Tories Ignore Productivity File

Ottawa's annual fall fiscal update tends to be a pretty dry affair. But this year's will be worth watching for more than the usual forecasts on economic growth (likely to disappoint) and the federal surplus (likely to astound, again).

Tories Ignore Productivity File

Ottawa's annual fall fiscal update tends to be a pretty dry affair. But this year's will be worth watching for more than the usual forecasts on economic growth (likely to disappoint) and the federal surplus (likely to astound, again). Just as important - or more, when it comes to sorting out what the next election is going to be fought over - will be the signal Finance Minister Jim Flaherty sends about a new CONSERVATIVE plan for boosting Canada's long-term prosperity. Informed observers detect a high-level struggle among Tories over the issue - with Flaherty pushing his competitiveness agenda and strategists close to Prime Minister Stephen HARPER shoving back. "I've met with people in the Prime Minister's Office," says Jayson Myers, chief economist of the business group Canadian Manufacturers and Exporters, "and competitiveness isn't on the tips of their tongues."

Myers says the message coming from Harper's aides is that making Canada more competitive is a theme that falls flat with voters - so don't expect much on it from a minority government braced to go to the polls sometime next year. Yet Flaherty seems eager to get on with tackling the core problems, arguing in his budget last May that Canada's current economic strength masks "difficult, deeper adjustments" ahead. Noting that Canadian productivity lags behind most other industrialized economies, including the U.S., he vowed to devise a plan to catch up. But how much of that policy package he is ready to unveil - or will be allowed to by Harper - remains to be seen. Asked last week about the status of the competitiveness agenda, Flaherty said: "We're doing a lot of work, and I look forward to having the opportunity to put the plan forward, I hope at the same time as the fiscal update - but we'll have to see."

His uncertainty is striking, given that the update is due this month. Don Drummond, TD Bank Financial Group's influential chief economist and a former top Finance Department official, says the Tories' willingness to champion serious economic reform is in doubt. He points to Flaherty's brief sketch of the productivity problem in his first budget as a promising, but strangely isolated, indication of interest. "It seemed at odds with the Conservative election platform," Drummond noted, "in which they didn't even have an economic platform." Like many economists, he dismissed the economic pledges the Tories ran on last time - notably cutting the GST - as vote-chasing gimmicks. But it's no mystery why a more serious effort is seen as too depressing by campaign tacticians: Canada's productivity standing among OECD countries has fallen from third in the 1960s to 17th today. And, as Drummond says, talk of turning that around "is interpreted as making people work harder for less pay."

Still, there are signs that at least some Tories are trying to inject serious economic ideas into the government's policy repertoire. Flaherty emphasizes the traditional Conservative bent for less regulation and lower taxes, but also flags education and infrastructure for spending. These are hardly novel ideas. New twists might emerge from Industry Minister Maxime Bernier's review of science and technology policy. Bernier is also tasked with replacing the suspended Technology Partnerships Canada program - a multi-billion-dollar support scheme for industries, like aerospace, that tend to be heavily subsidized everywhere - with something more acceptable to critics of corporate handouts. Meanwhile, business groups are pushing for broad new tax breaks. Nancy Hughes Anthony, president of the Canadian Chamber of Commerce, suggests making research and development credits refundable, so firms that innovate could cash in on tax incentives even before turning a profit.

Much depends on grabbing Harper's interest. When the Prime Minister talks about the economy, though, he tends to boast about Canada's resource treasure trove, not lecture on its productivity shortcomings. "For international investors, the most important sector story I have to tell is energy," he said recently. "Canada is an emerging energy superpower." But his preference for touting the oil and gas endowment of his Alberta base might soon be overshadowed by news of an export slump in the country's manufacturing heartland. A weakening U.S. economy is inflicting pain on central Canadian exporters, prompting the Royal Bank of Canada to recently revise its forecast for Ontario's growth this year down to a near-recessionary 1.5 per cent. The ominous short-term outlook for Ontario and Quebec, where federal elections tend to be won or lost, could heighten economic anxiety among voters there. Maybe that will help Flaherty's chances of slipping a plan for shoring up Canada's future ability to compete into the Tory election handbook.

Maclean's November 13, 2006