Chrystia Freeland finally gets serious with her second budget

Two budgets were needed to become Paul Martin.

The late Jim Flaherty's fiscal update in November 2008 nearly triggered a constitutional crisis before he got serious about the Great Recession and tabled a budget in January 2009.

The political class in Canada is incapable of making a difference before first making things worse, which is why there is a group more averse to risk than the business elite. Martin was the finance minister in 1993 when he was facing a debt crisis. In the 1990s, Flaherty was a foot soldier in the Common Sense Revolution.

The crisis at her door, as well as that of her boss, Prime Minister Trudeau, appears to have required a bloody war in Europe to appreciate the seriousness of the situation.

The delay is not unusual. Martin needed a dressing down by Canada's creditor to appreciate that the mismatch between spending and revenue had grown too wide to be fixed by promises. When private money flees out of fear of a depression, austerity doesn't spur economic growth. Freeland received her wakeup call in recent months, according to the Trudeau Liberals' closest budget to a long-term growth plan.

Freeland tends to equate firefighting with reconstruction. Statistics show that Canada's labour market recovered quicker from the Pandemic than the United States. The gravest challenge facing her as finance minister was fixing all the vulnerabilities exposed by the Pandemic.

Canada is an aging, complacent society that invests more in housing than in research and development, the core of innovation, because it wears a dysfunctional health system as a badge of honour. Canada is at risk of being left behind as the world shifts to a digital, carbon-neutral economy because politicians are too worried about alienating their vote blocks and executives are too focused on hurdle rates.

‘We are falling behind’

Canada is worse at generating wealth than most rich countries. The commodity boom that came with China's rise from poverty in the 1990s and 2000s masked that reality for decades. The world is over. The crutches are no longer in use. Canada needs to create its own wealth. She is willing to say the words, which is one of the most noteworthy things about Freeland's budget.

We are falling behind when it comes to economic productivity, Freeland said in a speech to the House of Commons after tabling her second budget as finance minister on April 7.

Productivity is what guarantees the dream of every parent, that their children will be more prosperous than we are. It is time for Canada to act.

It was time for Canada to tackle productivity, too, when Freeland tabled her first budget; a 725-page, 8.9-megabyte, everything-but-the-kitchen-sink plan.

(Productivity) is a well-known Canadian problem and an insidious one. It is time for Canada to tackle it

Chrystia Freeland

A lot has happened since then. Inflation has been a non-story for the better part of three decades. President Joe Biden helped get Michael Kovrig and Michael Spavor out of captivity in China, but has done little to change the protectionist impulses of his predecessor, Donald Trump. Trudeau rigged the act to clear protesters and their vehicles from the downtown area. The world will no longer be cowed by the democratic powers that won the Second World War after Russia invaded Ukraine.

Team Trudeau's previous financial plans have lacked maturity. The document has 304 pages and 4.3 megabytes in it's digital form. Inflation and healthy corporate profits left the government with considerably more revenue than it had expected, but the cabinet resisted the urge to spend the windfall in its entirety.

Freeland set a course that would see the deficit nearly erased within five years, while the debt as a percentage of gross domestic product is forecast to drop to 41.5 per cent over that period, compared with 46.5 per cent currently. It's not the best fiscal anchor, but it should be enough for Canada to retain its elite status with all the credit rating agencies.

Hurting ‘all Canadian citizens’

Trudeau's cabinet has struggled to find common ground for years.

Trudeau's decision to increase taxes on the profits of banks and insurers will be unpopular with the corporate elite. The business council and other corporate lobbyists will be busy this summer because of the government's pledge to make it harder for the richest Canadians to avoid the alternative minimum tax.

Canada's personal tax rates are relatively high, which is a problem for companies engaged in a global fight for talent. Income inequality and a sense that the game is rigged in favor of the world's biggest companies have made policy-making so difficult. Royal Bank of Canada chief executive Dave McKay says they want political stability so they can be free.

There are lots of echoes in the budget of things that business lobbies have been saying for a long time. Smaller companies have an incentive to stay small because of the lower tax rate that they pay on their profits. The Canadian Federation of Independent Business would never allow a neutral approach to taxation to happen.

Freeland proposes to offset the effects of the policy by making the preferential rate available to companies with $50 million or more in capital, instead of the current 15 million.

The Canada Growth Fund is the biggest item in the Trudeau government's productivity plan and will be seeding with billions of dollars to invest alongside private capital in potentially game-changing companies and projects. The idea is to create a publicly owned private-equity fund that would be run by professional asset managers who enjoy a level of independence similar to that of the governor of the Bank of Canada.

It is a bold play. The Canada Infrastructure Bank and the supercluster program were built on the same theoretical foundations. The theory hasn't been proven to work in the Canadian political context.

That isn't a reason to condemn the growth fund from the beginning. Without the bureaucracy, tax cuts might do the same thing. That is theoretical in the Canadian context. Canadian industry, which is dominated by legacy oligopolies, can't be inspired to do anything that would risk its profit margins or its ability to dole out dividends.

Canada's public pension funds are among the best. The Bank of Canada's history shows that a public entity can operate effectively if it has a clear mandate and strong governance.

The Trudeau government has a reputation for political engineering. Freeland's productivity plan has merit. The details about the growth fund will come in her autumn fiscal update. We will know for certain that she and her colleagues have woken up.

Email: kcarmichael@postmedia.com