Hooray - we're No. 17!
The Gazette (Montreal)
Thu 06 Oct 2005
Page: B1 / BREAK

Section: Business
Byline: JAY BRYAN
Column: Jay Bryan
Source:
The Gazette

On the surface, Canada's prosperity has been cruising
from strength to strength in recent years. Unemployment is near an all-time low
and economic growth is reasonably strong. Indeed, we're in some ways the envy of
many other nations, running balanced government budgets and enjoying trade
surpluses year after year.

So what's wrong with this picture?

Just this: it has been built on a lagging standard of living that shows no
signs of turning around. We are the national equivalent of a company with a
disastrously short-term mindset that manages to stay profitable only by stinting
on investment and squeezing its workers with substandard wage gains.

A recent flip-flop on corporate tax cuts by the Martin government suggests
that this unhappy trend will continue, because our present tax system, including
high corporate taxes, discourages the saving and investment that form the
bedrock on which productivity growth is built.

The shocking fact is that Canada has already fallen a long, long way. Once
the third most productive economy among the world's rich nations, we have sunk
all the way to 17th, notes a scathing new analysis by economists at the
Toronto-Dominion Bank.

A country's standard of living is based on its productivity - the amount of
value that a worker can produce in an hour. If a company invests more,
productivity goes up. Then its workers can be paid more.

But Canada has "failed dismally" in the productivity race, says the new
analysis, whose main author is the bank's chief economist, Don Drummond, once a
federal official and senior adviser to then-finance minister Paul Martin.

The implication is that Canada's private-sector productivity - surpassed not
only by the U.S, but in recent years by many other countries, including not only
Britain, France and Germany, but also small ones like Finland, Australia and
Ireland - will just keep lagging. Our incomes will follow, as they must.

And just to set aside a widely held misconception, productivity is not a
synonym for working long hours. It is measured in terms of output per hour, not
per day. In some high-productivity countries, like the U.S, people work long
days. Others, like France, have short days.

So why the big differences among nations? Key reasons are the quality and
quantity of production equipment and the innovativeness of companies.

Countries whose workers toil with typewriters or handsaws have lower
productivity, and thus lower wages, than those where people work with computers
and power equipment.

Many Canadians get to work with good equipment, but not as many as in the
U.S, where spending on machinery and equipment is nearly double that of Canada
once you adjust for the number of hours worked in each country.

How to fix this? An obvious area is tax policy, where the C.D. Howe Institute has
shown that among 10 of the world's most important economies, Canada has the
second-highest rate of taxation on capital investment.

Corporate profits - the ultimate source of such investment - are taxed at
different rates in different countries. Canada's rate is relatively high. And
most provinces, including Quebec, have the even more counterproductive policy of
taxing corporations on the total value of their invested capital.

Some countries, like Ireland, minimize the negative impact on investment by
having low corporate tax rates. Others, like Sweden, do so by having higher
rates but substantial tax breaks for corporate profits that are plowed back into
investment. Canada does neither.

The Martin government outlined its own modest effort to deal with this
problem last spring, saying that it would trim corporate income taxes to 19 per
cent from 21 per cent.

But this plan was junked two weeks ago, maybe reflecting the difficulty of
doing anything that might stir controversy if you're a minority government.
Maybe it will come back if there's a majority government after the next
election, maybe not. Meanwhile, Canada's standard of living keeps stagnating.

[email-masked]

Edition: Final
Story Type: Business; Column

Length: 648 words