Craig Alexander
Partner & Chief Economist - Deloitte Canada

Reforming Regulation is Key to Canadian Competitiveness

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Takeaways

  1. Regulations are acting as constraints to growth in the Canadian economy and the government should reform them in order to attract investment.
  2. A sound regulatory framework for data must be devised if Canada is going to capitalize on the rise of AI and big data.
  3. To improve the performance and unlock the potential of Canada’s superclusters, Canada needs to invest more in infrastructure.

Action

The Government of Canada should remove barriers to growth in the Canadian economy to increase our competitiveness internationally. It can do this by investing in national infrastructure so that Canada is on par with its international peers and designing a sound and competitive regulatory framework, which is particularly important around data policy to unlock the potential of technology. The government must also reform regulation and taxation so that businesses are encouraged to invest in Canada.


What are Canada’s strengths in the global economy and how is that economy shifting?

In terms of strengths, Canada has strong labour markets, low interest rates and a relatively weak Canadian dollar that boosts our competitiveness.

Globally, the political landscape has changed. The rise of populism and nationalism in recent years, and the economic growth of China mean there could be less openness to trade in the coming decade. Businesses and investors need to be aware that the biggest risks are likely to be political in the years to come.

That being said, Canada has secured trade deals with a very high percentage of the world’s economy. The Comprehensive Economic and Trade Agreement (CETA) gives us free trade with the European Union, while the newly renegotiated North American Free Trade Agreement (NAFTA) gives us access to the United States. We also have a trade deal in Asia through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

“While our trade deals are our strength, we are still vulnerable to shifting global economic conditions and politics that happen outside of our border.”

These trade agreements help to protect Canada to global economic shocks, but we are not immune. Our country has a small, open economy. Imports plus exports are about 60% of GDP, which means we are very impacted by the global economy, trade and commodity prices. So while our trade deals are our strength, we are still vulnerable to shifting global economic conditions and politics that happen outside of our border.


What must Canadian governments and the private sector do to improve our attractiveness to investment, competitiveness and productivity? 

We need more investment in infrastructure in order to facilitate growth, and both the government and the private sector have a role to play in that. However, the areas where we are the weakest from a policy point of view are taxation and regulation.

“We need more investment in infrastructure in order to facilitate growth, and both the government and the private sector have a role to play in that.”

Corporate tax rates in Canada are now higher than the United States, and as other countries lower their corporate tax rates Canada becomes less competitive on business taxation. Similarly, when we look at personal income taxes, the highest marginal tax rate for Canadians kicks in at a lower income level and a higher rate than in the United States. This high personal tax burden creates challenges for Canadians seeking to be entrepreneurial and take risk. If your gains are going to be taxed away, you will be less willing to take risks, and we need more entrepreneurs. But regulation is arguably our biggest challenge. On most international benchmark surveys, Canada’s international competitiveness has been steadily declining. Regulation is acting as a constraint on growth and the government needs to improve the regulatory environment.

“Canada’s international competitiveness has been steadily declining. Regulation is acting as a constraint on growth and the government needs to improve the regulatory environment.”

While the government’s role is to set the right policy framework to incent innovation, ultimately businesses are the ones who have to do it. Unfortunately, business investment has been a source of serial disappointment for many years. Canadian businesses are very risk averse and have not been investing. Businesses need not let the risks paralyze them and delay investments. The return on investment Canadian companies are requiring is excessively high, and they should lower their expectations. Canadian businesses should think more about capital spending. And we need Canadian companies to embrace new technologies to unlock the potential of those technologies so we can be more competitive.


What do you identify as Canada’s future economy sectors, and which sectors of the Canadian economy are most promising right now?

When considering this issue over the years to come we have to identify what Canada’s comparative advantages are. For example, the Government of Canada has pursued the Innovation Supercluster Initiative and has identified certain sectors that have great promise, like artificial intelligence or aquaculture. But when we look at small and medium-sized businesses that are growing rapidly, which we refer to as gazelles, you find them in every single sector of the Canadian economy. As a country we need to double down on gazelles. We need policies that will incent businesses that are rapidly growing and scaling, instead of picking sector winners or losers. Why would you not want to scale businesses that have great potential even outside of those sectors?

