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There are a number of key challenges facing the incoming government.
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Canada’s next government will have to address a daunting set of economic challenges – some new, some familiar to a pandemic-weary country, some seemingly intractable. Crucial decisions about the future of energy, trade and the digital economy will have to be made against a backdrop of mounting debt and persistently high inflation. Here are the key economic issues the incoming government will face:
The recovery The most pressing economic issue remains the pandemic. The high rate of vaccination in Canada has allowed businesses to reopen over the summer, with workers preparing for a return to the office this fall. But the Delta variant of the virus is creating uncertainty. Alberta, the province that was the furthest along in loosening pandemic restrictions, declared a health emergency last week and reintroduced strict measures to fight the virus.
The Canadian economy has rebounded since the spring of 2020, when the first round of lock-downs and plummeting oil prices caused the sharpest contraction in history. But there are still 156,000 fewer jobs than in February, 2020, and recent Statistics Canada data shows the recovery may not be as far along as previously thought. Meanwhile, COVID-19 continues to disrupt global supply chains, pushing up shipping prices, making it hard to source manufacturing inputs and weighing on exports.
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The most important public-health decisions will continue to be made at the provincial level. But the incoming federal government faces crucial choices about border restrictions and vaccination requirements, most notably for transportation. It will also have the delicate task of winding down support for businesses and individuals – moving from broad-based relief to targeted support for the hardest-hit sectors – without triggering a wave of bankruptcies and layoffs. – Mark Rendell
Jobs Canada’s labour market is in a strange situation. It’s still a long way removed from a full recovery, needing hundreds of thousands of people to get back to work. But companies say they’re struggling to fill positions. Discussions about low-wage work, and the degree to which pandemic income supports are skewing incentives, tend to obscure a persistent issue for employers: skills shortages.
Employment change in pandemic
In thousands of people
-3,000 -2,500 -2,000 -1,500 -1,000 -500 0 Feb. 2020 May Aug. Nov. Feb. 2021 May Down 156K from Feb. 2020 0.00 THE GLOBE AND MAIL, SOURCE: statscan
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month people 2020-02-01 0.00 2020-03-01 -996.50 2020-04-01 -2988.70 2020-05-01 -2686.30 2020-06-01 -1744.60 2020-07-01 -1327.70 2020-08-01 -1114.00 2020-09-01 -741.80 2020-10-01 -647.40 2020-11-01 -592.80 2020-12-01 -645.50 2021-01-01 -858.30 2021-02-01 -599.10 2021-03-01 -296.00 2021-04-01 -503.10 2021-05-01 -571.10 2021-06-01 -340.40 2021-07-01 -246.40 2021-08-01 -156.20
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Small businesses say the No. 1 thing holding back sales and production is a lack of skilled labour, according to survey results from the Canadian Federation of Independent Business. That’s a typical response that predates the pandemic and will likely outlast it, too. A recent Royal Bank of Canada report estimated that more than 700,000 skilled tradespeople are expected to retire by 2028. Some of the worst shortages, the report said, will be for industrial mechanics, boilermakers and welders – key roles in revitalizing the country’s infrastructure. Furthermore, the pandemic has highlighted another longstanding shortage: nurses. As of June, there were about 109,000 vacancies in health care and social assistance, a sector that often has the most unfilled positions. Canada will need a bold policy prescription to ensure it has enough people in the right jobs. – Matt Lundy
Public debt Government support for individuals and businesses during the pandemic led to an unprecedented surge in public debt. After running a $335-billion deficit in the last fiscal year and a projected $138-billion deficit this year, federal debt is expected to approach $1.2-trillion this year, about 48 per cent of GDP, according to Parliamentary Budget Officer estimates. None of the major parties has pledged to rein in spending significantly or raise taxes substantially.
With interest rates at record lows, the cost of servicing the growing debt load remains manageable, particularly when compared with the debt scare of the 1990s. But interest rates will inevitably rise in the coming years as central banks push back against inflation and withdraw stimulus. That will increase debt-servicing costs as bonds roll over.
