Federal budget missed the boat on innovation, tax reform

By now, many of you have heard from economists, tax experts and the media about what was in the federal budget – including the Conference Board's own Budget 2013 assessment. But what about what wasn't in the budget?

The view of the Conference Board of Canada (where I am chief economist) is that Budget 2013 was a prudent, common-sense effort to stay on track toward restoring fiscal balance in 2015-2016, while gradually shifting federal spending priorities toward some of the longer-term needs of our economy. This budget gets a good grade from us – but nevertheless, two economic priorities went unaddressed.

First, the budget did not address directly the innovation and productivity challenge facing Canada if we are to sustain our economy's growth potential. Second, it made no commitment to comprehensive tax reform, even though our tax system is unduly complicated, leaks significant revenues, and is long past its best-before date. Let's tackle those two issues in order.

In a recent article in Policy Options, we noted that Canada does not have an "innovation culture." There is no comprehensive innovation framework that includes governments, business and labour, unlike countries such as Switzerland or Germany that have a collective approach to innovation.

Budget 2013 committed more federal funding for skills development and public infrastructure. But it did not tackle the recommendations in last fall's Jenkins report on innovation, which proposed a significant reordering of federal spending priorities in order to foster innovation. Specifically, there was no mention in Budget 2013 of how the Scientific Research and Experimental Development (SR&ED) tax credit could be revised to produce more innovation horsepower. So on innovation, a key element of productivity growth (and where Canada is demonstrably mediocre), the can was kicked down the road.

The budget also missed the opportunity to show leadership on comprehensive tax reform as a way to improve the productive potential of the Canadian economy. Our tax system has lost sight of the basic principles of efficiency, neutrality and transparency, due to myriad incremental changes made over the past two decades. Due to nearly 200 tax exemptions, $100-billion in revenues leak annually from federal coffers – money that could be otherwise used to cut overall tax rates.

While the federal government should be recognized for a series of selective efforts to improve the business tax climate in Canada, the tax system still does not support productivity growth adequately, and is adding to business and personal costs. Tax reform should be part of the growth agenda to deal with structural challenges within our economy created by an aging population and work-force and skills shortages.

Our briefing, Reinventing the Canadian Tax System: The Case for Comprehensive Tax Reform, outlined the core areas for action. In our view, Canada's income tax system should have a broad, stable and neutral tax base, with fewer exemptions and lower rates of taxation in each bracket. The balance of personal taxation should shift toward consumption taxes, which would improve incentives to work and invest and help to sustain revenues to fund government programs. The GST should be reviewed and modernized, and provinces should be encouraged to harmonize their sales taxes with the GST. Business tax reform and simplification would reduce unproductive activities by firms to minimize taxation as well as the dead-weight cost to businesses of tax compliance.

So while the federal government deserves credit for delivering a common-sense budget that remains focused on balancing the books in 2015-2016, there is still much work to do. Fostering an innovation culture and committing to comprehensive tax reform is unavoidable – and should receive priority treatment in future budgets – if Canada is to reach its full growth potential.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.