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Jock FinlaysonMemo to Finance Minister Bill Morneau:

Congratulations on your election to the House of Commons as the MP for Toronto Centre and your appointment as minister of Finance. Business leaders across Canada wish you well as you come to grips with the economic challenges that lie ahead.

Canada appears to have entered a period of sub-par growth. Our economy lost ground over the first half of 2015, largely due to sharply lower oil prices, plus market weakness for many other commodities that form a large part of our export basket. More recent data signal an increase in activity over the summer and into the fall. However, for the year as a whole, inflation-adjusted gross domestic product (real GDP) is only likely to increase by perhaps 1 percent, down from an average of 2.2 percent over 2013-14.

The economy should gain a bit of momentum through 2016, in response to the ongoing expansion in the United States, the low Canadian dollar, and continued accommodative monetary policy. Real GDP is expected to climb by 1.5 to 2 percent next year.

But looking further ahead, Canada faces stiff economic headwinds from lower-for-longer commodity prices, record high levels of household indebtedness, and weak overall business investment.

A slow growth macroeconomic environment lends support to your government’s plan to expand infrastructure spending over the next few years.

But while spending more on infrastructure is a sound idea, the most convincing reason for doing so is not to boost short-term aggregate demand, but instead to make Canada’s economy more productive and competitive. This includes ensuring that critical infrastructure is in place to enable our resource, manufacturing and tourism industries to connect with and efficiently sell into global markets.

A second challenge is to tamp down the expectations created by the election platform adopted by your party. It is true that a number of the promises were costed, including the proposed middle income tax cut, a lower tax rate for small business, a revamping of federal support to families with dependent children, a hike in the Guaranteed Income Supplement for low-income seniors, and new initiatives to stimulate youth employment, business innovation, and the clean technology sector. And some new revenue sources were also identified, notably a higher tax bracket for individuals earning more than $200,000, a shift in the tax treatment of employee stock options, and the rolling back of annual contribution room for Tax-Free Savings Accounts. These latter measures, however, are likely to yield less government revenue than the platform projects, as taxpayers alter their behaviour in response to higher marginal tax rates. This should be reflected in the budget projections you will be tabling early next year.

Of more concern is the Liberal platform’s silence on the fiscal implications of several other high-level policy commitments. These include a new health accord with the provinces, improving home care and mental health services, reversing Canada Post’s plan to phase out door-do-door mail delivery, developing a new National Early Learning and Child Care Framework, and addressing issues around housing affordability.

These largely uncosted commitments could easily amount to many billions of dollars of additional federal outlays per year. With government revenues under pressure from low commodity prices and a generally sluggish economy, your cabinet colleagues will soon discover that there are limited resources to pay for new programs and expanded services, even with the decision to go into deficit. Avoiding a large structural budget deficit will arguably be your most important task as minister of Finance.

A final challenge is to improve Canada’s lacklustre productivity. Productivity measures the amount of economic output for every hour of work. Higher productivity means rising real incomes for workers and a better standard of living for all citizens.

Canada’s labour force growth rate is expected to slow and as it does, the economy’s growth potential will also diminish. By the mid-2020s, economic growth will depend almost entirely on our ability to increase productivity. On current projections, potential real GDP growth could fall to 1.0 to 1.5 percent within a decade, significantly below what Canadians have been accustomed to.

Faced with this sobering prospect, policy-makers must start to reassess the structure and impact of existing and new spending initiatives, taxes, regulatory frameworks and other government programs through a productivity lens. And the minister of Finance is the most logical person to direct this work.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.

Jock is a Troy Media contributor. Why aren’t you?

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