Federal government debt
Actual and baseline projections by the Parliamentary Budget Officer, in billions of dollars
0 200 400 600 800 1,000 1,200 $1,400 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Projections 652 THE GLOBE AND MAIL, SOURCE: Parliamentary Budget Officer; gov't of canada
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Date Debt 2017-01-01 652 2018-01-01 671 2019-01-01 685 2020-01-01 721 2021-01-01 1056 2022-01-01 1194 2023-01-01 1237 2024-01-01 1272 2025-01-01 1297 2026-01-01 1322
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Furthermore, all the parties are relying on optimistic economic growth projections to shrink public debt relative to the size of the economy over time. Robust growth is not guaranteed, particularly as the population ages and Canada continues to struggle with low productivity growth. As Bank of Montreal chief economist Douglas Porter put it in a recent note to clients: “Governments not repairing finances now, during an economic recovery, could leave them woefully vulnerable to the next major challenge.” – Mark Rendell
Inflation Inflation hit an 18-year high of 4.1 per cent in August, fuelled by business reopenings, supply-chain disruptions and prices bouncing back from last year. Central bankers argue that inflation will come down once supply chains normalize and “base year” effects dissipate. More skeptical economists point to the huge amount of fiscal and monetary stimulus during the pandemic to suggest that price pressures will remain elevated for some time.
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The Bank of Canada has stressed patience, saying it won’t raise interest rates until the labour market has healed and the country’s economic output is back to normal – something it doesn’t see happening until the second half of 2022. But after five months of inflation running above its 1-per-cent to 3-per-cent target range, the bank may be rethinking its timeline for removing stimulus and raising rates.
Governments typically avoid commenting on central bank decisions. However, the bank’s five-year mandate is up for renewal this year, giving the incoming government an opportunity to weigh in on the overall direction of monetary policy. At issue is whether to maintain the existing inflation-targeting regime, in place since the 1990s, or move to something like a dual mandate, which would target full employment alongside price stability, or a system that would aim for higher inflation coming out of recessions. – Mark Rendell
Housing Housing affordability became a campaign topic against the backdrop of a real-estate frenzy, but the problem has been building for years. The key issue is supply: not enough homes are being built to keep pace with population growth, especially in major cities such as Toronto and Vancouver. Jean-Fran？ois Perrault, the chief economist with Bank of Nova Scotia, estimates that Canada has the lowest number of housing units per 1,000 residents of any G7 country.
The federal government has few direct levers to deal with the supply problem, as most land-use and development decisions rest with municipalities and provinces. It can, however, encourage lower levels of government to speed up construction by tying federal funds to housing densification and pro-construction land-use policies.
Demand-side interventions are more controversial. Various parties proposed putting more money in the hands of first-time homebuyers and reducing their monthly mortgage and insurance costs. Housing market experts say these plans are counterproductive: Measures that make it easier to take on debt will fuel the run-up in prices and counteract regulatory interventions, such as stricter mortgage stress tests. As Evan Siddall, the former head of Canada Mortgage and Housing Corporation, remarked on Twitter: “It may be good politics but it’s irresponsible policy.” – Mark Rendell
Climate The next cabinet will be sworn in just weeks before the start of COP26, a landmark United Nations climate conference that is supposed to set the course for collectively working to reduce global greenhouse-gas emissions.
Ottawa has already submitted to the UN a new emissions-reduction commitment of 40 to 45 per cent below 2005 levels by 2030. (The Conservatives campaigned on returning to the previous 30-per-cent target.) But Ottawa still needs to work quickly to prepare for negotiations around new international policy mechanisms. That may include tariffs on some carbon-intensive imports, known as carbon border adjustments, which all the major parties say they are interested in implementing – but without really explaining how they would do so.
Meanwhile, to get Canada on track to meet its emissions-reduction target, the government will have to move swiftly to develop an array of new programs promised during the campaign, including a new sales quota and other measures to speed the transition to electric vehicles; an expanded strategy for retrofitting buildings; and new tax credits for carbon capture and other forms of clean technology.
