Canada needs a prosperity agenda. Here’s how to get there

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Sometime between now and Oct. 20, 2025, Canadians will cast ballots and choose a new federal government. Some very precise rules apply to such engagements. According to Elections Canada, for instance, campaigning must last for a minimum of 37 days. Now, no one at Elections Canada has asked me directly what I think the various parties and candidates should talk about for those 37 days. But if they did, then I would respectfully suggest that the following three closely-linked ideas, all anchored in our need to act today to assure Canada’s ongoing prosperity, should take political centre stage.

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1. Fixing our federal government’s spending problem 

Canada’s federal debt is projected to reach $1.4 trillion by the end of this year, after decades of deficit spending. The current government says it is committed to steadily lowering Canada’s debt-to-GDP ratio over the long term, even as it borrows billions for short-term spending.

But a mid-November forecast from the non-partisan federal Parliamentary Budget Officer, Yves Giroux, projects Ottawa may end 2024 having boosted spending such that Canada’s debt-to-GDP ratio will rise, not fall. If true, then the government will no doubt (per past performance) find room to increase taxes, restoring the ratio’s favourability.

Ottawa’s pattern of over-spending and then attempting to cover for this through tax increases or borrowing will get us nowhere. Instead of more of the same, how about we focus on spending that actually enhances Canada’s productivity, with a measurable return on investment through GDP growth?

Cuts alone are not enough, as we cannot chop or spend our way to prosperity. We need a detailed review of our federal government spending for efficiency and effectiveness. This review should include experienced leaders in the private sector to maximize ideas for productivity gains. How much of each dollar spent by Ottawa increases Canada’s competitiveness, or capacity to innovate? How much GDP growth can we squeeze from each federal dollar? In these questions, we have the basis for much better informed annual budget deliberations.

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2. Reforming our tax system 

Discussing spending leads inevitably to studying the origin of the tax dollars entering Ottawa’s coffers. To begin with, Canada’s personal income tax rates are uncompetitive compared to the U.S. and most of the OECD countries. The Fraser Institute ranks Canada’s top combined personal tax rate (included federal and provincial charges) as 5th highest out of 38 OECD countries, whereas the U.S. is 23rd. This league table does not factor in how our top tax rates kick in at much lower income levels relative to other jurisdictions. Our U.S. neighbours just voted for an administration that is very pro-low income taxes. We must broadly align with tax moves south of the border in order to remain competitive. This will require us to complete a wide-ranging review of our federal tax system, with an overall goal of simplifying taxation. As part of such an initiative, we must return our top marginal rates from 54 per cent today to at least the midpoint OECD level of 45 per cent, where it was 10 years ago.

At the same time, we must increase the portion of the tax base to which this income tax rate applies. One option is to shrink the available deductions and credits to focus on key priorities linked to enhancing our standard of living. These would include: 1) saving for retirement; 2) supporting education; 3) covering unreimbursed medical expenses; 4) incentivizing charitable donations; and 5) supporting entrepreneurship and the risk-taking that goes with it. Done correctly, we could enjoy a system where most people can easily complete and file their own tax returns, saving billions. Another Fraser Institute study found the total compliance costs shouldered by Canadians in filing their 2022 personal income taxes was approximately $4.2 billion.

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Beyond income taxes, we can anticipate our largest trading partner will cut other taxes, too. Canada’s corporate tax rates generally fall around the OECD’s midpoint, for example. If the new U.S. administration begins to loudly sing a lower corporate tax tune, however, we will need to hum along. Same goes if the U.S. cuts capital gains taxes, which in this country of late have become a lightning rod after Ottawa’s recent hike — and a disincentive for entrepreneurs and investors alike to take the risks necessary to invest in Canadian businesses that are core to our future wealth.

These pressures may spark a debate about another tax matter, that being Canada’s embrace of increased indirect taxes, such as carbon pricing. We can no longer ignore how indirect taxes contribute to inflated costs for critical goods such as housing, food and fuel, and the implications for wide swathes of our population.

Again, such a review and reform of our taxation system should include experienced leaders in the private sector so that any potential impact is well understood.

3. Develop and execute a prosperity agenda

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Reducing spending and reforming taxes will remove impediments to increasing Canada’s prosperity, but by themselves cannot boost our standard of living. Rather, they provide a foundation for a comprehensive prosperity agenda. This is the real key to our future.

The global economy that flourished after the fall of the Berlin Wall, through free flows of capital and goods across borders, is fading away. The U.S., the previous order’s primary guardian, now looks around warily as new challengers emerge. A more fractured, inward-looking and regionalized approach to trade is taking shape.

You can see this vividly in the U.S. desire to “friendshore” the manufacturing of critical technologies by re-anchoring supply chains with trusted partners who share its values, away from potential rivals or hostile states.

What this means for Canada is that, thanks to our geography, our future will be more closely staked than ever to that of the U.S. Intelligently leveraging our neighbour’s most important needs will provide us our best shot at a fair deal in this shifting global order. We desire continued tariff-free access to the U.S. market and their most vital supply chains, just as Washington seeks continued access to our energy, minerals and other natural resources, and favours coordinated defence of our shared borders.

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There is more to our prosperity equation, however. Our long-term sustainable prosperity rests on Canada’s ability to champion innovation in the digital economy.

We need a made-in-Canada prosperity agenda, built around entrepreneurs and backed by smart public policy that helps their firms scale up through access to capital, talent and customers.

Accessing new customers is perhaps the hardest task a new innovation-minded company faces. As my Council of Canadian Innovators colleagues observed in a recent white paper, when a new firm can point to current government customers, this reassures potential clients and can help attract overseas sales. A dollar of revenue from a government client can therefore be far more valuable to a new company than a dollar in state handouts. There’s a big lesson there for Canada.

When our federal government leverages the private sector’s expertise to strengthen our competitiveness and ability to innovate, we see Team Canada at its best, ready not just to compete but to win in the emerging global innovation economy.

A 30-year veteran of Canada’s tech investment scene, John Ruffolo is founder of Maverix Private Equity and co-founder of the Council of Canadian Innovators.

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