Productivity isn't sexy, but politicians ignore it
at Canadians' peril
The Vancouver Sun
Thu
19 Jan 2006
Page: A16
Section: Editorial
Byline:
Source:
Vancouver Sun

Last of four parts

Canada's lagging productivity performance is arguably the most critical issue
facing the next government. Yet no party leader has properly addressed it. Their
reluctance is understandable. Complex economic concepts do not lend themselves
to catchy slogans like "Stand up for Canada," "Choose your Canada" or "Getting
results for people."

Polls suggest many voters actually bristle at the "P" word and have
deep-seated suspicion of other misunderstood terms like "human capital." While a
lesson in economics won't draw nearly as much attention as running an
unflattering picture of a rival, one might hold out hope that the top priority
of a candidate seeking the job of Canada's chief executive officer would be to
ensure a high and rising standard of living for all Canadians.

Economic growth, after all, is not an end in itself; citizens should be
sharing its accrued benefits. But that's not happening. All the economic
indicators spell success, but most Canadians feel they're being left behind. And
they're right. Given its resource wealth, industrious workforce, advanced
technologies and quality post-secondary institutions as well as a high degree of
social cohesion, peace and safety, there's no reason Canada shouldn't be a
global economic leader with the highest standard of living in the world.
Instead, our quality of life is slipping and Canada's competitive position is
declining as the productivity gap with other industrialized countries, notably
the United States, widens.

Party platforms are meant to win votes, not solve the country's problems, so
perhaps it's too much to expect that productivity would be a cornerstone of the
campaign.

One party that did confront the issue head on, perhaps surprisingly, is the
New Democratic Party. It drew attention to Canada's dismal record on
productivity growth, noting it ranked 14th out of 25 Organization for Economic
Co-operation and Development industrialized countries between 1994 and 2003, and
pledged support for some of the main drivers of productivity including
education, skills training, applied technology and modern infrastructure. While
it dismissed general corporate tax cuts as unnecessary, noting that they have
had little impact on productivity despite a reduction from 28 per cent to 21 per
cent since 2000, the NDP would support what it called "smart incentives," such
as accelerated depreciation rates for capital investment, incentives to develop
environmental technologies and to promote workforce training and harmonization
of federal and provincial tax and regulatory policies.

What's missing from the NDP equation is a financial incentive for the private
sector to create the highly paid jobs all those well-educated and trained
workers would fill. Its philosophical aversion to the profit motive makes it
blind to the need for successful companies to invest in the technologies that
will help close the productivity gap.

The Liberal party has a productivity agenda, detailed in its 154-page Plan
for Growth and Prosperity, but gutted its major corporate tax provisions at the
behest of the NDP. It still recognizes that productivity is the key to Canada's
demographic challenge of fewer workers supporting more retirees, but the
corporate tax advantage relative to the U.S. that the plan promised has largely
evaporated. Much of the plan is a retread of the Liberal's 2002 Innovation
Strategy. It went nowhere and this latest revision is heading in the same
direction.

The Conservatives don't deal with productivity directly, raising the issue
only to attack the Liberal record. Their major tax measure -- a cut in the Goods
and Services Tax from seven per cent to five per cent -- will be popular but
does little to improve productivity growth. The Conservative platform does
propose making capital gains that are reinvested within six months tax exempt
and provides support for post-secondary students as well as funds for
apprenticeship programs. But there appears to be little else that would affect
productivity.

A number of studies have been released recently that suggest one measure
federal and provincial governments could introduce to dramatically improve
Canada's productivity performance. They could eliminate the tax on capital, a
charge on the equity and debt of a company, regardless of its profitability,
that acts as a brake on investment in the technologies that drive productivity
growth.

The C.D.
Howe Institute
found in a 2005 study that Canada had one of the highest marginal effective tax
rates on capital in the world, ranking second after China among 36 countries. As
a result, Canada invests less in machinery and equipment than other
industrialized countries and there is broad recognition that this is a principal
reason for the country's poor productivity record.

To their credit, the Liberals began to phase out the corporate capital tax in
2003, but it needlessly remains as a drag on productivity through 2008.
Moreover, it is uncertain whether this corporate tax cut would proceed under a
Liberal-NDP coalition. Most provinces still collect a capital tax, although B.C.
eliminated it for all but financial services companies.

The federal Finance Department correctly called these taxes on investment the
most detrimental to economic growth. A pledge to eliminate them would
demonstrate a commitment to Canada's competitiveness.

The leaders of all parties should make productivity a priority. It is the
linchpin in improving the lives of all Canadians.

Friday: The Sun's endorsement.

Edition: Final
Story Type: Editorial
Length:
861 words