And after a summer of deadly heat waves and natural disasters, the government will need to prioritize building resilience to unavoidable climate-change impacts. That will involve making good on commitments such as new funding to fight wildfires and ensuring the availability of flood insurance for high-risk homes and businesses. More broadly, it will mean completing work on a new national adaptation strategy that was in the works when the election was called. – Adam Radwanski
The future of energy In just over half a decade, Canada’s energy sector has been decimated by existential forces, including a price slump, a pandemic and environmental pressures that combined to sap its finances and force thousands of people out of their jobs.
Now, after a summer of heat waves, wildfires and destructive storms, oil-and-gas companies find themselves in a tougher struggle to convince investors and the general public that they are serious about reducing their emissions in the transition to a low-carbon economy – and that they can do it while supplying new markets.
The International Energy Agency and the UN Intergovernmental Panel on Climate Change issued reports this year detailing the extent of the crisis and the need to slash greenhouse-gas emissions from fossil fuels. The IEA laid out a roadmap to net-zero emissions that prescribes no spending on new oil and gas fields.
Canada’s biggest energy challenge remains Alberta’s oil sands, which generate almost 12 per cent of the country’s CO2 emissions. To survive, the industry must somehow show it is reducing its impact while making a case for more pipeline capacity to a carbon-constrained world.
The oil sands’ biggest players have pledged to get to net-zero emissions by 2050, and that will mean massive investments in new technology and offsets in the form of carbon capture and renewables. A big question for Canadians is how much taxpayer money should go into the effort as the world shifts to greener energy sources. – Jeffrey Jones
Reconciliation When the Mi’kmaq First Nations Coalition announced last year that it was buying 50 per cent of Clearwater Seafoods in a $1-billion deal, one of the parties most pleased with the transaction was the First Nations Finance Authority. The FNFA, based in B.C. and operating since 2005, provided the coalition with a $250-million loan for the Clearwater purchase, which it called a “historic step forward for the Indigenous economy.” That Indigenous economy is, by some calculations, a powerhouse-in-waiting, thanks to a young, fast-growing population and court rulings and legislation that support Indigenous rights.
Providing a welcoming runway for that workforce, in the form of education and opportunities, could benefit both Indigenous communities and government finances.
In a 2016 report, the National Indigenous Economic Development Board estimated that closing the productivity gap between Indigenous and non-Indigenous Canadians would lead to an annual increase of $27.7-billion in GDP.
First Nations, Inuit and Métis communities face a daunting infrastructure gap – estimated to be as much as $30-billion – when it comes to services such as drinking water, waste water, roads and broadband connections.
And, after this year’s confirmation of unmarked graves at several residential schools, those communities want the next government to implement the calls to action of the 2015 Truth and Reconciliation Commission report. – Wendy Stueck
Digital transformation The pandemic accelerated Canada’s digital transformation, spurring widespread adoption of e-commerce and remote work. The incoming government needs to build on this momentum while making high-stakes decisions about the infrastructure and regulation of the digital economy.
The central issues are 5G wireless service and rural broadband. Canada’s telecommunications companies are racing to build ultra-high-speed wireless networks across the country – which are expected to underpin a range of new industries, from autonomous vehicles to telemedicine – and are expanding internet services to remote areas. During this build-out, the federal government needs to balance affordability against the need for massive private-sector investment.
Large telecom companies want to limit competition, especially in 5G spectrum auctions, arguing they need to be able to make a decent return on their multibillion-dollar investments. Smaller companies say increased competition will bring down consumer prices. Crucially, the incoming government will have to decide whether to greenlight Rogers Communications Inc.‘s proposed $26-billion acquisition of Shaw Communications Inc. and whether to allow the use of equipment made by Chinese telecom giant Huawei Technologies Co. Ltd. in Canada’s 5G system.
