The G7, Free Trade, & the Fiscal Fallout with Trevor Tombe

[00:00:00][music] >> Hello and welcome to another edition of No Nonsense with Pamela Wallin. A look today at the so-called [music] peace deal, or is it really a political off-ramp for President Trump whose numbers are low, but the dropping oil prices is a plus for him politically. At the G7, the president said he's not interested in a trade deal with Canada anymore. It's a problem.

[00:00:29]Maybe because the prime minister on his way to the G7 stopped in Ireland and ramped up his rupture rhetoric again proposing new alignments to circumvent doing trade business with the US. But it turns out from what we hear and read that China may be a riskier participant for all of those sitting around the G7 table. Here at home, record debt, massive spending, and a recessionary economy which may be more than technical. So, we need some shovels in the ground and we need some action on the on the big projects. The TMX pipeline is now at capacity. So, for all of these economic issues, we turn to Trevor Toome.

[00:01:18]He is an economist and research fellow at the University of Calgary. He's the co-director of Finances of the Nation, a project with the Canada Tax Foundation to make financial data public. And his latest task or assignment, leading the productivity initiative with a 15-year $6 million federal investment to really help focus in on this and see if we can't find some answers. Trevor, welcome. Thanks for being here.

[00:01:47]>> It's really great to be here. Thanks for having me back.

[00:01:49]>> That's No, what we we would have you every week if we could to look at >> [laughter] >> things economic. So, let's just look at the peace deal if we can. Not the politics so much of it, but oil prices are down. So, if this holds, what does that mean um for all of the people around the table, but us specifically?

[00:02:12]The pressure on the Strait of Hormuz is actually in some ways been good for us, but not necessarily at the gas pumps.

[00:02:19]>> Yeah. Well, oil prices have come down from their recent highs. You know, it's just this time last month when it was over $100 per barrel uh oil being traded at. Now, it's down into the mid-70s, about 75 last time uh I checked. This is though a price that is still quite a bit higher than where oil prices were prior to this conflict beginning. You know, at the beginning of February, early on there, it was closer to $60 than where we are now. So, oil prices globally are still about 20 to 25% higher than where they were. That means that Canadians shouldn't be anticipating that prices at the pump fall back to where they were prior to this conflict beginning. And I think part of this reflects the fact that sensibly uh oil uh traders are recognizing the increased risks and vulnerability uh of the Strait and that will be here perhaps for years and decades to come. There's also been some permanent disruption in production in various facilities in many of the Gulf countries. Um both in terms of extraction, there's been some infrastructure damage, and so even just the volume of supply is going to be a little bit less for quite some time potentially.

[00:03:33]>> Some of them are trying to build um ground-based pipelines and routes to circumvent the the Strait of Hormuz totally, but that takes time.

[00:03:43]>> Indeed, it takes it takes quite a bit of time.

[00:03:46]Uh and you know, this event really just highlighted the vulnerability that many countries and and I guess indeed the world faces because so much was transiting that straight and now it's quite clear that Iran is able to block passage through it kind of at a at a moment at a moment's notice at its own choice and and that's a risk that's now going to be with the global economy for some time.

[00:04:14]>> So there's not there's no peace dividend there's no oil dividend dividend there's no price dividend from this whole intervention by the Americans.

[00:04:26]>> Well the intervention certainly didn't lead to a reduction in oil prices long term quite the reverse the announcement of a trade deal though did of course lower oil prices last week at this time we were high 80s close to $90 per barrel so that's come down quite a bit.

[00:04:42]>> So there's there's a little bit yeah.

[00:04:44]>> Yeah now in terms of the dividends that follow through this mean Canada's in an in an interesting position as are some other energy producers as you kind of noted at the top when oil prices rise gasoline prices rise as well and that's a pretty considerable hit to those who purchase gasoline and most do and it's a hit through the supply chain as fuel is an important input into almost everything else that we buy and earlier this year I estimated that a a 50% increase in global oil prices which is roughly what we were looking at for quite some time would in the long run represent about a thousand dollars per typical household in Canada in terms of the additional spending that's required just from the high energy prices half at the pump and then half through the supply chain.

[00:05:33]>> Yeah the and then food prices go exactly food is among the >> more energy sensitive non energy products but we also produce a lot of oil as well and so the Canadian economy on the whole actually benefits from higher oil to the US. So there is that tension.

[00:05:49]>> The trade-off isn't it? Yeah, that's the interesting thing.

[00:05:52]Again on on the issue of the relations with the US, the Prime Minister was very pointed in his remarks in Ireland saying that you know, we were too subservient to the US. That had to change proposing a new arrangement with Europe and Ireland and that they would kind of circumvent that. But you know, just the words of the president alone, this is pretty stunning. I'm not interested. This is not on. This is not in our interest to do this. The you know, the words we can't be too cavalier about this for ourselves. Personally, we need this deal or for a country, but also a lot of the people that consider investing in this country do so because of that arrangement with the US.

