Good morning, everyone.
I would like to thank you for inviting me here today. My colleague Gabriel Giguère and I are very pleased to be here to participate in the pre-budget consultations.
Two observations, directly related to fiscal policy, have caught our attention: first, the unsustainable trajectory of our public finances, and second, the decline in Canadian entrepreneurship, particularly over the past decade.
The chronic deficits of recent years have undermined our public finances. Interest expenses on the debt have risen, from approximately $25 billion a decade ago to just under $60 billion in this year’s budget. This increase stems from two factors: rising interest rates and—naturally—the growth of the debt on which that interest is charged.
Unfortunately, all signs indicate that the deficits fuelling this situation will persist. Earlier this year, researchers at the Montreal Economic Institute, or MEI, modelled the trajectory the Canadian budget would take over the next decade. The findings are alarming: if nothing changes, the federal deficit will grow to reach $117 billion in 2035—nearly double the deficit projected for this year. Interest payments on the debt will exceed $90 billion, and the debt will reach $2.4 trillion—that is, $2,400 billion—which suggests $900 billion in new federal debt over the next decade. This is a clear sign that current deficits are neither temporary nor under control.
In order to bring spending growth below revenue growth and restore a balanced budget within a reasonable time frame, we recommend that the government adopt a spending reduction plan that is much more ambitious than the one currently in place. In practical terms, this could mean an extended hiring freeze, systematic use of natural attrition, a review of the mandates of departments, agencies and programs, as well as increased reliance on efficiency gains made possible by new technologies. Here, the aim is to contrast this with the period of unbridled expansion that the Canadian public service has experienced over the past decade.
While this expansion of the state has had an impact on its spending, it is also important to recognize that it has affected our entrepreneurial sector. Such expansion typically entails increased regulation and higher taxes, two factors with a documented negative impact on entrepreneurship. Another negative effect of this state expansion, one that is less frequently discussed, concerns human resources. This is an aspect that is not discussed enough, but one that deserves consideration.
When the government expands rapidly, it competes directly with the private sector for the recruitment of skilled workers: analysts, managers, specialized professionals, technology experts and so on. All these talents represent not only a pool of future employees, but also future entrepreneurs. When an economy directs a growing share of its workforce toward public administration rather than private investment and business creation, it has direct long-term consequences for its ability to innovate.
In 2015, Canada had 803,000 self-employed individuals with paid employees—that is, entrepreneurs. Last year, that number had fallen to 716,000. This represented a decrease of more than 10% in the absolute number of entrepreneurs, while the population grew by 15% over the same period.
While the massive hiring of civil servants over the past decade has had an impact, it is not the sole cause of this decline in entrepreneurship. Increased regulation has made starting a business more complex. Announcements of capital gains tax increases and tax changes affecting small businesses have contributed to creating a hostile environment for entrepreneurship and to delaying certain investment projects. Additionally, the introduction of a new higher personal income tax rate in 2016 has made it more difficult to raise the capital needed to start a business. This echoes the comments made by my colleague Alexandre Laurin on this subject.
This decline in entrepreneurship is affecting our economic growth, which has been sluggish in recent years, as well as government finances. Fewer entrepreneurs means less wealth created, and therefore fewer good jobs, and, ultimately, less tax revenue.
If we want Canada to return to a stronger growth trajectory, better spending management will not be enough. In fact, we must also restore the conditions that make entrepreneurship attractive by addressing the decisions of the past decade that have contributed to the decline we are seeing.
Thank you very much for your time and attention.