Consumer Price Index
Year-over-year percentage change
-1 0 1 2 3 4 5% 2000 2004 2008 2012 2016 2020 2.18579235 THE GLOBE AND MAIL, SOURCE: statscan
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month yoy 2000-01-01 2.18579235 2000-02-01 2.729257642 2000-03-01 3.043478261 2000-04-01 2.162162162 2000-05-01 2.373247033 2000-06-01 2.798708288 2000-07-01 2.900107411 2000-08-01 2.572347267 2000-09-01 2.670940171 2000-10-01 2.774813234 2000-11-01 3.205128205 2000-12-01 3.201707577 2001-01-01 2.994652406 2001-02-01 2.869287991 2001-03-01 2.426160338 2001-04-01 3.492063492 2001-05-01 3.898840885 2001-06-01 3.35078534 2001-07-01 2.713987474 2001-08-01 2.821316614 2001-09-01 2.601456816 2001-10-01 1.869158879 2001-11-01 0.621118012 2001-12-01 0.723888314 2002-01-01 1.349948079 2002-02-01 1.446280992 2002-03-01 1.853759011 2002-04-01 1.738241309 2002-05-01 1.115618661 2002-06-01 1.215805471 2002-07-01 2.134146341 2002-08-01 2.540650407 2002-09-01 2.332657201 2002-10-01 3.160040775 2002-11-01 4.423868313 2002-12-01 3.798767967 2003-01-01 4.508196721 2003-02-01 4.684317719 2003-03-01 4.246713852 2003-04-01 2.914572864 2003-05-01 2.808425276 2003-06-01 2.602602603 2003-07-01 2.089552239 2003-08-01 1.982160555 2003-09-01 2.180376611 2003-10-01 1.581027668 2003-11-01 1.57635468 2003-12-01 2.077151335 2004-01-01 1.274509804 2004-02-01 0.680933852 2004-03-01 0.775945684 2004-04-01 1.66015625 2004-05-01 2.43902439 2004-06-01 2.536585366 2004-07-01 2.339181287 2004-08-01 1.846452867 2004-09-01 1.842870999 2004-10-01 2.33463035 2004-11-01 2.424830262 2004-12-01 2.131782946 2005-01-01 1.936108422 2005-02-01 2.125603865 2005-03-01 2.309913378 2005-04-01 2.401536984 2005-05-01 1.619047619 2005-06-01 1.712654615 2005-07-01 2 2005-08-01 2.576335878 2005-09-01 3.238095238 2005-10-01 2.566539924 2005-11-01 1.988636364 2005-12-01 2.087286528 2006-01-01 2.754036087 2006-02-01 2.175969726 2006-03-01 2.163687676 2006-04-01 2.43902439 2006-05-01 2.811621368 2006-06-01 2.432179607 2006-07-01 2.33426704 2006-08-01 2.139534884 2006-09-01 0.73800738 2006-10-01 1.019462465 2006-11-01 1.39275766 2006-12-01 1.672862454 2007-01-01 1.109057301 2007-02-01 2.037037037 2007-03-01 2.302025783 2007-04-01 2.197802198 2007-05-01 2.187784868 2007-06-01 2.191780822 2007-07-01 2.189781022 2007-08-01 1.730418944 2007-09-01 2.472527473 2007-10-01 2.385321101 2007-11-01 2.472527473 2007-12-01 2.376599634 2008-01-01 2.193784278 2008-02-01 1.814882033 2008-03-01 1.350135014 2008-04-01 1.702508961 2008-05-01 2.23015165 2008-06-01 3.127792672 2008-07-01 3.392857143 2008-08-01 3.491495076 2008-09-01 3.395889187 2008-10-01 2.598566308 2008-11-01 1.966041108 2008-12-01 1.160714286 2009-01-01 1.073345259 2009-02-01 1.426024955 2009-03-01 1.243339254 2009-04-01 0.352422907 2009-05-01 0.087260035 2009-06-01 -0.259965338 2009-07-01 -0.949913644 2009-08-01 -0.778546713 2009-09-01 -0.864304235 2009-10-01 0.087336245 2009-11-01 0.964066608 2009-12-01 1.3239188 2010-01-01 1.85840708 2010-02-01 1.58172232 2010-03-01 1.403508772 2010-04-01 1.843722564 2010-05-01 1.39494333 2010-06-01 0.955690704 2010-07-01 1.830863121 2010-08-01 1.743679163 2010-09-01 1.918047079 2010-10-01 2.443280977 2010-11-01 1.996527778 2010-12-01 2.351916376 2011-01-01 2.345786273 2011-02-01 2.162629758 2011-03-01 3.287197232 2011-04-01 3.275862069 2011-05-01 3.69733448 2011-06-01 3.098106713 2011-07-01 2.739726027 2011-08-01 3.084832905 2011-09-01 3.165098375 2011-10-01 2.896081772 2011-11-01 2.893617021 2011-12-01 