[00:06:45]>> Yeah, this is a complicated issue because of course trade access to the US matters a lot for Canada. So much of our economy roughly a third is tied into exports to the United States. We also benefit from imports to the United States. A lot of or sorry from the United States. A lot of manufacturing activity here in Canada autos in particular use inputs from the US to produce the outputs that facilitates our own domestic consumption or exports to other countries. So we're tied in to the US and any additional costs of that trade does represent a drag on the Canadian economy. But I don't want to overstate the significance of that. The Bank of Canada last year estimated that a full-blown trade war with tariffs on the order of 25% flying both directions on almost all goods between the two countries um would shrink the Canadian economy by about 2 and 1/2%.

[00:07:41]That's a lot. The and 1/2 % on a $3.3 trillion economy is a significant amount of lost income for Canadians, about $80 billion.

[00:07:52]But there are so many other ways that we can boost the economy far beyond that. I mean, you mentioned the productivity initiative at at the start. The past 10 years of slow productivity growth has accumulated to a point where had we simply kept pace with the US over the past decade, our economy today would be 18% larger than it is. So, more than 600 billion in additional income. So, I certainly don't want to say that uh trade costs with the US are are unimportant, far from it. But there are lots of ways we can boost how attractive our economy is for investment, capital accumulation, for growth, and that's under our control. Um and of course, we should be working towards, you know, a deal with the United States. But it it's not an existential threat to the Canadian economy the way that um some portray it to be.

[00:08:50]>> But but this just the trouble that these ongoing um uh tit-for-tat wars, I mean, if you're an investor thinking about whether or not you should choose Canada over some other places, that's not helpful.

[00:09:04]Neither is a vote on separation in Alberta or Quebec or anywhere. Like we're we've got a lot of own goals here.

[00:09:12]>> Uncertainty is a challenge for investors, no question. And there is some uncertainty, um perhaps more than some, um with respect to the trading relationship between Canada and the US, but there's a lot of uncertainty that we create for ourselves. And yeah, the separation discussion in Alberta and Quebec is one part of that, but there's also policy uncertainty from the federal government, too, and it and it has been for years, nothing new. Like when you're changing policy from one year to the next dramatically so, it makes it very hard uh for businesses to plan, especially for large-scale multi-year investments.

[00:09:48]It It also makes it difficult for uh commitments being made for long-term hiring decisions, too. So, when uncertainty is high, hiring slows and investment slows. That is that is crystal clear. And so, part of what governments can do is uh reform is needed in a lot of different areas in Canada, for sure, but really execute on that quickly. Get to the new policy environment and make it stable from that uh point forward rather than introducing dramatic changes.

[00:10:17]>> This is the problem. You know, you have a bill that says, "Oh, we can circumvent the laws on the books if we want to."

[00:10:24]Um says the federal government. Leave it up to cabinet ministers, but that doesn't give any certainty to an investor because governments change.

[00:10:33]There could be an election tomorrow, the policy will change again. If they just change some of the regulatory nightmares, the Bill 69s, the 48s, all of that stuff, and made their position clear, then companies [clears throat] would invest regardless of who's in charge.

[00:10:49]>> Exactly. And I I I think I share your perspective there and and I think in a past conversation, um I noted that I tend to view the shorter-term Building Canada Act, you know, providing the ability to exempt certain projects from certain regulations that it serves a from in my perspective an important short-term goal of of just like really trying to move the needle here on some major projects while the work of improving the regulations and the the broader uh structural challenges we face is ongoing cuz that can't be done instantly. Uh now, it does seem to be taking some time. I got to say. It's been roughly a year now. We're heading up on the one year anniversary actually of uh of this uh uh bill and and very little in terms of the underlying structure of some of the regulatory challenges have been addressed. Um very very little changes in terms of the um disincentive to invest from the tax system has been addressed. Some some some valuable changes in the budget, but just targeted and temporary rather than broader based structural reforms. And just And that's slower, but it it really should have started by now. And >> Yeah. Some some shovels in the ground as we say in in shorthand here. It was interesting to me that at the um G7 when uh when the statements, these communiqués are are released because the Prime Minister has been going to all these European countries talking about we we are an energy superpower and we're going to, you know, supply for you. And even in the um communiqué they referred to Canada's potential energy supply quote in the coming years. So, they're pretty realistic about this that we're not the answer to their problem in either the uh you know, post Strait of Hormuz days or even longer than that.

[00:12:45]>> Yeah, the the communiqué uh made made made a number of points as these uh typically do, but one of them was indeed that they are committed. So, all seven countries here as a group to accelerate the diversification of energy supply routes.

[00:13:00]Uh direct quote there. And really that's just to avoid the the risks and vulnerability faced by having so much of supply transiting through the strait, you know, at some point in the future renewed conflict comes again and then there's another energy shock. And the potential for Canada in particular being singled out in the communiqué for significant additional capacity to global markets. I think that was really quite uh interesting to see.

