Good morning.
I want to thank the committee for the invitation to appear today. I'll try to be brief, probably seven minutes or so, with any luck.
I would start with the question around the number one challenge facing almost every industry in Canada today, and that's the labour shortage. It's something I don't think we've experienced in our lifetimes, and it's time to start getting serious about it.
Ten years from now in Nova Scotia our unemployment rate is going to be zero. Today in Prince Edward Island we've got guest workers working at fish plants. Today in New Brunswick we've got guest workers being brought in from Europe to drive long-haul vehicles.
This is a reality we face and a challenge we have to address today. Immigration is not the solution. Certainly done right, immigration can help address the problem, but it is certainly not going to be a be-all and end-all.
Our current immigration pattern sees immigrants that look a lot like us already in terms of age, skill sets, composition, and place in life. We need younger entrepreneurial immigrants along an older model. We also need to take a serious look at guest workers along the lines of the recent invitation to enter into a guest worker program with Mexico, a ready labour pool, already inside NAFTA at a time when Canada and the United States are facing severe labour shortages.
We need to make those kinds of things easier, not harder. We also need to consider the long-term benefits of efforts to increase the domestic birth rate along the lines of the things that Quebec has done successfully. But more immediately and most urgently for this committee, we need to adjust the myriad of federal and provincial policies designed to mop up surplus labour of the 1970s.
For example, we still have employment insurance with benefits that probably outweigh the need. We have access to rotating benefits so EI can still become a lifestyle. We have regionally differentiated benefits that ensure that people stay in places of low unemployment and are not as productive as they possibly could be. We need to take a look at our public services. They're far too large. They're keeping people who could be used in the private sector out of that employment. We have to take a serious look at our universities and the post-secondary sector. They often take too long to instill skills into our youth, and they take an awful lot of labour to do that kind of training, so they take both of those groups out of our labour pool.
We also have to remember that not everyone needs a university degree. Not just software engineers can make $100,000 a year any more. The other thing we need to take a serious look at is our continued focus on job-based subsidies and forgivable loans. What we need are productive enterprises, not make-work projects. Maybe we need to consider rewards for eliminating jobs or focusing our tax credits based on the highest production per employee, as opposed to simply having employees.
If we dropped the civil service in every province to the national average, we would add about 133,000 people to the national workforce. If we just got the five easternmost provinces to the national participation rate, we'd add another 156,000 people to the national workforce. And even in those kinds of efforts we also have to stop penalizing people who want to work. For example, retirees lose pension income for working. They have high effective marginal tax on any earnings they make after retirement. The same thing applies for people trying to transition from welfare to employment. They pay the highest tax rates in the country. In some instances the marginal effective tax is 100%, so every dollar they earn by going to work, they lose.
Getting beyond labour, we have to recognize that an aging population and a labour shortage is not the death knell for Canada. The answer is improved productivity. And we've been talking about productivity for over a decade, so the question becomes why are we not celebrating our foresight in having recognized that was what we needed to do?
The answer is quite simple. Capital drives productivity, and our policies right now drive capital away.
On average, our combined federal and provincial tax on capital is around 4% to 6% better than the U.S. They take roughly 40%. We take roughly 36% on average, but our effective marginal tax rate on the next dollar added in investment is higher than most other jurisdictions. Other jurisdictions encourage the next dollar of investment. We tax it. As a result, we have among the lowest return of tax receipts as a percentage of GDP on business. We have a 1% to 1.5% gap between Canada and the U.S. in actual investment and we have a similar gap in investment in R and D.
When capital flees and labour is in short supply, we get negative results. Our GDP per capita gap between us and the United States is widening, not narrowing.
With capital and labour in short supply, clearly, smart investment becomes the priority. Research and development, new technologies, new industries, all result from this focus. And we certainly have seen some progress in this area--or have we? According to one measure I saw recently, Canada offers the best tax treatment of R and D in the G-7: tax credits, accelerated tax deductions, and a broader definition of allowable costs. But the problem is that our R and D investment is heavily weighted to the government and academic sectors.
In 2003, government and academic R and D spending was effectively equal to that in the private sector. Now, contrast that to the United States, where the private sector is about three times the academic and government investment. Then consider that balance in the light of the regular admissions that universities are generally bad at commercialization. Certainly they've got better over the last few years, but they've improved primarily by working with the private sector.
We need to rebalance our R and D investment. R and D can happen in the private sector. In terms of swift, practical commercialization and broad application, it's often better if it happens in the private sector. Consider a recent approach suggested to me by a small manufacturer in rural Nova Scotia. He suggested that we not only look at increasing our R and D tax credits, but we match that with a tax credit for production. So, in effect, if you have an R and D tax credit that results in a product you bring to market, you get a second reward for doing that exercise. To put it in his words, “You do R and D into something new, you receive an incentive. You produce something innovative and you receive an incentive.” That's innovation. That's technology. That's manufacturing. The added benefit is you might see some of our existing manufacturers, even small manufacturers, start to invest in R and D capacity, driving even more innovation, more investment, and more production.
Now, even if we had the ideal balance with workforce and capital and the right incentives for R and D, we also still have the challenge of getting our products to market, and quite honestly in this region in many instances you simply can't. East coast ports, for example, have been the poor cousin of trade expansion as Asian trade has driven growth. But we have real opportunities on this coast with post-Panamax and post-Panamax plus and the even larger ships that are coming along to meet that demand on both coasts. Again, it's about markets.
A twinned highway from here to central Canada takes us away from our markets, not toward them. CN has recognized this by increasingly expanding its rail service in the Midwest. We need to follow suit with expanded road and air capacity and improved, consistent regulations that allow traffic to move across provincial boundaries and across provincial, national, and state boundaries in the same manner. To use one example, we need to be able to load a road train--which is a truck with a couple of trailers attached to it--either in Yarmouth or Halifax and move it across roads into Buffalo without having to go 500 or 1,000 miles north to avoid roads that are either poorly serviced or on which those vehicles aren't allowed to operate. Here in Atlantic Canada, for example, the only stretch of road you can operate those vehicles on is between Moncton and Saint John.