Thank you very much.
Thank you for the invitation from the House of Commons finance committee to appear again. I hope you won't be disappointed.
One of the important trends mentioned in the fiscal update that deserve more attention is the effect of the pandemic on structural unemployment. On page 52, we see that temporary unemployment has fallen dramatically but permanent unemployment is gaining ground. With labour force exits, we now have a roughly 3.5% decline in employment since February 2020. Over one million workers are unemployed or are working at less than 50% of normal hours. In fact, 90% of the latter category are working zero hours but are not counted as unemployed in part due to the wage subsidy that keeps workers attached to their companies.
Structural unemployment reflects the pandemic's supply shock as people were told to stay home. Supply shock has led to a steep loss in jobs and hours worked in certain sectors, especially in hospitality, travel, retail and commercial real estate. After the pandemic is no longer with us, probably in 2022, many workers will not be able to go back to their original employers in certain sectors, in part reflecting long-term changes in consumer and business behaviour. This type of unemployment is different from cyclical unemployment when jobs disappear in a recession but come back in a boom stimulated by demand. Even if the government tries to prop up demand through stimulus programs, it won't help those who no longer have skills for new employment. Structural unemployment is one issue.
The other is labour productivity, which has been virtually flat since 2015, prior to the pandemic. It is well accepted that countries with high levels of labour productivity tend to also have higher personal incomes per capita. Labour productivity is particularly important since the output generated per hour of work provides income available to pay wages, taxes and other income to Canadians. Our social programs are not affordable if our productivity performance lags.
One of the leading factors affecting productivity is investment. It enables businesses to adopt the latest vintages of capital, typically reflecting innovative ideas being adopted in business practices. Non-residential, public and private capital formation in Canada has declined by 12% from 2014 to 2019. While the biggest decline has been in mining and oil and gas with 53%, investment per worker in other industries fell by 10%. Even intellectual property product investments have declined by 10%, with per capita pharmaceutical research and development dropping by half since 2007.
If we're going to build back better, we will need to address both structural unemployment arising from the pandemic and productivity investment problems that were already in place before the pandemic. In the immediate term, while COVID still haunts us, we have focused on helping businesses keep workers through wage subsidy programs, similarly adopted by seven other OECD countries. While there have been good reasons to keep workers attached to their companies, we should recognize that the wage subsidy is biased against capital-intensive industries, an issue partly addressed by the rental subsidy program.
Other countries have taken on other short-term policies that also help business investment besides the deferral of corporate tax payments; 28 OECD countries, including Canada, have provided deferrals. These policies include investment or research and development tax credits or enhanced deductions, 14 countries; accelerated depreciation, five countries—although we introduced that in 2018; and capital subsidies, nine countries.
Besides deferrals, the most frequently used corporate tax policy, among 18 countries, was to enhance the use of corporate tax losses by extending periods for carrying back or carrying forward losses, lowering limits on loss utilization or, in a few cases, providing some refundability. These policies were sensible, in that carrying back losses gave more cash to past profitable companies; loss companies cannot use carrybacks. On a longer-term basis, enhanced tax loss utilization provides a more neutral treatment for start-up companies compared to established companies and has reduced the tax penalty on risk.
Canada was one of the few countries not to use the corporate tax or other policies to support companies with capital investment directly during the pandemic. This should not continue in the recovery period, since our investment performance must be improved to spur both innovation and growth.
The update, surprisingly, had little to say about private investment, even though it is so important. As we have seen with this pandemic, it is the private sector that delivers technology, vaccines and even groceries to people. Government programs should enable, and not obstruct, private investment.
Let me provide some policy examples.
The federal government should have a greater focus on regulatory reform to spur investment. For example, policies such as pharmaceutical drug price controls are hurting Canada’s capacity to develop its own drugs and vaccines.
Another one is the following. The time taken to obtain project permits for infrastructure is one of the slowest amongst OECD countries. Even the recently amended regime for resource regulatory approvals has failed to shorten the time taken for a pipeline approval, such as in the case of the $2.3-billion Nova Gas Transmission Ltd. project, which was unduly delayed by a year.
The federal government should also be taking a stronger leadership role in achieving an internal economic union in Canada. Current interprovincial obstacles to trade and even regionally based federal tax, regulatory and employment policies undermine the free flow of capital and labour in Canada. The cost of internal trade barriers alone is estimated to be 4% of GDP.