[00:13:29]>> Yeah, that's >> And and I agree with you that Canada has that potential for sure to have some significant additional capacity.

[00:13:35]Um natural gas, much more in terms of LNG export, uh not just in British Columbia, perhaps on the East Coast as well, and natural gas production can increase in um at Atlantic Canada as well.

[00:13:50]Uh and plus of course pipeline infrastructure to ship more from I guess the you know, Alberta and and Saskatchewan in terms of oil and gas, but that does take years. Even in the best-case scenario, building the physical export capacity or the facilities themselves, even if there was no uncertainty, even if policy was very well aligned and predictable and no risks, just the physical act of building it >> Yeah.

[00:14:18]>> certainly takes time. And so yeah, them noting that this is something that would happen in the coming years, yeah, it's pretty realistic. But hopefully >> Yeah.

[00:14:26]>> those coming years are not um greater in number than they need to be. And and I I and you know, there's a challenge of course. Canada's a very decentralized country and so managing >> Yeah.

[00:14:36]>> this is difficult. Things are hard to uh do quickly unless all provinces are rowing in the same direction and not all provinces are.

[00:14:46]>> No.

[00:14:46]>> And and so how to navigate that federally? That's way above my pay grade, but I do take the Prime Minister, you know, the the goal is pretty clear and I think I think it's genuine that there is a desire to increase investment activity, resource production, and exports, not just for our own um e- e- economic benefit, but to the resilience of the global economy and in direct support of our kind of key global allies.

[00:15:13]>> I want to come back to uh another issue that was highlighted as well because of our arrangements with China, making them a a new strategic partner, but also the tension it creates with the EVs coming in um with the US. They don't want them coming across the border.

[00:15:32]But it's um it's not just us. I mean, the the G7 a a consensus is building. This I'm reading again from notes. What makes um Chinese industrial overcapacity harmful is that the surge in Chinese exports, right, which we all have in all of our stores everywhere, has come at the same time as a drop in imports. So, they're they're trying to become more self-reliant as well and and not buying more from us and other places in the Western world. And of course, they hold a huge amount of um of US [clears throat] debt as well, which gives them more bargaining chips. Where are you on this issue with China and how much trade and how much stake we should be putting in that relationship?

[00:16:25]>> Yeah, I I tend to view trade favorably.

[00:16:28]There are gains from trade for countries on the export side, of course, the employment that comes with that, but there are gains on the import side as well.

[00:16:37]The items we buy from abroad are typically at lower costs or sometimes higher quality than what can be done domestically. And that's that's the nature of trade. You focus on where you have a comparative advantage. For Canada, that's a a lot of resource activity areas, and manufacturing in particular in certain areas, too, of course. But then uh you focus on those and import from elsewhere items that other countries have a comparative advantage in. And for anyone within Canada competing with those imports, of course, that's that's competition, and competition can lead to contraction or or even exit to firms in Canada. That's a natural feature of of a market economy and I'm kind of reminded of of Japan when it increased its auto production I guess now a half century or so ago there was a great deal of concern mounting in the United States and elsewhere around the uh you know autos being shipped into the US market. A lot of you know calls for protectionism then and you know thankfully it didn't really disrupt the relationship there. I mean it led to competition and an improvement in auto production and the quality and the price of domestic producers in the US. So competition is good and if that's coming from China because they have uh improved on how we build electric vehicles and we haven't quite caught up well then our producers should catch up or exit. And I mean creative destruction is a a real source of growth. Now >> But then you have these other issues like is slave labor being used and are they influencing our elections unduly and all of those things?

[00:18:24]>> and I am and this certainly gets then beyond economic issues and it is absolutely um and absolutely fair for us to use trade policy as a way to exert pressure on other countries to adopt policy changes.

[00:18:43]This is and that's fine. Uh we should recognize that it comes with an economic cost and it might be a cost worth paying. No doubt. Uh but how these measures are often portrayed is as something that is damaging to the Canadian economy if we allow the 49,000 uh or whatever the number is Chinese EVs into the market. Well I think that's not the case. There are economic gains uh from trade liberalization.

[00:19:08]Um and whether it's with China or others.

[00:19:12]>> So, where this is um part of the conflicting messages sometimes we hear from the political leadership. So, everybody's aware of the Prime Minister's speech in Davos and the rupture and it's not a transition and the US weaponizes its economic clout and it's made us subordinate. So, we're going to be because we're the most European of non-European countries. Um it And and you put that in the context of everybody having rushed to the globalization world where we were all just going to do what we were good at and then trade out there in the real world and now people are retrenching and saying no, we need to provide more of our own stuff to ourselves, not be so vulnerable. I think COVID kind of put that in really sharp relief. So, where are we on that scale of moving toward how we do business and with whom?

[00:20:16]>> Yeah, it's true that increasing international trade exposes an economy and therefore a country to shocks that originate from abroad.

[00:20:27]>> somewhere else. Yeah.

