The productivity agenda: why the federal government is expected to get serious about lagging productivity growth.

Just like individuals and families, there are choices to be made by nations between consumption and investment. And there are also choices to be made from a temporal perspective, ranging from immediate outcomes to longer-term outcomes.

Measures to enhance productivity growth tend to be in the investment category and longer term in nature and, thus, less politically popular.

In our market-based economy, most resource allocation decisions are made in the private sector by producers and consumers. Government policy does, however, have a major impact on private sector decision making through an array of policy instruments ranging from taxation to regulations, to economic instruments like grants and contributions. The role of government is to deal in various areas of the economy for the common good, which individuals want and need but the private economy alone will not produce. Government also provides framework legislation to ensure markets are fair and efficient and property rights are protected, for both producers and consumers.

Government policy concerns both our economic well-being and our social well-being. Put another way, government policy is about both wealth creation and wealth redistribution. But when contemplating these choices, socially-minded government policy makers are well aware that there are real limits to their capacity to pursue redistribution before the wealth creation process is adversely affected. National economic surpluses are needed to pay for the social programs voters tell politicians they want. So, even the social development side of government has a stake in encouraging increased productivity growth.

Governments frequently talk about productivity growth but rarely seem to aggressively pursue it. One of the challenges policy makers face in designing measures to enhance productivity growth is the question of who will benefit from the measures. If producers reap most of the benefits rather than consumers, it's not surprising that democratically elected politicians are leery about the subject of productivity. And when producers benefit from increased productivity but business owners don't share the rewards with their employees, the scepticism in government circles mounts.

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What does the OECD say?

The perspectives of knowledgeable but non-partisan observers like the Organization for Economic Development and Cooperation (OECD) in Paris helps to inform the debate and can help governments muster resolve to tackle politically sensitive issues like productivity.

In its economic survey of Canada for 2006, the OECD said the following:

  Canada's economic performance has been excellent in almost all
  respects and Canadians continue to enjoy among the highest living
  standards in the OECD. The economy is undergoing significant
  structural change in response to soaring commodity prices, expanding
  oil and gas production and exchange rate appreciation and has so far
  shown a remarkable capacity to adjust.
    Looking ahead, the key challenge for all levels of government will
  be to lift productivity growth and to maintain sustainable fiscal and
  social policies to deal with pressures from a rising population
  ageing. Some broad reorientation of policy should underpin the
  strategy.

Many Canadians wouldn't be surprised if the Prime Minister ignored this advice or deferred it until some future date when he could form a majority government. His government's first budget was, after all, decidedly populist, offering tax credits aimed at swing voters and the first reduction to the Goods and Services Tax (GST), which economists unanimously denounced as bad public policy. The OECD assessment of Canada actually calls for increased value-added taxes as one measure to boost productivity. But the Prime Minister was bound by an election campaign promise on lowering the GST.

What is different now?

One thing Ottawa observers agree upon is that this government is quite different than its founding parties and is quite different from the previous Liberal government. The observed ambivalence of the previous Liberal government toward productivity growth is unlikely to continue with the new Conservative government.

There are three major reasons I believe this to be true:

1. Micro-economic activists are now in charge

Although he is a career politician, Stephen Harper is not a poll-driven, political chameleon. He is trained as an economist and is ideas-driven and analysis-driven. While shrewd, he has demonstrated boldness and decisiveness during his first half year in office, even in the face of controversy. He has a vision for a better Canada that is markedly different than that of the previous government and he is pursuing it actively.

The Prime Minister's choice for Clerk of the Privy Council (his Deputy Minister and head of the Public Service) speaks volumes. Kevin Lynch, a former Deputy Minister of Finance and Industry, and latterly Canada's representative at the International Monetary Fund, is renowned as a creative and energetic economist and policy thought leader. He believes public policy can make a difference.

Lynch is a passionate advocate that Canada must take bold steps not only to increase its rate of productivity growth, but it must also reduce the gap with the rate of productivity growth in the U.S. With the rapid economic integration of North America and the global challenges to NAFTA zone countries from emerging giants in China and India, Canada has no choice in the race for trade and investment.

2. Ottawa is concerned about the looming demographic crisis

Recent budgets have focused on demographic trends as one of the major policy drivers Canada faces. The ratio of elderly (65 plus) to the 15 to 64 years population is projected to double to almost 40% in the next 25 years. Seniors as a group are less economically productive, as they withdraw from the labour force and consume more social and health services. The rate of growth of the elderly population in Canada is forecasted to be one of the highest in the G7, second to Japan.

If our universal health care system is to continue, the productivity of the labour force must be dramatically increased to cover the mounting costs.

3. Addressing the fiscal balance with the provinces

One of the bolder challenges the government has accepted is to try to negotiate new fiscal arrangements with the provinces. Ottawa takes in more revenue than it needs for its programs and services and debt reduction plans, while most provinces are chronically under fiscal pressure. It isn't clear at what point the provinces will be satisfied with new fiscal arrangements, if ever. Part of the problem is that the economic prosperity of the provinces varies widely, so total equality is beyond reach.

This could prove to be a very expensive proposition for the federal government. The Prime Minister can cut back some programs, particularly in areas of provincial jurisdiction or shared jurisdiction. Or he can find ways to "make the pie bigger" by stimulating growth in productivity.

How can the government increase productivity growth?

If there were a proven formula for this challenge, the problem would have been solved long ago and the wealth of nations would be more uniform. There are many intangibles beyond the grasp of government policy makers such as entrepreneurship and the work ethic.

The OECD offers four areas where productivity growth can be encouraged.

Improve the overall business environment

Reduced subsidies, lower overall corporate tax rates and vigorous competition in all markets are recommended.

Foster innovation

Special measures for research and development such as tax breaks should be reconsidered and more emphasis placed upon literacy and skills development.

Ensure fiscal arrangements are efficient

A new federal-provincial equalization system with accountability for outcomes is recommended.

Tackle disadvantage and strengthen social development

Improved incentives to work are needed and more effective social programs to break the poverty trap, such as early childhood education and childcare.

The next budget will be seen as the start of the federal government's productivity agenda. It will be interesting to see what transpires.

John M. Banigan is vice-president of Tactix Government Consulting Inc. He is a former ADM Industry at Industry Canada.