The prescription for manufacturing

Three economists on how the manufacturing sector can bounce back
This article originally appeared in the Toronto Star.

Know your advantages

Manufacturing absolutely has a future in Canada, and in particular southwestern Ontario. The key to understanding the future of the industry is in knowing where our competitive advantages lie.

Low labour costs will never be a comparative advantage for Canadian manufacturing, but given those “costs” are largely wages, this should not be seen as a problem. Less obvious is how proximity to markets is no longer a comparative advantage for traditional manufacturing regions. The world’s economic centre of gravity is heading toward Asia, which places goods from southwestern Ontario at a geographic disadvantage compared to most other parts of North America. Even markets within North America are changing. In 1900, neighbouring cities such as Cleveland (7th), Buffalo (8th) and Detroit (13th) were among the biggest cities in the U.S. Now those cities are 48th, 73rd and 18th in population.

This disadvantage may pose less of a problem than it to appears at first glance. With supply chains becoming increasingly global, a smartphone assembled in China may have an operating system designed in Kitchener-Waterloo and Brantford, applications programmed in London and Windsor and use precision-crafted parts from St. Thomas and Sarnia.

The region maintains a number of advantages, including a financial sector that is familiar with the industry. We have one of the most well-educated workforces in the world, which gives us an advantage when it comes to precision manufacturing and products where high-quality control is important, such as food. Although our labour costs are high, there are significant cost advantages in other areas, such as access to land and clean water. Manufacturers that use these advantages are well-positioned for future growth.

— Mike Moffatt, assistant professor, Ivey Business School

Three ways to act now

Ontario manufacturing has had a rough ride over the last decade. A number of factors have been at play, including the rise of the dollar, the deep U.S. recession, and the growth of competition from emerging economies. However, we should not conclude that Ontario manufacturing is down for the count. Far from it.

In some research looking at leading Canadian firms done at Ivey’s Lawrence Centre, we find reasons for optimism. Firms such as Linamar, Magna and Shawcor are competing and winning at home and in global markets. Focusing on high value-added manufacturing, they are making the most of Canada’s skilled workforce and capacity for innovation to win new business around the globe.

Business and public-sector leaders convened with Ivey researchers in November to translate our research findings into action. They agreed on three recommendations for immediate action.

Leaders agreed that the primary responsibility for manufacturing success lies with the private sector. Therefore they aimed their first two recommendations at firms. Their first was to find a mentor: Firms seeking to expand into international markets need the counsel and advice of seasoned executives.

Their second recommendation was to form partnerships with local educational institutions. To attract the next generation of skilled workers and managers to manufacturing, firms need to connect directly with students by visiting classrooms and hosting plant tours. Linamar is a good example of a firm that is putting these ideas into practice.

Finally, leaders are looking for governments to raise their game, particularly in the area of attracting investment. Despite Canada’s many advantages, jurisdictions such as Mexico are winning the investment attraction game, even when wages are a small part of the total business proposition. Ottawa, provinces and municipalities need to work together to put our best case forward.

Ontario can compete and win at manufacturing. The leading firms we studied prove it. We need to stop focusing on our problems and start taking action on solutions.

— Paul Boothe, director of the Lawrence Centre at Ivey

How to work together

The recent depreciation of the Canadian dollar combined with recovery in the United States opens up a temporary window for recovery of Ontario’s hard-hit manufacturing sector. Those companies that have survived a brutal decade have the opportunity to grow. However, recovery will not happen automatically, and will require a major effort on the part of many players.

Support for new corporate investment is critical, but lowering the overall corporate tax rate has had little impact. Ontario’s corporate tax system should use enhanced tax credits to reward companies that invest heavily in new machinery and equipment, research and development, and worker skills.

Governments must also ensure access to the “patient” equity capital needed to finance investment that has a long-term payoff. Given the small scale of venture capital funds in Ontario and the focus of banks on short-term loans, we should establish an Ontario public investment bank focused exclusively on manufacturing. Such a body should operate at arms’ length from government, on the model of the federal Export Development Corporation.

Ontario has had a patchy record of fostering collaboration between the key players in a successful modern economy: government, companies, the post-secondary educational system; local governments; and unions. Drawing on past successes, Ontario should establish province-wide and local sector councils, bringing key players together to promote and deliver skills training and collaborative research programs. Community colleges can play a major role in rebuilding local manufacturing.

A revival of Ontario manufacturing will require active government leadership, and a spirit of partnership. It will certainly not come about if public institutions and unions are seen as the enemy.

— Andrew Jackson, Senior Policy Advisor, Broadbent Institute

Canadian families experience robust growth in net wealth despite high debt

Julian Beltrame / Canadian Press

Canadian families have become wealthier over the past several years, with net worth rising despite the well-documented growth in household debt and a setback from the recession, a new Statistics Canada study shows.

In a report that takes a long view on the state of Canadian finances, the agency finds that the 2012 median net worth among family units — of two or more persons and unattached individuals — has risen 44.5 per cent since 2005 to $243,800 and up almost 80 per cent since 1999.

Those family units have also accumulated more debt, a total of $1.34 trillion in 2012, up from $864.6 billion in 2005. Most of the debt — about $1 trillion — has been used to finance home purchases. All figures are in inflation-adjusted dollars.

The Conservative government said the report shows that Liberal criticism of their policies as not benefiting Canadians generally is wrong.

