From the Fraser Institute

By Jake Fuss

For decades, Canada and other countries in the G7 have been known as the economic powerhouses of the world. They generally have had the biggest economies and the most prosperous countries. But in recent years, poor government policy across the G7 has contributed to slowing economic growth and near-stagnant living standards.

Simply put, the Group of Seven countries—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—have become complacent. Rather than build off past economic success by employing small governments that are limited and efficient, these countries have largely pursued policies that increase or maintain high taxes on families and businesses, increase regulation and grow government spending.

Canada is a prime example. As multiple levels of government have turned on the spending taps to expand programs or implement new ones, the size of total government has surged ever higher. Unsurprisingly, Canada’s general government spending as a share of GDP has risen from 39.3 per cent in 2007 to 42.2 per cent in 2022.

At the same time, federal and provincial governments have increased taxes on professionals, businessowners and entrepreneurs to the point where the country’s top combined marginal tax rate is now the fifth-highest among OECD countries. New regulations such as Bill C-69, which instituted a complex and burdensome assessment process for major infrastructure projects and Bill C-48, which prohibits producers from shipping oil or natural gas from British Columbia’s northern coast, have also made it difficult to conduct business.

The results of poor government policy in Canada and other G7 countries have not been pretty.

Productivity, which is typically defined as economic output per hour of work, is a crucial determinant of overall economic growth and living standards in a country. Over the most recent 10-year period of available data (2013 to 2022), productivity growth has been meagre at best. Annual productivity growth equaled 0.9 per cent for the G7 on average over this period, which means the average rate of growth during the two previous decades (1.6 per cent) has essentially been chopped in half. For some countries such as Canada, productivity has grown even slower than the paltry G7 average.

Since productivity has grown at a snail’s pace, citizens are now experiencing stalled improvement in living standards. Gross domestic product (GDP) per person, a common indicator of living standards, grew annually (inflation-adjusted) by an anemic 0.7 per cent in Canada from 2013 to 2022 and only slightly better across the G7 at 1.3 per cent. This should raise alarm bells for policymakers.

A skeptic might suggest this is merely a global phenomenon. But other countries have fared much better. Two European countries, Ireland and Estonia, have seen a far more significant improvement than G7 countries in both productivity and per-person GDP.

From 2013 to 2022, Estonia’s annual productivity has grown more than twice as fast (1.9 per cent) as the G7 countries (0.9 per cent). Productivity in Ireland has grown at a rapid annual pace of 5.9 per cent, more than six times faster than the G7.

A similar story occurs when examining improvements in living standards. Estonians enjoyed average per-person GDP growth of 2.8 per cent from 2013 to 2022—more than double the G7. Meanwhile, Ireland’s per-person GDP has surged by 7.9 per cent annually over the 10-year period. To put this in perspective, living standards for the Irish grew 10 times faster than for Canadians.

But this should come as no surprise. Governments in Ireland and Estonia are smaller than the G7 average and impose lower taxes on individuals and businesses. In 2019, general government spending as a percentage of GDP averaged 44.0 per cent for G7 countries. Spending for governments in both Estonia and Ireland were well below this benchmark.

Moreover, the business tax rate averaged 27.2 per cent for G7 countries in 2023 compared to lower rates in Ireland (12.5 per cent) and Estonia (20.0 per cent). For personal income taxes, Estonia’s top marginal tax rate (20.0 per cent) is significantly below the G7 average of 49.7 per cent. Ireland’s top marginal tax rate is below the G7 average as well.

Economic progress has largely stalled for Canada and other G7 countries. The status quo of government policy is simply untenable.

Author:

From the Macdonald Laurier Institute

Aaron Wudrick, for Inside Policy

No party wants to be seen as soft on “big business” but that is a bad reason to pass potentially harmful, counterproductive competition policy legislation.

The recent federal budget was widely panned – in particular by the entrepreneurial class – for its proposal to raise the capital gains inclusion rate. As it turns out, “soak the rich” might sound like clever politics (it’s not) but it’s definitely a poor narrative if your goal is to incentivize and encourage risk-taking and investment.

But while this damaging measure in the federal budget has at least drawn plenty of public ire, other harmful legislative changes are afoot that are getting virtually no attention at all. They’re contained in Bill C-59 – the omnibus bill still wending its way through Parliament to enact measures contained in last fall’s economic statement – and consist of major proposed amendments to Canada’s Competition Act. The lack of coverage and debate on these changes is all the more concerning given that, if enacted, they could have a long-term negative impact on our economy comparable to the capital gains inclusion rate hike.

