Budget 2006
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Archived - Chapter 5:
Concerns Over a Competitive and Efficient Economic Union

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In recent years, strong global growth and rising demand for Canadian commodities, combined with provincial and federal policies to improve the flexibility and adaptability of the economy, have helped generate solid gross domestic product (GDP) growth and healthy gains in employment.

Chart 5.1 - Canad Led The G7 in Employment and Real GDP - Growth Over the 1997-2005 Period

As the population ages, Canada will be less able to rely on gains in the share of the population that is working for future growth in living standards. Indeed, the employment-to-population ratio is projected to decline as the baby boom generation retires. Instead, Canada must increasingly rely on productivity growth to increase our standard of living.

Chart 5.2 - Productivity Growth Will Be Required in the Future to Offset Projected Declines in the Size of the Labour Force

In addition to the challenges posed by demographics, Canada must also prepare for the opportunities and increased competition of fast-growing economies, and the widespread adoption of new ways of producing and delivering goods and services around the world. In many respects, barriers to trade and to mobility are being eliminated more rapidly outside our borders than within them.

Each order of government must therefore contribute to creating an environment that allows the private sector to generate the wealth necessary to foster shared goals of job creation and high living standards, while maintaining a sustainable environment and high-quality public services. Doing so will also mean reducing taxes for all Canadians so that they have more money to make choices about what to buy, when to save, and where to invest to allow our economy to grow to its full potential. It will also require more effective regulation across a range of goods and services, labour and capital markets issues.

To strengthen the economic union, governments will have to work together better, especially with respect to mobility and trade, employment for immigrants, capital markets and tax harmonization.

Barriers to Mobility and Trade Within Canada

While some progress has been made on reducing barriers to trade within Canada, primarily through the Agreement on Internal Trade (AIT), a number of barriers still exist that unnecessarily limit growth, investment and job creation.

For example, greater progress could be made to reduce impediments to the mobility of skilled labour between provinces. A recent, extensive survey commissioned by all governments revealed that when a professional trained in Canada moves from one province to another, the destination province does not recognize the professional qualifications of the originating province one-third of the time. This means that Canadians often cannot find the best jobs that are available to them, and employers cannot choose the most qualified workers. This is especially important now, given the labour shortages experienced regionally and sectorally.

Other areas where more progress is possible include the conclusion of the Energy chapter of the AIT, which would give a province the right to transmit electricity through another to a third market ("wheeling") and greater regulatory harmonization across jurisdictions to simplify transactions for businesses.

Barriers to Employment for Immigrants

Immigration not only enriches Canada’s diversity, it also bolsters our labour force and prosperity. Immigration is an important source of labour force growth and is expected to account for all of the net growth in Canada’s population within the next ten years, if current trends continue.

While more than 50 per cent of recent immigrants have some post-secondary education or trade certification, the challenge lies in ensuring that the immigration system meets the needs of the economy and that this inflow of new, skilled, talented individuals can quickly integrate into the workforce and the community.

Many immigrants have difficulty entering the professions and careers in which they were trained and engaged in their country of origin. The federal government, provinces and professional regulatory bodies have crucial roles to play in recognizing foreign credentials.

Barriers to Efficient Capital Markets

An important foundation for a strong economy is a regulatory regime for the securities market that ensures market integrity and investor protection. Efficient capital markets promote domestic and foreign investment in the economy, stimulating productivity growth and jobs. All jurisdictions recognize that Canada’s securities regulatory system must be improved to respond more rapidly and effectively to regulatory and market developments at home and abroad.

The provinces and territories have made progress in improving the current system of securities regulation in Canada by narrowing regulatory differences and streamlining the administration of securities laws. To maximize benefits for investors and issuers and strengthen the federation, intensified efforts are required.

Benefits From Further Tax Harmonization

A key to maintaining an efficient tax system that provides governments with the flexibility to raise the revenues they need is to harmonize taxes to the greatest degree possible.

Canada has achieved a substantial degree of tax harmonization without compromising policy flexibility. The recently revised and signed Tax Collection Agreements, which promote a common tax base and a single administrator for both corporate and personal income taxation, illustrate how efficiency and flexibility can be combined. These agreements help to reduce compliance costs for taxpayers and administration costs for governments. Even in the case of provinces that have not entered into such agreements (such as Quebec in the case of both personal and corporate income taxes, and Ontario and Alberta in the case of corporate income taxes), a significant degree of harmonization in the definition of the tax base has been maintained.

Recent efforts by federal and provincial governments to phase out capital taxes have also been a major step in enhancing the efficiency of the tax system, as these taxes have particularly negative impacts on investment and distort the allocation of capital within Canada.

But there remain areas where additional harmonization would provide substantial benefits. On tax collection, the Government is working with Ontario to extend the Tax Collection Agreements to include Ontario’s corporate income tax.

More importantly, work needs to be done on the sales tax front. Harmonized value-added taxes are now in place in Newfoundland and Labrador, Nova Scotia and New Brunswick—and Quebec administers a provincial value-added tax, as well as collecting the goods and services tax on behalf of the federal government. But separate provincial retail sales taxes continue to be collected in five provinces, increasing administration and compliance costs for both governments and businesses. Provincial retail sales taxes also substantially increase the effective tax rate on investment by taxing business capital goods and intermediate materials, thereby impairing the competitiveness of our tax system.

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