Survey of Innovation. From the point of view of fostering productivity growth, what is
relevant is the adoption of best practice technologies. Yet this path to productivity
improvement receives much less attention than R&D.
A case can thus be made that there should be a rebalancing of the relative efforts
that governments in Canada devote to support for private sector R&D activities versus
the support given for the adoption of best practice technologies. To foster technological
innovation and productivity growth, it is proposed that additional resources be allocated
to programs that assist SMEs in the identification and adoption/adaptation of new
technologies. The National Research Council’s Industrial Research Assistance Program
(NRC-IRAP) is an example of a successful technology transfer program. Productivity
advance in Canada can be fostered in a cost effective manner through expansion of
existing technology transfer programs such as IRAP, and the creation of new programs
with similar objectives. Specific initiatives to develop these types of program merit
serious attention as a means to improve productivity.
Removal of the Provincial Sales Tax on Purchases of Machinery and Equipment
It has long been recognized that investment in machinery and equipment (M&E)
is a key driver of productivity growth. M&E investment has historically been weak in
Canada relative to other OECD countries. One reason for lower M&E investment in
Canada may be the higher cost of capital in Canada, as proxied by the marginal effective
tax rate (METR) on capital. In 2006, the METR was 36.6 per cent in Canada, sixth out of
45 countries.
A key reason why our METR is so high is because five provinces (Ontario,
British Columbia, Prince Edward Island, Saskatchewan, and Manitoba) apply their retail
or provincial sales tax (PST) to the purchase of capital goods such as machinery and
equipment, including ICT goods. Tax policy experts across the political spectrum are
unanimous that the current PST regime which taxes the purchase of new capital
equipment is extremely bad policy, perhaps unique in its incompetence among developed
countries.
The federal government has long recognized the problems associated with the
PST on capital goods. A possible resolution to this situation lies in the federal
government providing financial assistance to the PST provinces to harmonize their PST
with the GST. Such assistance was offered to the three Atlantic provinces in the early
1990s to encourage harmonization. This is the ideal time for such an initiative given the
sound fiscal situation of the federal government.
Promotion of the Geographical Migration of Workers
In addition to the three fundamental drivers, the reallocation of factors of
production from low productivity level uses to high productivity level uses contributes
significantly to aggregate productivity growth. This reallocation can take place between
firms, across industries, across occupations, and across space.