[00:20:28]>> no question. Now, there are risks having more protectionism as well because trade is also a way to cushion the hit from domestic shocks.

[00:20:44]>> Yep.

[00:20:44]>> So, increased international trade while it does expose you to some risk abroad, it may and it it depends, it could go either way. Dampen the overall amount of volatility that we see economically. You know, the rise of globalization it really accelerating through the 1980s and onwards is also a period when economies became fundamentally less volatile. You know, economists call this period over the past 40 plus years the great moderation.

[00:21:14]>> Yeah.

[00:21:15]>> Not very well known like in broader public conversations, but the volatility of our economies is much lower than before.

[00:21:24]And so we should keep that in mind as well that there's a benefit not just in terms of productivity and growth and lower priced imports, but there might be a dampening effect here as well. But with the US in particular, you know, Canada's exposure there is is just so much higher than many other countries. Mexico, you know, along with us in terms of how important the US market is and that just you know, does does make it a little bit challenging to navigate sudden changes in US policy. But this is not new. This is something we've been grappling with since be Confederation. Think about when the reciprocity treaty was suddenly eliminated. Big negative shock to Atlantic Canada in particular. You know, we this is part of what it is to be Canadian. Our exposure to the United States is nothing new, won't change, and while policy can move things at the margin, it's not going to fundamentally change this. I think about the last 30 years. We really started a big push under first Jean Chrétien, continued on through Paul Martin and Stephen Harper, and a little bit more recently true Trudeau expanding the number of free trade agreements that we have. So 1997 Israel and Chile and 2002 Costa Rica and then and Peru, Colombia, Jordan, Honduras, South Korea, big one in 2015. Then of course the EU, massive trade agreement and the Trans-Pacific Partnership, another massive one.

[00:22:54]This has lowered our export dependence on the US. About 82% of our exports in 1997 went to the US.

[00:23:03]>> Mhm.

[00:23:04]>> Now it's about 72%.

[00:23:06]>> Yeah.

[00:23:07]>> Um so still dominant and will always be.

[00:23:10]>> Yeah. Geography is geography.

[00:23:11]>> But [clears throat] you know, these these increases in trade agreements and and the Prime Minister is trying to push through more of these agreements with South America. I think is a really interesting potential short-term possibility.

[00:23:23]>> That That can move the needle at the margin, but we should never be under the impression that the US will be anything but our overwhelmingly most important trading partner both imports and exports.

[00:23:34]>> Let me put the the question to you this way because you were suggesting a moment ago that the the liberation day trade tariff uh hoopla uh didn't have in the end uh a huge impact on our economy and in fact some of our counter tariffs were just as punitive on on Canadian um buyers and sellers as anything. What so if Trump is is true to his word here and it's not just negotiating that you know, I don't want to have anything to do with this deal. We're going to get out of uh USMCA or Kuzman after 3.0 whatever you want to call it. Um maybe it won't have that big an impact.

[00:24:20]Maybe we can just carry on doing business with people who want to continue to do business.

[00:24:26]>> Yeah, I and I don't want to think think about it as as as black and white here. There's certainly costs and maybe Ontario is a good example of this.

[00:24:34]Perhaps the most hardest hit in terms of the disruption uh of the uncertainty, you know, the clear challenges for auto manufacturing and what we've seen in Ontario is and and you don't just need to take you know, my word for it in terms of the modeling.

[00:24:49]The government of Ontario, their growth projections when they tabled their budget in 2024, right? So before the the US uh administration changed versus their latest projections now have the Ontario economy by next year about 2.2% smaller than they were originally projecting. And so I think I think that's a good sense of like how big has the economic hit for Ontario have been.

[00:25:18]>> Yeah.

[00:25:19]>> Roughly 2% reduction. Now, if if you look at goods-producing industries, manufacturing in particular, there's about 30,000 fewer jobs now in Ontario goods production than there was before January 2025. And and those are real significant costs to the individuals involved, really difficult uh for them, but it's a manageable shock from the perspective of the government, like the state.

[00:25:49]Uh certainly increases the deficit, you know, and and creates challenges to support workers through these transitions, but it's manageable. It's not existential.

[00:25:59]And so when thinking about what Canada has to do in order to get a deal done, we shouldn't think about the cost of no deal as infinite.

[00:26:10]Now, that's That doesn't mean we should resist having a deal. Like we're protectionist in many areas. The US is rightly pushing us to liberalize, and we should be willing to liberalize there.

[00:26:24]>> Yeah.

[00:26:25]>> But if the US is going to be using trade negotiations to push in other dimensions, in particular, like non-economic >> Yeah.

[00:26:34]>> dimensions, it then that's a broader conversation.

[00:26:38]Uh you know, do we participate in the golden dome missile defense system or or not? And I I have no expertise to say whether we should or should not.

[00:26:48]>> we're doing the opposite, which is we're going to buy Swedish planes, not American planes cuz we're you know we're that's my concern is we're getting into tit-for-tat here.

