Competitive Taxation and Smart Regulation: Creating a Climate for Innovation and Growth

December 14, 2004

Thank you for the opportunity to appear before this committee, together with my colleagues John Dillon, Vice President Regulatory Affairs and Legal Counsel, and Sam Boutziouvis, Vice President Policy and Director of Research, to offer the perspective of the Canadian Council of Chief Executives (CCCE) on the topic of industrial strategy. 

A review of Canada’s industrial strategy has to start from the assumption that we have been doing something right in recent years.  Canada is enjoying large trade and current account surpluses.  Our pace of economic growth and job creation is among the best in the industrialized world.  Having cut personal and corporate tax rates, the federal government is raking in record tax revenue and boosting social spending to new highs.

However, Canada cannot take the good news of recent years for granted.  New powers such as China and India are generating fierce competition in selling goods and services and in attracting skilled people and capital investment.  The North American Free Trade Agreement, once the leading edge of global trade liberalization, is being eclipsed by a host of bilateral and regional deals in Europe and Asia.  The United States, which buys most of our exports, is suffering from large fiscal and current account deficits that are pushing its dollar down and its interest rates up.  Canadian exporters face a risk of economic slowdown in our biggest market even as a rising currency pushes their cost base up.

The fundamental goal of industrial strategy is to reinforce Canada’s reputation as a land of opportunity.  People from across our country and around the world must be confident that there is no better place for them to build better lives for themselves and their families.  As the CCCE said in launching its Canada Global Leadership Initiative several years ago, we must aim to make Canada “the best place in the world in which to live, to work, to invest and to grow”.

As I said to the Standing Committee on Finance last month, sound fiscal and tax policy is a prerequisite for competitiveness and economic growth.  Robust growth in turn is vital if the government is to sustain the extensive commitments it is making to social programs.

On the fiscal front, the government should remain prudent in its planning.  It should continue to run surpluses and pay down public debt.  It should free up resources through a rigorous and continuing review of existing spending.  And it should consider a second major round of tax cuts, this time with a focus on reducing the effective corporate tax burden in ways that will help Canadian companies move faster in boosting productivity and responding to the rapid rise of the Canadian dollar.

Tax policy, however, is not the only way for government to create a business climate that fosters innovation and provides a significant competitive edge for Canadian enterprises and communities.  The most exciting opportunity for immediate action lies in the field of regulatory reform. 

The report of the External Advisory Committee on Smart Regulation published in September provides a compelling blueprint for making Canada’s regulatory system more effective, responsive, cost-efficient, transparent and accountable.  Let me suggest five reasons why members of this Committee should consider the smart regulation report as the centerpiece of your recommendations on industrial strategy.

1. Smart regulation serves social as well as economic goals.  Smart regulation is not deregulation.  It links the concepts of opportunity and sustainability, enabling citizens to feel safe while encouraging a more dynamic economy that can sustain Canada’s well-being into the future.
   


2. Smart regulation cuts costs without cutting protection.  Canada’s regulatory standards are part of our competitive advantage, but its processes take too long and are too complex, too costly and too unpredictable. Better rules backed up by more effective and transparent processes would reduce administrative costs for governments and compliance costs for businesses.
   


3. Smart regulation reduces duplication and delay.    Many areas of regulation are shared between different levels of government, leading to duplication, delay and uncertainty.  The Advisory Committee highlighted the advantages that would flow from a single-window approach to environmental assessments.  At the CCCE, we have focused over the past year on the need for a single Canadian regulator for securities markets.
   


4. Smart regulation strengthens Canada’s competitiveness within North America.  Canada and our biggest trading partner share similar regulatory goals and the desire for high standards and consistent enforcement.  But what has been called “the tyranny of small differences” penalizes both consumers and manufacturers.  Why does the United States allow the additives BHA, BHT and caramel colour in frozen pepperoni pizzas, while Canada approves these additives anywhere in the pizza except in the pepperoni?  Is the health of Canadians better protected because we define “cheddar-flavoured popcorn” as having less than 49 percent real cheese instead of 53 percent as in the United States?
   


5. Smart regulation enhances Canadian leadership globally.  International cooperation is increasingly necessary to provide high levels of consumer, social and environmental protection.  Canada should be a leader in encouraging better regulation worldwide and in bringing Canadian rules into line with global standards as they evolve. The Advisory Committee has recommended that regulatory policy be a fundamental pillar of Canada’s foreign policy, and we agree.

This Committee has asked for comments on one area of regulation in particular, that of foreign ownership.  Foreign investment is highly positive for any economy.  In Canada, the economic evidence suggests that in addition to its direct impact on job creation, inward flows of foreign capital bring with them flows of people and ideas, flows that stimulate greater adoption of innovative technologies and development of new products for global markets.  These benefits also are generated by Canadian-based companies as they invest and expand operations abroad.  Robust investment flows in both directions are good for Canada.

Our major concern in this respect flows from another issue that this Committee is studying in depth, that of competition policy.  In many industries, global competition is driving considerable consolidation through mergers and acquisitions.  Canadian companies have been active both as buyers and sellers. 

This two-way process is healthy, but there are clear advantages to Canada in maintaining the employment and influence that flow from having head offices in our communities.  As my colleague John Dillon said to this Committee two weeks ago, Canadian firms must have the size, skills, efficiencies and capacity to compete effectively against global leaders in their sector who often are larger and continuing to grow.  Canada’s Competition Act therefore should facilitate rather than inhibit the kind of strategic alliances and new business arrangements that companies need to operate effectively in the global marketplace.

To conclude, the time has come to combine sound fiscal and tax policy with a serious push for regulatory reform.  The blueprint produced by the External Advisory Committee on Smart Regulation stands out as a realistic way to drive innovation and growth without adding to the burden on taxpayers.  I would ask members of this Committee from all parties to become champions for this cause and make regulatory reform the centerpiece of your own recommendations on industrial strategy.