November 13, 2013
Coordinating Economic Development Spending in Canada
This Mowat Note argues for better coordination of the $20 billion per year that is currently spent on municipal, provincial and federal economic development, R&D, and innovation programs and incentives.
Introduction
Governments in Canada spend roughly $20B a year on a variety of economic development, R&D, and innovation programs. [ref]Given that these expenditures are divided between federal, provincial, and local governments and accounted for in different ways, this is a rough estimate to illustrate the scope of the issue. while we have sought to avoid double-counting of contributions at different levels of government, our estimate can only be approximate given current accounting and reporting practices.[/ref] The spending is designed to spur economic growth, increase productivity and foster private sector innovation. This is an enormous public expenditure, larger than the oft-debated Equalization program and higher than the annual expenditures of the governments of Manitoba and New Brunswick combined.
Government efforts to promote economic development are diverse, ranging from direct supports like cash grants and preferential tax treatment, to indirect supports like export promotion and research centres (see Table 1). What they have in common, however, is that with occasional exceptions (such as the auto sector, energy development or centres of excellence) these programs are almost always designed and delivered in isolation from one another, with little to no effort to align the priorities or design of federal, provincial and municipal initiatives.[ref] The one exception to this rule is efforts to break down barriers within internal markets and to access external markets, which have benefitted from strong cooperation. while these efforts have produced bursts of progress (such as the agreement on internal Trade) they have also seen their share of delays and disputes.[/ref]
This lack of formal coordination of roles and spending stands in stark contrast to most other policy areas where both orders of government are engaged.[ref] Some areas of spending, like primary and secondary education or defense, benefit from clear jurisdictional accountability and intergovernmental conflict does not occur and coordination is not necessary [/ref] In health care, for example, it is now well-established that the federal government is responsible for setting system principles through the Canada Health Act, and for contributing modestly to the cost of provincially-delivered services through the CHT. The provinces, in turn, are clearly responsible for delivering health care services and setting their own policy direction within this broad framework.
In many other areas–infrastructure, skills training and affordable housing, for example–there are formal intergovernmental agreements (whether bilateral or multilateral) on priorities and funding that are subject to periodic renewal and renegotiation. Although many of these processes represent less than ideal examples of federal-provincial cooperation, they all demonstrate some minimum attempt to align spending that is currently absent from the economic development space. These agreements compel governments to sit down and discuss their policy priorities and the objectives of their program spending. These intergovernmental negotiations are not always pretty but they almost always result in some measure of agreement on shared priorities and a good deal of coordination and alignment within the areas they cover.
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Both of these existing approaches–federal transfers to provinces through fiscal arrangements like the CHT or negotiated intergovernmental agreements on issues such as infrastructure and housing–contain flaws. Lengthy negotiations with governments jostling in each other’s policy space can be sub-optimal. It is often better for governments to decide what each does best and get out of each other’s way. There are significant opportunities to clarify roles and responsibilities in many of these policy areas. [ref] Mendelsohn et al., 2010 [/ref] But these messy processes at least represent an effort to coordinate priorities and spending.
But Canada’s economic development and productivity efforts are even more dysfunctional, with uncoordinated and independent approaches from the federal and provincial governments. With sporadic exceptions, governments design and target their economic development programs in isolation from each other. No coherent or functional process exists for governments to coordinate their efforts to maximize impact and return on investment.
In fact, these programs are not even well-coordinated and clearly prioritized within governments. Clear objectives and rationale for investment decisions are rare and meaningful performance measures are rarer still. This is only amplified by the lack of clarity and coordination between federal and provincial governments, with the result that the roughly $20B that Canadians contribute annually to programs to support economic development essentially goes into a black box. The need for greater coordination in these programs–both within governments and between governments–has been highlighted before. The federal government recently completed a review of its spending on business support and R&D,[ref] independent Panel on Federal Support to research and Development, 2011.[/ref] while provincial governments are also re-examining their expenditures in this space (e.g., the work of the Drummond Commission in Ontario), and independent research groups have called for better clarification and coordination.[ref] See Wolfe, 2010; Bradford and Wolfe, 2010; Creutzberg, 2011; Mendelsohn et al., 2010.[/ref] To date, these calls have largely gone unheeded.
Despite their shortcomings, the shared approaches used to coordinate federal and provincial investments in areas like health, infrastructure and training have valuable lessons for economic development. An intergovernmental process is needed to agree on shared priorities, invest in programs that work, measure impact and return on investment, and coordinate spending to achieve agreed upon strategic objectives.
Given the on-going weakness in most sectors and regions of the Canadian economy, along with the global economic transformation underway, governments must ensure that economic policies and programs are delivering the greatest public value possible. Program dollars should go to those initiatives that are most successful at generating increased prosperity, innovation, productivity and good employment opportunities.
To achieve these goals, we need intergovernmental coordination and negotiations. Right now that coordination is not happening–and there is no good reason that it shouldn’t be. A bilateral process–with the federal government sitting down with individual provincial governments to inventory their spending, understand their programming and discuss opportunities to align their priorities–is the best place to start.
Authors
Matthew Mendelsohn
Sunil Johal
Noah Zon
Release Date
November 13, 2013
ISBN
978-1-927350-60-7
Mowat Publication
No. 77