[00:26:58]It may be the right military decision, right? But that's how it's seen and that's how it's being used.

[00:27:05]>> Yeah, I'll leave it to others I guess to comment on the military procurement stuff.

[00:27:09]>> to I want to get us back closer to home here in terms of some of what we're dealing with. So first let's start with the big R question >> Mhm.

[00:27:19]>> or the TR question. Is this a technical recession or just a recession?

[00:27:25]>> I'm reminded of 2015 when we were having a debate in the lead up to that year's election about whether Canada was in a recession or not. We had two quarters of negative growth.

[00:27:37]>> Yep.

[00:27:37]>> Nope, we did. And and many wanted to characterize it as a recession. Many I should say the opposition at the time Liberal Party in particular.

[00:27:47]>> Yep.

[00:27:48]>> And and the government under Stephen Harper saying no, it's not a not a recession. And now you just have a complete reversal of the I guess partisan talking points on on this. We have two quarters of negative growth. Do I think it's a recession?

[00:28:02]No.

[00:28:03]Was 2015 a recession? No.

[00:28:06]So two quarters of negative growth doesn't automatically mean you're in a recession. And and sometimes you can have a recession without two quarters of negative growth. I think about US the dot-com like the 2000 2001 recession didn't have two consecutive quarters of negative growth. So a recession is really a broad and persistent and sustained contraction in economic activity. And that it's somewhat subjective about when you label the start of a recession or not.

[00:28:40]And we have a lot of trouble I should say economists labeling a recession in real time. We have to look back and use a lot of different data and try and time things out. We have a committee in Canada under the the CD Howe Institute, actually, that's broadly viewed as the kind of authority in classifying when recessions start and stop. And I suspect that they will not classify this as a recession.

[00:29:05]>> the the larger problem is, and I know that just becomes a political fight.

[00:29:09]The, you know, who gets to call what a recession and when. But but the growth in this country has been, um, slowing. I don't know how many reports we've worked on here in in the Senate on what's happened to our productivity, you know, relative to the US it's disastrous in terms of our GDP.

[00:29:32]>> Relative to almost any country in the advanced industrial world that you want to compare us to.

[00:29:36]>> Yeah, I think we're 19 out of 38 in the OECD, something. It's not a good track record. And so, um, what is the key point? What, you know, that we really have to focus on here with all of these productivity, GDP issues, all of those things. Where do we have to focus our attention?

[00:29:58]>> Uh, so that that's an important point that whether we call the current moment a recession or not, you know, it is one thing. The experience of individuals and businesses of the economic situation can be quite quite another.

[00:30:13]>> People lining up at the food bank are feeling it.

[00:30:16]>> Exactly. Exactly. I think many are feeling it and the statistic that looms large to me is is one that, you know, gets outside of abstract more abstract economic statistics like gross domestic product and things like this, but how fast are people's incomes growing relative to prices? You know, real income growth for households over the past 10 years has been slower than at any point over the past century with the exception only of the Great Depression, which of course was its own unique >> Right. Right.

[00:30:46]>> and the 1990s recession. And that 1990s recession was a very deep and long-lasting contraction for Canada.

[00:30:55]And here we are right now, while I I wouldn't label us as in a recession, the real income growth of Canadian households is slower than any point since that 1990s recession. So, it feels many will feel very much >> It feels pretty recessionary.

[00:31:13]>> And employment, the employment rate has been falling over the past 2 years by a level that exceeds most post-war recessions >> These >> over a comparable period of time. So, it's it's a challenging economic moment, for sure.

[00:31:29]>> These job numbers that came out the 8080 88,000 new jobs, but then everybody went into the statistics and said, "Yes, but a third of them were temporary, uh people hired to do the census or to work on all the FIFA activity that's underway. These were were not real significant increase in jobs."

[00:31:52]>> Yeah, you never want to hang your hat on any single >> Yeah.

[00:31:56]>> jobs report from Statistics Canada. We do not track everybody in every day and ask what they're doing. This is effectively a very large poll.

[00:32:06]And it has, like any poll, a margin of error. Like Statistics Canada is literally surveying people, a lot of people, and it's a high-quality poll.

[00:32:13]I'm not taking away from Stat Can, but but it has error.

[00:32:17]>> Yeah.

[00:32:18]>> We might one month measure employment going up when in reality it didn't, and you know, the reverse another month. So, it's best to look at trends.

[00:32:25]>> Yeah.

[00:32:25]>> And the trend in in Canada's labor market over the past 2 years is that it's been worsening.

[00:32:32]It appears to have flattened out. And so, it doesn't appear to be getting uh much more worse than it was before.

[00:32:40]Whether we're at we've actually turned the corner or not and are starting to see a sustained recovery, I think it's too soon to know.

[00:32:49]>> Yeah.

