Thank you for the opportunity to participate in your consultations.
After contracting in the second quarter, Canadian economic growth is reviving; however, the pace of economic growth will remain modest, and it will take considerable time for the slack in the economy to be absorbed. This reflects the fact that Canada has a small open economy. It is importing the weakness from the global economy through the channel of soft global demand and sustained lower commodity prices. While the Canadian economy weathers the cyclical forces, there are structural factors weighing down the trend rate of economic growth. The pace of growth in the long run is determined by either having more workers or using workers more productively. Canada's population is aging. The labour force is slowing. At the same time, labour productivity is weak.
If Canada stays on its current track, the potential pace of annual growth in the economy will drop to well below 2% in the coming decade. This has far-reaching implications. It means Canadians will be frustrated by the fact that their standard of living is rising extremely slowly. It means businesses will be frustrated by the limited domestic growth opportunities. For governments, it means that national income growth will only be about 3.5% per annum. This will constrain tax revenue growth and limit fiscal capacity for economic and social imperatives.
At the same time, the Canadian economy is being shaped by powerful forces of globalization and technical change that are fundamentally altering demand for workers in the labour market. Specifically, job creation for high-skilled workers will be strong, while employment opportunities for middle- and low-skilled workers are likely to be poor.
What can policy-makers do to help foster stronger economic growth? Well, monetary policy is extremely and appropriately accommodative, but low interest rates will not be sufficient to propel robust economic growth. Further monetary stimulus through exceptional policies like quantitative easing or negative interest rates carry significant risk, and in my opinion should be avoided.
If monetary policy is stretched to the limit, this naturally leads the question, can fiscal policy play a role in providing stimulus to the economy?
Targeted timely and temporary fiscal measures such as investment in key infrastructure have the potential to lift productivity and economic activity. At this point in time there is little risk of crowding out private investment, which remains weak. The cost of debt financing is cheap. It should also be highlighted that investment in public infrastructure can not only boost economic activity directly, but it can also act as a catalyst for private sector investment. The key is to invest in the right projects that will have the greatest economic payoff over the long haul.
I also feel fiscal policy can be used to address some of the social and economic implications of the slow growth and changing job environment. For example, displaced and temporary workers need better support. Canada needs to build the skilled workforce of the future. This means greater investment in education, including early childhood education and adult skills training.
Canada has large pools of underutilized labour, including aboriginals, immigrants, and youths. While there is slack in the labour market, it is remarkable that close to a quarter of employers report having shortages of high-skilled labour. These shortages need to be addressed with immigration, education, and skills policy. Older workers should also be incented to stay attached to the labour market for longer. Weak private sector investment has become a serial disappointment that is limiting capital per worker and may weaken productivity growth. The latest Conference Board business confidence survey showed that one-third of businesses felt that government policy was hampering investment. Reducing the regulatory burden and improving regulatory approval times for new investments could be advantageous.
One measure that might improve business confidence is clear guidance on how and when the federal government will return its finances to balance. Without such information, Canadian businesses will worry about future tax increases. I would stress that Canada needs to maintain its currently competitive corporate tax rates. Canada is a trading nation, and it needs to lean against the rising protectionist sentiment that we see abroad. Policies to facilitate and expand trade are obviously critical.
The bottom line is that there is scope for fiscal policy to improve Canada's economic and productivity performance. I believe many of these themes were present in the last budget and align well with the comments I made. Key investments in infrastructure and people can make a difference, but I also would stress that you have to keep your expectations realistic.
Much of the economic weakness is being imported from abroad, and domestic policy cannot change that. Stimulative monetary and fiscal policy can help support growth by adding a few tenths of a percentage point to the national growth rate, but I would stress that in the current environment even a few tenths of a point matter. Running temporary deficits at a time when the economy is struggling and adjusting to lower commodity prices is acceptable, but sound policy also includes returning to a fiscal balance over a reasonable time frame.
With respect to budget 2017, I would like to suggest that the debt-to-GDP ratio is a poor fiscal anchor. While the government may have some control on the numerator, it has very little control on the denominator.
I've covered a lot of ground in a short period of time. I look forward to your questions.