Worst of all, the most potentially damaging changes weren’t even in the original bill, but were brought forward by the NDP at the House of Commons Standing Committee on Finance, and are lifted directly from a previous submission made to the committee by the Commissioner of Competition himself. In effect, they would change competition law to put a new onus on businesses to prove a negative: that having a large market share isn’t harmful to consumers.

MPs on the committee have acknowledged they don’t really understand the changes – they involve a “concentration index” described as “the sum of the squares of the market shares of the suppliers or customers” – but the government itself previously cast doubt on the need for this additional change. It’s obvious that a lot of politics are at play here: no party wants to be seen as soft on “big business.” But this is about much more than “big business.” It’s about whether we want to enshrine in law unfounded, and potentially very harmful, assumptions about how competition operates in the real world.

The changes in question are what are known in legal circles as “structural presumptions” – which, as the name implies, involve creating presumptions in law based on market “structure” – in this case, regarding the concentration level of a given market. Presumptions in law matter, because they determine which side in a competition dispute – the regulatory authority, or the impugned would-be merging parties – bears the burden of proof.

So why is this a bad idea? There are at least three reasons.

First of all, the very premise is faulty: most economists consider concentration measures alone (as opposed to market power) to be a poor proxy for the level of competition that prevails in a given market. In fact, competition for customers often increases concentration.

This may strike most people as counterintuitive. But because robust competition often leads to one company in particular offering lower prices, higher quality, or more innovative products, those who break from the pack tend to attract more customers and increase their market share. In this respect, higher concentration can actually signal more, rather than less, competition.

Second, structural presumptions for mergers are not codified in the US or any other developed country other than Germany (and even then, at a 40 percent combined share rather than 30 percent). In other words, at a time when Canada’s economy is suffering from the significant dual risks of stalled productivity growth and net foreign investment flight, the amendments proposed by the NDP would introduce one of the most onerous competition laws in the world.

There is a crucial distinction between parliamentarians putting such wording into legislation – which bind the courts – and regulatory agencies putting them in enforcement guidelines, which leave courts with a degree of discretion.

Incorporating structural presumptions into legislation surpasses what most advanced economies do and could lead to false negatives (blocking mergers that would, if permitted, actually benefit consumers), chill innovation (as companies seeking to up their game in the hopes of selling or merging are deterred from even bothering), and result in more orphaned Canadian businesses (as companies elect not to acquire Canadian operations on global transactions).

Finally, the impact on merger review will not be a simplification but will likely just fetter the discretion and judgment of the expert and impartial Competition Tribunal in determining which mergers are truly harmful for consumers and give more power to the Competition Bureau, the head of which is appointed by the federal Cabinet. Although the Competition Bureau is considered an independent law enforcement agency, it must still make its case before a court (the Tribunal, in this case).The battleground at the Tribunal will shift from focusing on the likely effect of the merger on consumers to instead entertaining arguments between the Bureau’s and companies’ opposing arguments about defining the relevant market and shares.

Even if, after further study, the government decided that rebuttable structural presumptions are desirable, C-59 already repeals subsection 92(2) of the Competition Act, which allows the Tribunal to develop the relevance of market shares through case law – a far better process than a blanket rule in legislation. Nothing prevents the Bureau from incorporating structural presumptions as an enforcement screen for mergers in its guidelines, which is what the United States has done for decades, rather than putting strict (and therefore inflexible) metrics into statute and regulations.

No one disputes that Canada needs a healthy dose of competition in a wide range of sectors. But codifying dubious rules around mergers risks doing more harm than good. In asking for structural presumptions to be codified, the Competition Bureau is missing the mark. Most proposed mergers that will get caught by these changes should in fact be permitted on the basis that consumers would be better off – and the uncertainty of being an extreme outlier on the global stage in terms of competition policy will create yet another disincentive to start and grow businesses in Canada.

This is the opposite of what Canada needs right now. Rather than looking for ill-advised shortcuts that entangle more companies in litigation and punt disputes about market definition rather than effects to the Tribunal, the Bureau should be focusing on doing its existing job better: building evidence-backed cases against mergers that would actually harm Canadians.

Aaron Wudrick is the domestic policy director at the Macdonald-Laurier Institute.