Bill Morneau has been Canada's Minister of Finance since November 2015 (photo: IMF)

Canada's Balancing Act

January 8, 2018

When the Trudeau government took office in 2015, Canada’s growth was hovering at around 1 percent, largely because lower oil and commodity prices were hurting the country’s trade-dependent economy.

Since then, fiscal and monetary stimulus enacted as part of the government’s inclusive growth agenda has led to a strong economic recovery. With GDP forecast to grow at 3 percent for 2017 and 2.1 percent for 2018, Canada is at or near the top of the G7 countries.

But can the recovery be sustained, particularly in light of the current downside risks to international trade—including the ongoing renegotiation of the North American Free Trade Arrangement (NAFTA)?

We recently spoke with Canada’s Finance Minister Bill Morneau about the challenges and opportunities that lie ahead for the government’s growth agenda, and about his country’s plans for the G7, as it gets ready to take over the 2018 presidency.

Canada has embraced free trade, economic integration, and a relatively open immigration policy. What would you say to those who are skeptical about the benefits of globalization?

Canada is demonstrable proof that being an open trading nation can lead to positive outcomes. Under Prime Minister Trudeau, our focus on openness, equality, and concern for the wellbeing of the middle class in Canada and around the world were quickly rewarded with positive results. We have seen a high level of growth as a result of trade between Canada, the United States and Mexico through NAFTA, for example. We are clearly the beneficiaries of an open approach to the world.

Nevertheless, we face the challenge of remaining competitive in a globalized environment. Recognizing this, we have developed a structural reform agenda to maintain and enhance Canada’s productivity, including by reducing barriers to international trade, promoting infrastructure investment, improving the innovation framework, investing in education and training, promoting high-skilled immigration, and encouraging more women to enter—and stay—in the work force.

It is imperative for us to think about how the benefits of growth are distributed to a broader cross section of the population–what we in Canada describe as the middle class. In my view, a growth policy is only effective if the gains are real to the average person.

If people don’t believe that trade advantages them, then why are they going to buy into it? So, our agenda has been very clearly to show benefits to Canadians from our growth and then to help people understand that trade has been a huge advantage for us from a growth standpoint over time.

Similarly, with NAFTA we think we can achieve a positive outcome only if the people who are affected by this trading relationship buy into the fact that it is good for them and their families. So, we have been active in talking to individual states in the United States about employment gains that result from trade, and spoken extensively about the nine million Americans who are reliant on trade with Canada.

Which policies have helped distribute the benefits of growth?

When we were elected, we recognized that middle class Canadians were anxious that the likelihood of success for the next generation was getting more difficult, as evidenced by a prolonged period of rising income inequality.

We recognized that the only solution was to put in place policies that directly advantage middle class Canadians. A fairer tax system will provide the impetus for people to feel confident and make investments, which will provide that impetus for further growth.

So, we lowered middle class taxes, and to finance the revenue loss, raised taxes on the top one percent. With these measures, we are aiming to reduce income inequality and ensure that more people have more opportunities to succeed.

We have also sought to support families in other ways. For example, we looked at our child care system and means tested it to ensure that it positively impacted families that most needed the assistance. We subsequently increased child care benefits under the Canada Child Benefit plan. Since the new policies went into effect, we have reduced child poverty by forty percent.

Taken together, disposable income of families has improved. As a result, we have seen a big boost in the confidence that families, and their children, have for the future. The unemployment rate has fallen to its lowest level in almost a decade and household spending on durable goods has been robust. In fact, because our economy is growing faster than expected, we were able to tie future increases in the Canada Child Benefit with inflation ahead of schedule, ensuring that it could keep pace with the costs of raising a family.

Canada will shape the agenda of the world’s richest countries as the host of the G7 presidency this year. What’s at the top of your list?

Top of our list is to address the challenges facing the middle classes across all our countries–in particular, ensuring that women get the same opportunities as men. The reality is that the nature of our economies is changing. Digitization and automation present real challenges in getting everyone engaged in growth. But it also presents important opportunities. Digital skills are increasingly relevant—in school, at home and in the workplace. To ensure that Canadians have the digital skills they need to succeed, we plan to invest in developing and supporting the digital skills of younger and older Canadians, and groups that are underrepresented in the digital economy.

For all our countries, we need to focus on how to create more interesting jobs and optimism about the future. That optimism is necessary to get a virtuous circle going where businesses invest in the digital economy and people invest in training themselves for the jobs of the future, which gives everyone the opportunity to do better.

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