Four Ways to Promote Growth

By Peter Lindfield, published in the Telegraph-Journal 8th May 2012

New Brunswick’s current level of prosperity is below average in Canada. The jurisdictions competing against New Brunswick are winning more than their proportional share of business in most industries while our demographic profile is characterized by slow growth while a shortage of skilled labour is being used as a quick filter to dismiss investment in the province.  The challenge appears in many ways to be a vicious circle—without an adequate supply of skilled workers, industry will find growth difficult and slow growth is a disincentive for skilled workers to locate here.

To address these issues, the New Brunswick government has selected six key sectors where it will concentrate its efforts for future economic development: value-added wood, industrial fabrication, information and communications technologies, biosciences, aerospace and defence, and value-added food. Premier David Alward additionally underscored the importance of using innovative methods to develop natural resources to increase exports. While the marketplace will determine winners and losers, policymakers must make specific choices on where and how to invest.  One of the key questions is how much investment will New Brunswick need to support these target industries for the medium term. How much money is required for New Brunswick managers, investors, researchers and workers to invest in the time required to ensure results? The answer lies in determining what revenue sources can be dedicated to this extraordinary task.

One answer to this question is avoiding the crowding out of investment by instituting government expenditure management. For this reason, restructuring public expenditures is the most prominent of four growth promotion measures that can be undertaken by government. Each represents difficult but necessary decisions and posses their own element of risk.

A change to tax treatment is the second growth promotion measure. This takes two forms. One is tax reform involving the restructuring of the provincial tax system. Eliminating fiscal disincentives to hiring labour while rewriting the various tax schedules to encourage work, investment and innovation would provide real assistance. The second form is raising the Harmonized Sales Tax (HST) by two per cent at the earliest opportunity. Although there will be opposition to any tax increase, government would do less economic harm if the increase were tied to the simplification of New Brunswick’s tax codes. The strong upside of an HST increase is a revenue stream of $250 million per year.

Privatization offers the third growth avenue. A focus on privatizing commercial enterprises other than genuine public services would increase revenues. It would also promote economic efficiencies by creating organizations with management better attuned to market signals. Privatization further enhances growth by assisting in the finance of non-essential government services without burdening the productive side of the economy with additional taxes or fees.

Regulatory reform promises the fourth broad avenue. Of all obstacles to growth promotion, Atlantic Canada’s regulatory thicket notoriously has played a role in making each of its constituencies’ economies more inflexible and less dynamic. Antiquated labour laws, accompanied by rigid rules effectively have rendered regional labour markets unresponsive to economic signals. There is a broad recognition that labour market regulation has become a significant impediment to growth. Other regulatory interferences span the horizon from arcane licensing requirements to barriers to trade that actively discourage investment and business expansion. It is time for the Atlantic Provinces with the support of the state of Maine to revamp these rules.

A profound change has swept over government finance and it does not involve just a few bad quarters.  While the short-term prospects for the global economy remain uncertain, it is increasingly apparent that what lies ahead will involve a longer-lasting instability. In this setting, it is imperative that we make the best of our critical investments.

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Filed under Business attraction, Economics, Fiscal Policy, Government transformation, Innovation strategy, New Brunswick, Tax policy

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