[00:32:50]>> And a lot of the slowdown here is tied to uncertainty. The biggest weakness in the labor market is in sectors that are dependent on the US market for their output. That's where you see a lot of employment >> and energy sectors cuz the only way they can survive is to export to the US.

[00:33:09]>> film and television, too. So, services are not immune to to this. Uh but in sectors that are not exposed to the US market, they've seen employment growth.

[00:33:17]So, the economy has seen growth in some areas and uh losses in others. And overall, it's sort of just flatlining for lack of a uh a better word. And a lot of that slowdown is tied to uncertainty or to real tariffs like in in autos, steel and aluminum, >> Yeah.

[00:33:35]>> those sectors.

[00:33:37]>> So, whenever we talk about this our economic numbers, the the the shocking numbers are always the debt. Government debt per person, $97,000.

[00:33:51]Like, that's what I owe because of how the government is spending the tax dollars. They don't have any of their own money. This is all our money that that we give them. GDP per capita, 76 um thousand. We owe Let Let me put it this way. We owe more than we actually produce. So, we are a genuinely indebted country. Um how vulnerable does that really make us because you have all the people that are subscribed, including governments, to modern monetary theory, which is just keep spending. It'll all work out in the end and we'll grow our way out or whatever the answer may be.

[00:34:34]This to me makes me feel more vulnerable than almost anything else.

[00:34:40]>> Well, you're right to think about public debt levels as risk exposure about being vulnerable.

[00:34:49]The higher the level of public debt is, the greater the impact that adverse economic developments >> Right.

[00:34:57]>> or changes in interest rates has on well, the government's bottom line and then over time necessarily the level of public services that we enjoy or the tax rates that we face in the future. No question.

[00:35:12]And we're at a point now that you know, interestingly the combined debt to GDP ratio, if you just look at like credit market debt, bonds, things like that that are outstanding of provinces and the federal government without counting CPP cuz that we should >> Right.

[00:35:30]>> it as a separate bucket.

[00:35:31]>> Yep.

[00:35:31]>> We're at a level of debt relative to the economy now that's equivalent to the peak that we saw in the mid-1990s.

[00:35:41]Now, interest rates are lower now, so the overall burden's not as bad as it was then, but >> Yeah, when your mortgage was at 25% you know.

[00:35:49]>> We're entering somewhat new territory in that the overall combined debt levels as a share of GDP will um exceed the levels that we had in the mid-1990s. And it's the longer-term outlook that makes me even more concerned.

[00:36:07]Federally, we have because of the increase in military spending, you know, needed for all sorts of reasons. Um financing that's going to be a challenge unless we make adjustments on how much we're spending in other areas, on transfers to individuals, to provinces.

[00:36:24]Um government's already put some focus on the operational spending like the direct expenses of the the federal government, but that's a big source of pressure for the federal government that's hard to hard to overstate. You know, it's equivalent to doubling the GST if we were to just cover the military spending on the revenue side, which I'm not suggesting we do, but to give you a sense of scale.

[00:36:47]>> This is this is the issue because in in government's response to all of this, um, we're seeing them create sort of new parallel bureaucracies to deal with housing issues or major projects issues or, um, defense you know, do we Yes, there are some cuts being proposed in the federal civil service and whatnot, but we have got a lot, it looks like, parallel organizations trying to solve the same problem.

[00:37:19]>> Yeah, and and this connects into a comment I made earlier that is perhaps overly generous, but I kind of see it as circumvent what exists now cuz that's quick while you either reform or completely deconstruct the the previous kind of institution. So, if if there's a problem in how things are structured, sometimes it is simple to build a diversion and then do the do the reform renovations or or elimination of of the of the problem areas. Now, we haven't seen that second step. Yes, that's and if we do, well, then I think that all validate a lot of these choices, but if not, if we're just duplicating efforts, then that's a whole other conversation.

[00:38:06]>> Yeah. But when what why, I guess let's put it this way, is it as simple as government spending? We are the most indebted country at the federal level. We're the most indebted country at the provincial levels.

[00:38:22]>> So, >> Maybe well you might have you might correct me and also personal like what what we're all putting on our credit cards now is um a whole other level of debt.

[00:38:35]>> Yeah, so so we're not the most indebted federally.

[00:38:39]We actually perform pretty well federally.

[00:38:41]Uh I think about the United States where their federal debt is over 100% of GDP whereas ours is in the low 40s percentage GDP. Now, >> That's not good though.

[00:38:53]>> countries is that we're very decentralized. We're the most centralized advanced economy on Earth.

[00:39:01]And so neglecting the subnational, the provincial uh order of government can really skew how Canada compares to others.

[00:39:11]>> Right, cuz so much is offloaded onto the provinces constitutionally.

[00:39:16]>> if if a province finds itself in real genuine difficulty, that's going to be uh a cost for Canada at large, for Canadians everywhere.

[00:39:25]Um and provincially is where you also see the biggest longer-term challenge.

[00:39:31]Uh healthcare cost growth from an aging population is over the next couple of decades going to add up to more than the military spending increase that the federal government faces. So, the provincial challenge is even greater and currently no province is ready.