2.29787234 2012-01-01 2.46179966 2012-02-01 2.624894157 2012-03-01 1.926298157 2012-04-01 2.003338898 2012-05-01 1.243781095 2012-06-01 1.502504174 2012-07-01 1.25 2012-08-01 1.246882793 2012-09-01 1.160862355 2012-10-01 1.158940397 2012-11-01 0.827129859 2012-12-01 0.831946755 2013-01-01 0.497100249 2013-02-01 1.237623762 2013-03-01 0.986031224 2013-04-01 0.409165303 2013-05-01 0.737100737 2013-06-01 1.151315789 2013-07-01 1.316872428 2013-08-01 1.067323481 2013-09-01 1.06557377 2013-10-01 0.654664484 2013-11-01 0.902378999 2013-12-01 1.237623762 2014-01-01 1.483924155 2014-02-01 1.140994295 2014-03-01 1.545972335 2014-04-01 2.037489813 2014-05-01 2.276422764 2014-06-01 2.357723577 2014-07-01 2.112103981 2014-08-01 2.112103981 2014-09-01 2.02757502 2014-10-01 2.357723577 2014-11-01 1.951219512 2014-12-01 1.466992665 2015-01-01 0.974817222 2015-02-01 1.047542305 2015-03-01 1.201923077 2015-04-01 0.798722045 2015-05-01 0.874403816 2015-06-01 1.032565528 2015-07-01 1.272871917 2015-08-01 1.272871917 2015-09-01 1.033386328 2015-10-01 1.032565528 2015-11-01 1.355661882 2015-12-01 1.606425703 2016-01-01 2.011263073 2016-02-01 1.355661882 2016-03-01 1.26682502 2016-04-01 1.664025357 2016-05-01 1.497241923 2016-06-01 1.493710692 2016-07-01 1.256873527 2016-08-01 1.099764336 2016-09-01 1.337529504 2016-10-01 1.493710692 2016-11-01 1.180173092 2016-12-01 1.501976285 2017-01-01 2.129337539 2017-02-01 2.04563336 2017-03-01 1.563721658 2017-04-01 1.636788776 2017-05-01 1.319875776 2017-06-01 1.00697134 2017-07-01 1.163692785 2017-08-01 1.398601399 2017-09-01 1.552795031 2017-10-01 1.394268009 2017-11-01 2.099533437 2017-12-01 1.869158879 2018-01-01 1.698841699 2018-02-01 2.158828065 2018-03-01 2.309468822 2018-04-01 2.22392638 2018-05-01 2.222222222 2018-06-01 2.45398773 2018-07-01 2.990797546 2018-08-01 2.835249042 2018-09-01 2.217125382 2018-10-01 2.444614209 2018-11-01 1.675552171 2018-12-01 1.987767584 2019-01-01 1.442672741 2019-02-01 1.509433962 2019-03-01 1.881113619 2019-04-01 2.025506377 2019-05-01 2.3988006 2019-06-01 2.020958084 2019-07-01 2.010424423 2019-08-01 1.937406855 2019-09-01 1.869857891 2019-10-01 1.864280388 2019-11-01 2.172284644 2019-12-01 2.248875562 2020-01-01 2.395209581 2020-02-01 2.156133829 2020-03-01 0.886262925 2020-04-01 -0.220588235 2020-05-01 -0.366032211 2020-06-01 0.660308144 2020-07-01 0.145985401 2020-08-01 0.14619883 2020-09-01 0.513950073 2020-10-01 0.65885798 2020-11-01 0.953079179 2020-12-01 0.73313783 2021-01-01 1.023391813 2021-02-01 1.091703057 2021-03-01 2.196193265 2021-04-01 3.389830508 2021-05-01 3.600293902 2021-06-01 3.06122449 2021-07-01 3.717201166 2021-08-01 4.087591241
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The next government is expected to oversee the introduction of open banking legislation, aimed at giving banking customers more control over their data and encouraging competition from financial technology startups. Policymakers must also keep an eye on advances in artificial intelligence, quantum computing and digital currencies, all of which could drive major economic changes in the coming years. – Mark Rendell
Productivity and innovation Canada is a perennial laggard when it comes to productivity. The amount of GDP generated per hour worked has been below the OECD average for decades. Economists attribute this to weak business investment in machinery and equipment, low research and development spending and barriers to interprovincial trade, among other things.