“We must be very careful about picking sectors. Instead let’s focus on companies that are growing rapidly and remove the barriers that are preventing them from growing even faster.”

What we are broadly seeing in the Canadian economy is a shift from a traditional manufacturing and commodity-based economy to an economy oriented to more advanced manufacturing and services. Services are definitely becoming a larger component of our economy. An interesting trend is that the fastest growing Canadian exports are now coming from services, not goods, and it is because technologies allows us to trade in services in which we couldn’t before. Canada’s is becoming a more sophisticated, knowledge-based economy.

But, we must be very careful about picking sectors. Instead let’s focus on companies that are growing rapidly and remove the barriers that are preventing them from growing even faster.

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How can Canada leverage our traditional resource sectors to increase our opportunities for innovation and investment?

The Innovation Supercluster Initiative identified agriculture as one of our strengths. Looking at the world’s economy, if you think about the rise of China and other developing nations, the rise in income scale creates a demand for food products and a transition from rice to meat. Canada is well positioned to take advantage of this shift, and agriculture is a sector that could see a large amount of growth. If we want to export more agricultural products to Asia, we will need to build more transport capacity and expand our railways and ports. So there are certain conditions that must be met before agriculture can reach its potential. 

Canada is also blessed with an abundance of energy and world energy demand is going to continue to rise. Canada could become a big supplier of energy to the rest of the world, and it could shift from crude oil towards natural gas – but it can also turn to green technology. We can become a leader in cleantech and deploy that knowledge to the rest of the world.

“There are a lot of opportunities for our resources sectors to grow and innovate, but the challenge is do we have the right regulations to unlock the full potential of our commodities space?”

There are a lot of opportunities for our resources sectors to grow and innovate, but the challenge is do we have the right regulations to unlock the full potential of our commodities space? In recent years we have had enormous difficulty in getting major national infrastructure projects approved and built. There are constraints in available infrastructure and constraints in regulation. Further, if you want to expand Canada’s energy sector you need to attract capital, and in recent years Canada is looking like a difficult place to do business, particularly in energy.


How can Canada better serve businesses that are seeking to leverage AI and big data? And how do you see the increasing implementation of AI impacting our workforce?

Canada is doing very well in terms of artificial intelligence. We have a growing reputation on the world stage in terms of the work that we have been doing in this space.But if Canada is going to unlock the potential of AI and big data analytics for business, we desperately need to design an appropriate national data policy. I have talked to many businesses that could capture more opportunity with AI if only they had a regulatory framework around data. Similarly, there are many governments that could find efficiencies, save money, and use their tax dollars more effectively if they fully deployed AI and big data analytics. For example, individual government departments and ministries are currently not allowed to share data. This is a big weakness. So if we want to unlock the potential of this tremendous technology and the technological revolution happening around us, we need to move forward on this because the countries that will grow the fastest from this technological revolution will be those that figure out how to get regulations on data right.

“If Canada is going to unlock the potential of AI and big data analytics for business, we desperately need to design an appropriate national data policy.”

In terms of the future of work and how AI will impact the Canadian labour market, the AI experts at Deloitte predict that AI will replace certain tasks – the mundane, repetitive ones – rather than jobs. This will free up more of employees’ time. So the question then becomes: what will employers do with the time that AI will free up?

It is true that if enough tasks are taken on by AI, it will ultimately be disruptive to the labour market because companies will need fewer full-time equivalent employees to get the same amount of work done. So there will be a labour market effect if firms cannot find uses for the savings in work time since they will then reduce the number of workers. But if companies can find productive things that those employees could be doing with that spare time, that can enhance their growth.

“We must adopt the view that there are more complementary dimensions between AI and workers than many people think.”

So we must adopt the view that there are more complementary dimensions between AI and workers than many people think. Will AI be disruptive? Absolutely. Will it reduce demand for certain skills? Yes. Will it create transition problems for some workers that are displaced by technology? Yes, it will. But it might not be as bad as the doomsayers make out because what we are really talking about is reducing tasks, not jobs.