. However, business investment in Canada has been falling. In fact, the level of business investment in the latest quarter of available data is down 20%, after accounting for inflation, over the peak in 2014. By international standards, Canada's rate of business investment as a share of the economy and per worker is among the lowest compared to other countries where we have comparable data; in fact, it's second lowest among 17 countries.
Looking at the longer-term trends, business investment—particularly in machinery and equipment, which is the type of investment that provides workers the tools that they need to become more productive—has been on a long-term downward trend going back to 2000.
There are many possible explanations for why we've seen the decline in recent years. Certainly, part of that has to do with the drop in commodity prices. However, some factors affecting growth and investment are due to policy decisions, and on this front, the federal government hasn't acted. Policies are sent signals that have discouraged investment and economic growth in recent years.
For example, we've seen an increase in marginal income tax rates, particularly those that affect entrepreneurs and highly skilled workers. We've seen, by extension, an increase in the capital gains tax rate, which is levied at half of one's marginal tax rate. There's been uncertainty about whether the capital gains inclusion rate will increase. The government did muse about this last year but has not really closed the book on whether that will happen. This creates an enormous amount of uncertainty among investors and entrepreneurs.
In addition, we have a looming payroll tax hike, both from the employment insurance system as well as from the planned expansion of the Canada Pension Plan, and a new carbon pricing mandate, which will certainly affect business investment in our country, particularly as other countries like Australia move away from carbon pricing. Of course, there's an unstable fiscal framework, federally and in a lot of provinces. I don't need to remind the committee about the government's pledge to run no more than $10 billion of deficits for three years before returning to balance. So far, they've doubled and tripled that amount with no plan to revert back to a balanced budget. This matters for investment for a number of reasons.
In particular, it creates uncertainty about future tax hikes introduced to repay and service the increased debt that's being accumulated. There have been missteps by the federal government in response to these challenges, which I argue are contributing to our depressed levels of business investment. They are being exacerbated by several provincial policies. We don't need to get into those, but they include higher marginal tax rates as well as increased corporate income tax rates, which have led to an increase in the effective tax rate on new investment in Canada, unstable fiscal frameworks, a dramatic increase in the minimum wage in some provinces, new labour regulations, and skyrocketing energy prices in Ontario.
As a result of all this, Canada has become less competitive in recent years as a place to do business and as a place to work. For instance, according to the World Bank's rankings for ease of doing business, Canada dropped to 22nd from its 14th ranking of last year. Also, a recent survey of large companies by the Business Council of Canada found that 64% of CEOs thought Canada's investment climate had been worsening over the last five years, with particular notes about the tax and regulatory burden increasing. Similar results have been found by small businesses in surveys done by the Canadian Federation of Independent Business, so overall there has been a decline in our investment climate over the years.
In addition, I would like to point out that while there are some near-term challenges with investment and economic growth there are also long-term challenges that flow from an aging population. This is an issue that is often discussed but doesn't receive enough attention, in my opinion. There are concerns that older people will be less entrepreneurial and will participate in the labour force less than their younger counterparts. This demographic shift is causing projections for very long-term growth to fall below 2% over the next 35 years. On this front, the government has also discouraged the labour force participation of our seniors through a policy that reduces the age of eligibility for old age security.
There are lots of policy ideas that could be used to counteract these forces. I'm happy to elaborate on some of them in questions and answers. I would like to point to two broad issues. One of these, which is important for our prosperity to thrive, is the need for increased certainty in our business environment and investment climate. We can achieve greater certainty through a more sound fiscal framework going forward. The government is now undertaking a review of the personal income tax system, which is a positive move in light of the growing complexity and our declining competitiveness in recent years. While this review is under way, the government should move to reform the system more comprehensively rather than adopting a piecemeal approach, which is what it has done to date.
Those are my opening remarks. Thank you for the opportunity. I'd be happy to answer any questions in the Q and A.