The need to boost productivity is growing more acute as the population ages. Fewer workers supporting more retirees means the country will depend increasingly on productivity improvements to drive economic growth.
Innovation is central to the conversation. Canadian companies spend less on R&D than businesses in most developed countries and have a poor track record when it comes commercializing intellectual property. Access to venture capital for startups has improved over the past decade, but companies have difficulty scaling up. Those that do are often bought by U.S. competitors.
Various party platforms suggested reforming the R&D tax credits and improving the patent system. Industrial policy is also back in vogue. Both the Liberals and the Conservatives promised to funnel large amounts of money into industries such as zero-emission vehicles and hydrogen production, and both pledged to create a major new research institution modelled on the U.S. Defence Advanced Research Projects Agency (DARPA). – Mark Rendell
Trade Canadian diplomats may have breathed a sigh of relief when Joe Biden replaced the mercurial Donald Trump as U.S. President last year, but Canada’s trade tensions with the United States have not disappeared.
Mr. Biden cancelled the Keystone XL pipeline permit on his first day in office. The State of Michigan is trying to shut down Enbridge Inc.’s Line 5 pipeline, which carries as much as 540,000 barrels of oil a day from Western Canada to Ontario through two U.S. states.
Meanwhile, Canadian diplomats are trying to make sense of the “Buy America” provisions in that country’s US$1-trillion infrastructure spending bill, which could keep Canadian firms from bidding on major government-funded projects.
Geopolitical changes will complicate the trade file. The rising tension between China and the U.S. is leading both countries to rejig global supply chains to their own strategic advantage. Meanwhile, institutions at the heart of the liberal trading order, notably the World Trade Organization, have become dysfunctional, making bilateral and regional trade agreements even more important.
Canada’s own trade relationship with China has grown enormously in recent decades, but the political relationship has soured since the detention of Huawei executive Meng Wanzhou in Canada and Canadians Michael Spavor and Michael Kovrig in China. How the incoming government navigates these uncertainties will have major implications for Canada’s trade-oriented economy. – Mark Rendell
Taxes The closest Canada has come to comprehensive tax reform occurred half a century ago. Since then, an ever-growing list of exemptions, deductions, tax credits and other set-asides have resulted in a tax system as riddled with complexity as it is susceptible to avoidance.
The 2021 campaign will make a bad situation even worse, with both the Liberals and Conservatives continuing to wield the tax code as a wedge to win votes.
The NDP is the only major party proposing a comprehensive tax review. Presumably, the New Democrats don’t intend to push for what economists say Canada really needs: a broad debate about simplifying taxation to encourage investment and push up long-term productivity.
Such a debate would focus on eliminating tax credits and incentives in favour of lower rates and simplified rules. It would entail shifting the tax burden away from income – particularly corporate income – and toward consumption. And it would focus on allowing the provinces to increase sales taxes as Ottawa trims marginal income tax rates.
Canadians didn’t get that debate during this campaign. But to galvanize economic growth, it’s one that will need to start soon. – Patrick Brethour
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