Can a Small Change Budget Transform Canada’s Economy?

The federal Budget thus far seems to be known most for eliminating the penny, a small change initiative if there ever was one.  Yet the government claims Budget 2012, entitled Jobs, Growth and Long Term Prosperity, will secure Canada’s long-term prosperity, which, according to Mr. Flaherty and the Prime Minister, is anchored in this country’s innovation performance.

This budget, like many others over the past fifteen years, spills a lot of ink on Canada’s well- documented innovation deficit.  There is a whole chapter on “supporting entrepreneurs, innovators and world class research”.  The government claims that its approach to innovation policy, as outlined in the Budget, will, over time, transform Canada’s economy, making it much more innovative and globally competitive. This, in turn, will secure our prosperity.
Does the substance in Budget 2012 line up with that claim?
For at least fifteen years, successive governments – Liberal and Conservative – have tried to improve the Canadian business sector’s woeful innovation performance, primarily through spending and tax measures of various kinds. These are aimed at stimulating private and public sector research and development, and the commercialization of that research. Spending on R&D is effectively considered, in government circles, to be a rough proxy for innovation. As a result, we have seen a litany of tax and spending measures over the years, and the creation of all kinds of new entities to deliver that agenda.  And yet Canada has barely moved the needle at all on innovation and productivity performance.
Budget 2012 devotes a total of $1.1 billion over five years to improving Canada’s innovation performance.  To some, that might sound like a lot of money, especially in the context of an austerity-focused government.  It isn’t: it is trivial.  It amounts to one tenth of one percent of total federal spending.  It is a drop in the ocean in a $1.75 trillion economy.  It is considerably less innovation-related expenditure than most governments – including previous Conservative governments – have apportioned in recent budgets.
So how can the government seriously claim that Budget 2012 is all about the economy’s long-term prosperity, which it acknowledges is bound up with improving Canada’s innovation performance?
Here’s how.
Budget 2012 basically throws in the towel on the traditional federal approach to improving innovation performance through government spending and tax incentives.  The government seems to have concluded that this standard remedy isn’t working after many years of considerable federal effort.  The evidence suggests they are right.
The government also seems to have concluded that the most significant thing they can do to improve Canada’s innovation performance is to expose the Canadian business sector to the full forces of global business competition.  This is the Harper government’s new innovation agenda for Canada.
Budget 2012 is unique, and quite bold, among recent federal budgets in one respect.  It devotes 10 pages to outlining how the government is “expanding trade and opening new markets for Canadian business”.  This globalization agenda has been emerging piecemeal over the past 18 months, and is now laid bare for all to see in the Budget.  The Harper government is embarking upon the most significant international trade agenda in memory – opening up free trade talks with the EU, India, Japan and the Trans Pacific Partnership (a multi-lateral free trade agreement centered in Asia), and beginning exploratory free trade discussions with Thailand and Mercosur (a customs union involving four large south American countries).  In addition, the government recently signed a foreign investment protection agreement with China – which was 18 years in the making – and is now finally taking a serious interest in Chinese trade and investment.
Exposing Canadian business to the full forces of global market competition, and prying open foreign markets for Canadian exports, is also a textbook way to drive innovation performance in the business sector.  And it doesn’t cost a penny pinching (and penny eliminating) government any money at all to do so.
That is why Budget 2012—“the small change budget”—could actually do as the government says, and significantly improve Canada’s innovation performance in a way no previous government has been able to.  The only remaining question is this:  Are Canadian businesses and workers prepared to meet the gale winds of global competition?