COLUMN

In search of long-term growth

Dian Cohen January 13 1986
COLUMN

In search of long-term growth

Dian Cohen January 13 1986

In search of long-term growth

COLUMN

Dian Cohen

Canadians’ attitudes, as reported in the second annual Maclean's/ Decima Poll (Maclean's, Jan. 6), are more revealing than any statistic on the national economy ever could be. The poll findings show that three out of four Canadians are satisfied or very satisfied with their own personal economic situation while eight out of 10 are optimistic about their prospects. Fewer Canadians today than last year expect government to look after their best economic interests. And more than half the respondents said they believed that Canadians have to make personal sacrifices before the economy could improve any further.

I do not share that optimism. It is a healthy sign that a solid portion of Canadians are expecting to rely less on governments than they used to, that they are optimistic about their own futures and recognize the need to make sacrifices. But my own sense is that the Canadian public will have to play a greater role in establishing an economic strategy for the future. We must prod our leaders into providing a healthy economic environment. As the past record shows, relying on public policymakers—the so-called experts— would be a serious error.

Take, for example, the pointless— and woefully inaccurate—predictions our economic leaders made for the nation’s economy in 1985. One year ago economists, politicians and other bores projected that the value of the goods and services we as a nation would produce in 1985 would increase by no more than three or 3.5 per cent. Now, they are expressing delight and amazement that the economy has performed better than expected—four per cent, and maybe 4.5 per cent once the final revisions have been added in. Buoyed by these numbers, many experts are predicting that the “recovery” will continue throughout 1986.

Perhaps it will. But such predictions only obscure the real task facing economists and politicians: the introduction of fundamental reforms that will improve the long-term outlook for this country. Without serious changes in the direction of economic policy, real economic growth—that increases disposable income, boosts overall employment and guarantees greater social security for the weakest members of society—will never take place.

One of the greatest challenges facing

us is reducing the 10.2-per-cent rate of unemployment. The Canadian economy actually outperformed its U.S. counterpart last year. In the United States the growth rate reached only three per cent. But while the U.S. unemployment rate has been cut almost in half since 1982 to seven per cent, our jobless rate has decreased only 1.5 per cent during the same period. One likely explanation, suggests the Paris-based Organization for Economic Co-operation and Development, which monitors economic policy among industrialized nations, is that the United States has introduced more incentives than Canada has for the kind of business investment that creates jobs.

For Canadians, that means an urgent re-examination of our tax system. We must ensure that the taxes people and corporations pay—as well as the benefits and subsidies they receive from government—do, in fact, encour-

Without serious changes in the direction of economic policy, real growth in Canada will never take place

age greater economic efficiency and growth. There have been two disastrous attempts at piecemeal reform. In 1981 then-finance minister Allan MacEachen withdrew most of his federal budget five weeks after it was introduced because of widespread outrage over his elimination of a wide variety of tax exemptions and reductions. Similarly, last June Finance Minister Michael Wilson was forced to backtrack on plans to partially deindex old age pensions in the face of widespread public anger. That experience has convinced many Canadians that comprehensive tax reform is desperately needed, but unfortunately the political fallout from that disaster has left the government of Prime Minister Brian Mulroney in a cautious mood.

At the same time, Canadians must have a better understanding of the dynamics of both job loss and job creation. The C.D. Howe Institute, in its 1986 Policy Review and Outlook, demonstrates that the majority of new jobs in Canada are produced not by large firms that governments can influence directly but by hundreds of

thousands of small firms whose owners say they do not want more direct assistance. Even if the government chooses to help small business with direct assistance—and so far it has introduced limited changes—the costs will be prohibitive. The institute concludes correctly that “government strategists cannot hope to identify the one per cent [or less] of small firms that will become major job creators. The policy approach best suited to achieving this objective is one that changes tax, regulatory and trade policies.”

This is not, in fact, the kind of policy change we have been getting. For instance, there is no doubt that the feeble measures the Mulroney government has taken so far to reduce the size of the elephantine federal deficit will never do more than contain it just below the $40-billion-a-year mark. The government can only achieve this near-static level of maintenance either by making cuts to spending or through successive tax increases. So far, it has shown a preference for tax hikes, a course of action that discourages the private sector from investing. Taxes will only continue to absorb an increasing portion of our savings. Those savings would then be unavailable for investment.

To be fair, there is some economic planning taking place in Ottawa—Mulroney’s initiative on freer bilateral trade with the Americans, to name the best action taken last year. However, I fear that the initiative may already be in peril. Public discussion is already becoming polarized between dire predictions of economic emasculation and rosy portraits of ever-greater riches. Canadians will have to follow the discussions carefully as the negotiations continue through 1986.

This column sounds, unfortunately, all too familiar. The subject matter is nothing more than a summary of the issues that have appeared in this space over the past year. Our leaders are still pussyfooting around them. The government must be willing to develop a comprehensive economic strategy that will ensure long-term growth. The task for all of us during the next year is to convince our leaders and experts that what is missing in public policy is an economic strategy to deal with changing times. Happy New Year.

Dian Cohen is a Montreal-based economics writer.