[00:39:49]Some are Some are trying to make adjustments at the margin. Um I think about Alberta and I'm not qualified to evaluate the choices that Alberta is making, but they are trying to do some things a little bit differently.

[00:40:02]>> Yeah.

[00:40:02]>> Um uh public provision of certain types of publicly funded services is one example. A little more flexibility for doctors to provide services outside the system is another example. And and the government's doing that you know, dare I say to at least a little bit of controversy. Whereas, I tend to think about because of the health care challenge we face long-term, we do need to think about innovating, about changing the way that we do things, about allowing for more flexibility across the country.

[00:40:28]>> things that won't be popular.

[00:40:30]>> Yeah, and and and doing things that might not work. But we don't know until we try a few things out and learn what works and what doesn't. And so that also might call for a change to things like the Canada Health Act to allow for a little more flexibility here to try and address that massive long-term fiscal challenge that we all face.

[00:40:51]>> The other thing that has a lot of people troubled, it comes up in conversations that I have about um access to the CPP um funds. They um >> Mhm.

[00:41:03]>> the Canadian Pension Plan, their let's just say their rate of return isn't much better than if they just uh you know, put it in a general investment fund at at one of the banks.

[00:41:15]Um but it's also everybody's security blanket, and they're worried about do we harness that? Do we take that and start using that for the so-called sovereign wealth fund that only has borrowed money in it, or to you know, fund some of these projects, which you say quite rightly, could be risky.

[00:41:37]We may need to try it, but we may not know if it works, and it might not.

[00:41:41]>> Yes, that's a really interesting conversation right now about about pensions. Yes, the Canada Pension Plan first, we're lucky that we do not face the unsustainable uh pension arrangements that many many other countries do.

[00:41:56]>> Yeah. Yeah.

[00:41:57]>> The reforms in the 1990s crossed party lines that had Jean Chrétien and Mike Harris and Ralph Klein agreeing. Uh that was a really nice moment for Canadian federalism, and >> Yes, that we could look on back on fondly.

[00:42:11]>> And and and it was legitimately a solid reform that ensured that the CPP will be here for us for generations to come.

[00:42:19]>> Yep.

[00:42:20]>> Um you know, but can we do it better? I I think as you noted the the cost of operating the CPP fund, the investment uh board, because it's actively managed might be uh more like the cost might be more than if we were to have more of a passive approach where the returns could have just been as as good and in broad highly diversified index funds, if you will.

[00:42:48]And And Andrew Coyne, for example, every year I think writes an article on this very thing. And And And I have all the time in the world for those for those articles. I I do tend to be a little bit more skeptical of active management as a as an appropriate strategy. But But others will disagree with me. And so I think it's an interesting area >> Yeah.

[00:43:09]>> of discussion and debate. But what what I worry about is uh calls to use public pension funds to achieve, you know, infrastructure goals or economic development goals. Those funds are there in order to cover pension benefits.

[00:43:29]>> Right.

[00:43:30]>> Those funds need to be invested to earn a return as large a return as we can get so that we don't need to increase uh taxes on workers to fund the future benefits or so that we don't >> Cuz there's way more of us at this end and way fewer people paying into that system. So the returns actually have to be better.

[00:43:49]>> accumulating this large fund was this awareness that we have an aging population. And in order to cover that we need to build up a fund and invest it to generate income.

[00:44:02]>> Yeah.

[00:44:02]>> And that should be the only objective of these pension funds. And the second you start introducing other goals for these funds, especially domestic economic or infrastructure goals, that is necessarily going to come at the cost of lowering the long-term returns of the fund, which makes it harder to cover pension benefits. And so I I hope that that's not a route that governments go. And as an aside, it would not affect investment in Canada at all. It would simply displace >> Well, that's where I was exactly. That's where I was going to go with this, which is until we wrestle the real problem, which is right now, uh we have more outflow than inflow of investment dollars, we need to actually do things that will attract people to come and invest in this country, not buy us out, invest in the projects that we need to do, that we need to have.

[00:45:00]>> I phrase it as we have a demand for investment problem, not a supply of capital >> the money's out there, absolutely.

[00:45:11]>> And how you move the demand for investment is about the expected returns on various projects, the after-tax returns. You can boost those returns by making it easier to invest, lowering the cost of investment, regulatory reform, for example, speeding things up and so on. Or you can do it through some smart tax changes to increase the after-tax return to investment. Those are the conversations we should be having. The supply of capital, that's not the constraint that we face.

[00:45:40]>> Yeah. Yeah. So, that's the trick. Um and and is the approach we're having going around saying we need new trading partners and reducing our reliance on the US?

[00:45:54]But, um not really being uh as as proactive as we could be on the major projects in which they might invest or having votes on separatism or whatever the you know, at a certain point we have to get our own house in order to ask people to come over to the house and invest.

