CCI Chair Jim Balsillie addresses MPs studying the 2021 federal budget

Today, CCI chair Jim Balsillie testified to the House of Commons Standing Committee on Finance as MPs study the Bill C-30, the 2021 budget implementation bill. The following is Mr. Balsillie’s opening statement at the committee hearing.

‍

In addition, you can read CCI’s initial reaction to the federal budget issued by executive director Benjamin Bergen in the hours immediately after Finance Minister Chrystia Freeland tabled her 2021 fiscal plan in Parliament on April 19.

I am Jim Balsillie presenting on behalf of the Council of Canadian Innovators.

For the Committee’s study of Bill C-30: Budget Implementation Act, I’ll make two observations about the structure of the modern economy in relation to the budget, and then conclude with one recommendation:

1. The nature of the global economy has shifted significantly, particularly in the structure of successful companies

2. Without understanding contemporary marketplace frameworks that guide modern day wealth creation, the investments Canada makes, including in this budget, will not yield prosperity and security for Canadians; and,

3. It is an urgent priority to develop long overdue institutional capacity in our public sector to support policy development for 21st century realities.

‍

‍

Shift from a tangible production economy to an intangible rentier economy

The accelerated pace of innovation and the digital transformation over the last 30 years has created a new kind of economy in which the basis of wealth and power is derived from the ownership of valuable intellectual property (IP) and in the last ten years to control of data. Concurrently, the new technologies of this era, centered on the nexus of automated decision making (AI) and machine learning are reshaping our social and political space. Intangible assets comprise over 91% of the S&P500’s $28 trillion total value.

This shift is unprecedented in its degree and rapidity, particularly with the emergence of high profit firms with monopoly positions based on IP rights and control of data assets. Wage growth is now concentrated on the small workforces of firms rich in IP and data, which drives inequality. These firms have a low propensity to invest because they generally don’t produce tangible goods, rather the marginal production cost of their intangible goods is near zero. Additionally, the nature of the taxation system on the profits of intangible assets allows firms to deploy effective tax minimization strategies resulting in tax base erosion for Canada.

Countries around the world, starting with the US in 1980s and then many others, have retooled and recalibrated their prosperity strategies to fit the shift from the traditional economy to the economy of intangible assets. Canada’s prevailing policy orthodoxy — still visible in the most recent budget — is to stick with traditional, production economy strategies for growth even though such an approach continues to result in weak productivity, lower rankings in innovation indices and most acutely over the last decade, in the decline in our GDP per capita compared to the U.S. But GDP per capita is no longer a sufficient metric for prosperity because it fails to capture earnings on assets abroad and the accrual of value in asset holdings, so this gap would certainly be even wider if we included these wealth effects. As the chart in my appendix shows, Canada’s deficit on IP payments and receipts is widening at an alarming rate — and this deficit would be much larger if the value of net flows of data were included.

In the contemporary economy, the objective is to generate and control IP and data stock assets for their economic and non-economic benefits amidst rivalrous international economies. Canada’s prosperity strategies are not only inadequate but often counter-productive such as:

• creating Foreign Direct Investment agencies and programs that have no contemporary analytical framework for spillover effects (unlike efforts in US, UK, Germany, France, EU, and other advanced economies).
• a 15-year spree of signing “free trade” agreements despite economists writing as early as 2003 that international trade treaties have shifted to dealing with strengthening protections for IP owners rather than traditional tariff reductions.
• making enormous investments in scientific research without adequate IP policies and strategies.
• underfunded and outdated mandates for critical regulators of the modern-day economy such as for foreign investment, privacy (data governance), and competition.

These are just a few examples that demonstrate that Canada’s policy leadership is using outdated strategies to govern an economy that has changed in its nature and structure.

The federal budget reflects an outdated approach to the contemporary economy. It also fails to recognize the real limitations of our institutions. It’s irresponsible to pack 270 measures in a 700+ page document and expect that they will be implemented and it’s futile to invest enormous public funds without updated frameworks and clear strategies that would yield desired outcomes for Canada. While the risk remains high for turning $1 of taxpayer investment into 10 cents, there is also the risk of continued counterproductive measures where taxpayer funds generate negative returns for Canada.

Finally, redistribution of a fixed economic pie or “prudent fiscal anchors” many are advocating for are insufficient without a strategy to generate new wealth. Canada urgently needs growth strategies attuned to contemporary realities and budgets that reflect them.

‍

‍

Institutional Capacity for policymaking in the modern economy

I offer one recommendation that can foundationally help improve Canada’s budget planning and implementation: Re-build the Economic Council of Canada to create in-house capacity for the analysis of the contemporary economy.

The nature of today’s global economy requires an unprecedented amount of horizontal integration, analytical depth, and rapid response to deal with the accelerated pace of innovation and the powerful feedbacks and spillovers that emerge in our networked society.

A revived Economic Council would have several core functions including:

• Develop the expertise to measure and manage the intangibles economy, including the capacity to develop IP and data governance strategies and understand contemporary marketplace frameworks.
• Serve as a centralized resource to support line departments and expertly assess policy decision spillovers on Canada’s intangible assets.

A properly built Economic Council would lead in the very necessary intellectual revival of our policy community and help government rebuild critical capacity that favours national interest, including post-Covid economic recovery.

In closing, I reiterate that misunderstanding our changed economic realities comes with real consequences on our prosperity, security, and ultimately our sovereignty. Helicoptering money does not work like it used to because the volume of credit needed to produce one unit of GDP growth tripled between 2007 and 2015. And simply chasing “jobs” with an assumption of relatively homogenous firms is a race-to-the-bottom strategy that will also worsen inequality. Canada has the potential to “build back better” but it begins with knowing what we need to build and how we need to build.

‍

‍

Appendix: Canada’s IP deficit

‍