Say you’re a store owner and your competitor across the street offers everything at lower prices, with higher quality and a friendlier attitude.
You’re in trouble. If your competitor was on the other side of the city, things might be a bit better. But across the street?
That’s roughly where Canada finds itself in relation to the United States. This year for the first time since 2008, the U.S. topped the World Competitiveness Forum’s Global Competitiveness Index (GCI).
Canada ranked 12th out of 140. Not bad, but the best is just across the border.
The 2018 competitiveness report is not directly comparable with previous years due to changes in methodology, which increased emphasis on innovation, where the U.S. remains world champion.
However, the CGI recalculated last year’s scores using the new methodology, revealing a troubling trend. Canada’s rank declined from 10th last year while the U.S. would have been first.
Even using last year’s methodology, with little innovation weighting, the U.S. ranked second while Canada was down at 14th. As the report notes: “The U.S. has been on an upward path for some years.”
The report warns that U.S. competitiveness could be damaged by trade tensions and closing borders. But so could Canada’s. The first shots may have been fired by the U.S., but past experience shows a few shots can erupt into a global trade war, harming everyone. Although a North American Free Trade Agreement replacement – the United States-Mexico-Canada Agreement – has been negotiated, Canada has also imposed new tariffs.
On the positive side for the U.S., deregulation has boosted competitiveness. Regulation is a balancing act – the optimal level of regulation is not zero. However, unnecessary complexity, hurdles, delays and uncertainty should be zero. Canada is far from there. Canadian governments have failed to offer any significant deregulatory strategy to keep the country competitive.
Things may get worse. To give two examples – the grave uncertainty over the Trans Mountain pipeline expansion has alarmed domestic and international investors, while Canada’s baffling climate plan, involving regulation and taxation, gets murkier by the day.
Perhaps surprisingly, in the GCI, Canada ranks first in macroeconomic stability, based on inflation and the size and structure of national debt. Canada scored a perfect 100 out of 100. The U.S. ranked 34th. That may seem to give Canada a big edge but the U.S. score is 99.6, a whisker behind Canada. Countries are so tightly bunched at the top that a minuscule difference in score can result in a big difference in rank.
However, Canada is taking a dangerous fiscal path that threatens to send our macroeconomic score spiralling downward. Bank of Canada monetary stewardship remains strong but government debt could soon enter a red zone. The federal government has allowed spending to climb and seems in no hurry to put its fiscal house in order. Alberta and British Columbia are becoming spendthrifts. Ontario’s new government inherited a fiscal mess and has yet to announce serious plans to control spending.
Canada’s macroeconomic score may already be drifting downward. The CGI uses data from international sources, which are typically a year or two old. Canada’s fiscal recklessness has increased over that period.
The U.S. faces risks, too. After huge tax cuts, the federal deficit has exploded. But past big tax cuts under presidents John F. Kennedy and Ronald Reagan caused economic activity to flourish and tax revenues to recover quickly and grow, restoring fiscal balance.
As Kennedy said in promoting tax cuts: “Our true choice is not between tax reduction on the one hand and the avoidance of large federal deficits on the other. It is increasingly clear that no matter what party is in power … an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget, just as it will never produce enough jobs or enough profits.”
With the U.S. ranking soaring, Canadian competitiveness faces dangers on at least two fronts. Far from launching rational deregulation, Canadian governments are gumming up the works and sowing uncertainty.
Both Canada and the U.S. face fiscal challenges, but Canada lacks the competitiveness edge and economic boost that tax cuts create.
Fred McMahon is an analyst with the Fraser Institute.