[00:46:18]>> Completely agree. I think we're singing from the same song sheet here. And it and it has been a year or I guess more than a year now, a year and a half or so from the last election.

[00:46:28]Um >> It's time >> hope- hopelessly optimistic that we'll start to see a big uptake in activity very soon cuz there is a lot of upfront work that needs to be done on a lot of major projects. But yeah, I think there's a so much that we can do domestically.

[00:46:48]And there's so much that we could start the process for without delays. I think about tax reform. I mentioned this a lot only cuz I think this is relatively easy to do relatively quickly cuz it's not about physically building something.

[00:47:04]And and making reforms to the tax system, we haven't had a hardheaded look by an expert panel for example on the business tax system since the 1990s.

[00:47:12]>> Yeah.

[00:47:13]>> The Liberals did commit to it in their platform last year, I think smartly.

[00:47:17]>> Yep.

[00:47:17]>> And that's a that's a big lever that we can pull and we could have initiated that in the last budget but didn't. We could have initiated that in the in the spring update and we didn't. Just start the process. It doesn't take away from anything else and it gets us to the other side sooner.

[00:47:34]>> And I my my final point, I will let you go here but but and you've written about this a lot, this long promised, much debated, you know, taking down interprovincial trade barriers so we can all do business with one another to fill some of those gaps that we may be losing with the Americans or we haven't quite consolidated with others, that's a huge piece of the pie. I was looking for the number that you that you put on it because it's it's worth people thinking about about what we could be generating ourselves by just doing things more sensibly at home.

[00:48:13]>> Yeah, and so that the number that's used quite a bit by governments now is the $200 billion. That's that's from some work that that I did through the McConnell Alliance Institute with Ryan Manutech a couple years back. I think so there's some new work with the IMF on a team that I'm working with there. We're we're coming in about 220 billion. So whatever the right number is that gives you a sense of scale. But here's the important point.

[00:48:38]Most of those gains the overwhelming majority of those gains about 180 or so billion of the 220 comes from services liberalization.

[00:48:51]And the barriers there >> that. Just explain what you mean by that.

[00:48:55]>> Well, if you're a profession, sorry, a professional in different areas, maybe you're a healthcare professional, an engineer, or what have you, financial services advisor, you go down the list. There's about 700 of these occupations across the country that have provincial professional licensing bodies. And you can't practice within a province unless you're licensed. You can't sell in to a province unless you're licensed. So if you want to provide legal advice to a client in other provinces, you need to have appropriate licenses to do so.

[00:49:35]If you're a podiatrist and you want to practice and so on down the list. And that's often viewed as a barrier to labor mobility. It makes it hard to move and it is. But it's also a barrier to your ability to trade your services with clients who live elsewhere or sell your services to a business that is located outside of that.

[00:49:55]>> move and people commute and people do all sorts of >> Indeed. And and getting those licenses is sometimes hard. It takes a while, it's costly, and that limits how much trade and services we engage in. And it'd be very simple for provinces to simply say, "If you're a podiatrist from New Brunswick, >> Right.

[00:50:16]>> you are good to go. Just automatic uh good to go in our province."

[00:50:21]>> over to Saskatchewan. We'll we'll help you set up shop. Yeah.

[00:50:24]>> Yes. And and >> That's a staggering number though just on on the service sector alone. Never mind trade in in hard goods, right?

[00:50:33]>> we think about trade as trade in hard goods. And between countries, most trade is between hard goods or in hard goods.

[00:50:39]But but interprovincial trade within Canada, most most of that trade is services.

[00:50:47]>> Trevor, I don't know. I always love talking to you, but then I'm always at the end of the conversation going, "Why Why can't we do this? It's so obvious."

[00:50:56]>> [snorts] >> Governing is not easy. I don't envy anyone who's in the process. And so, thank you to you for all of your efforts on uh on the governing side of things to try and move the needle here. But um you know, it's hopefully it's moments like this that I think reminds Canadians generally about the value of good policy. And there does seem to be a willingness now to do things differently. And that has leave me with some optimism.

[00:51:21]>> Yeah. Yeah, the Prime Minister's got all the popularity needs and he's got a majority government. So, let's see it happen. Yeah. Trevor, great to talk to you as always. Thanks so much.

[00:51:31]>> Thank you.

[00:51:31]>> He's He's got the longest title here, Trevor Toome, so an economist and research fellow at the University of Calgary, coordinator co- co-director of Finances of the Nation. That's a good project with the Canadian Tax Foundation to make finance data of And then this new project that you're on, which we hope that you come up with brilliant answers leading the productivity initiative because that's what we lack, and you've got money and time to do it. So, I hope you I hope we'll we can continue to have these conversations and you'll continue to point us in the right direction.

[00:52:08]Thanks a lot, Trevor. [music] See you soon. And thanks to all of you for joining us today for this conversation.

[00:52:14]That's it for this edition of No Nonsense with Pamela Wallin. We'll see you soon. [music]