"That is a very significant increase ... after-tax disposable income has increased by 10 per cent across all income bracket," said Employment Minister Jason Kenney.

But while the overall picture of family finances was positive, the report also pointed to continuing disparities across regions, age groups and types of families.

The biggest single reason for the improvement in finances overall has been due to house prices reaching record levels, notes economist Andrew Jackson of the Broadbent Institute, and those prices are widely projected to moderate or even fall in the next few years.

"The big question is if and when we get a housing price correction, individuals will still be holding the debt and that is a cause for concern," he said.

Real estate prices have risen faster than mortgage debt and other assets, he notes, but if the trend reverses, some Canadian families may discover their wealth rests on "shifting sand."

For those who owned their homes, the median reported value of the residence was $300,000, up 46.6 per cent from 2005 and 83.2 per cent from 1999.

In terms of inequality, the report found that the wealthiest 20 per cent of family units accounted for 67.4 per cent of the total national net worth, although that was slightly lower than the 69.2 per cent the top quintile possessed in 2005.

Meanwhile, the top 40 per cent of families possessed 88.9 per cent of total net worth, leaving the bottom 60 per cent with a mere 11.1 per cent of the pie.

The lowest quintile — the poorest 20 per cent of families — had an overall negative net worth, meaning that as a group they had more debts than assets.

That segment of the population saw its family median net worth drop from about $1,300 in 1999 to $1,100 in 2012. By contrast, the top quintile saw its family median net worth rise from $981,400 in 2005 to $1.38 million in 2012.

Bank of Montreal chief economist Doug Porter said the data, while positive, still shows household debt remains a concern.

"The standout is the tremendous growth in net worth over the 13-year period. It works out to average annual increases of better than five per cent, which is quite impressive," he said.

But that doesn't mean household debt is a non-issue, he added, predicting that the biggest impact on the economy will be to act as a check on consumer spending going forward.

Overall, total family assets in Canada rose to $9.4 trillion in 2012, with the value of families' principle home representing one third of the total assets. Pension assets, including employer plans and private pension plans, made up 30 per cent of the total, while other real estate holdings — rental properties, cottages, timeshares and commercial properties — represent almost 10 per cent.

But the report confirms large disparities in net worth depending on age, the nature of the family unit and regions of the country.

For instance, median net worth was highest for families where the person with the highest income was 55 to 64 years old in 2012. For that group it came in at $533,600, more than double that of the overall population.

And lone parent families had the lowest median net worth — only $37,000.

Regionally, British Columbia reported the highest family median net worth at $344,000, followed by Saskatchewan ($271,400), Alberta ($267,500), and Ontario ($265,700). B.C. families had the biggest improvement since 1999, jumping from $150,700 when the province placed fourth.

At the bottom, family units in Newfoundland and Labrador and Prince Edward Island had a median net worth of $167,900 and $150,300 respectively.

Canada’s family wealth gains look “fragile”

Don Curren / Wall Street Journal

If you divide Canadian families up into fifths in terms of net worth, the lowest quintile had net assets of about 1,300 Canadian dollars ($1,170) in 1999.

In 2012, it was actually below that; the overall worth of the lowest 20% of families declined 15.4% to C$1,100 by 2012, according to the “Survey of Financial Security” from Statistics Canada.

It’s a stark indication Canada is not immune the drift toward economic inequality in evidence in many other economies around the world.

“All in all, [the Statistics Canada report is] further disturbing evidence that economic inequality remains a serious concern,” said a blog posting from the left-leaning Broadbent Institute.

Income inequality is more frequently used as a metric when assessing economic inequality. But net worth, the wealth a family has when its debts are subtracted from its assets, also provides insight.

It’s important to note that, unlike the bottom 20%, Canadians in the four other quintiles did reasonably well in those 13 years.

The median net worth of Canadian families was C$243,800 in 2012, up 44.5% from 2005, and almost 80% more than the 1999 median of C$137,000, after adjusting for inflation.

Some analysts say the report undermines the idea Canada’s middle class is under siege, and that’s supported by the fact that the three middle quintiles all enjoyed gains of more than 75% since 1999.

But there is a catch. Much of the gain in wealth was driven by the increase in housing prices. If they drop, as many expect, that could erode much of the gains.

“Housing prices went up faster than any other form of wealth, including financial wealth, [and] housing wealth is more equally distributed,” said Andrew Jackson, senior policy adviser to the Broadbent Institute.

As in 1999 and 2005, the principal residence was the largest asset for Canadian households in 2012. Their median value was C$300,000, up 83.2% from 1999 and 46.6% more than in 2005.

Housing prices fluctuate, but debt is generally fixed. When the housing market collapsed in the U.S., many American households that had high net worth on paper watched it being eradicated as slumping housing prices left them with a sharply reduced asset position, or indebted overall.

“The experience of the U.S. tells us that housing values can fall, and housing debts will remain,” Mr. Jackson said.

If Canada’s housing market is subject to a sharp correction, as some analysts forecast, the value of Canadian families’ principal asset will decline without an offsetting decline in debt.

That fact points to the “fragility” of Canadians’ recent gains in wealth, Mr. Jackson said.

Flaherty’s doubts about income splitting are one step to addressing inequality

This week has been a watershed moment in the battle against income inequality in Canada.

The curious twist is that it was comments made by Jim Flaherty – who, as Finance Minister, has actually exacerbated income inequality – that illuminate a fundamental shift in Canada’s political imagination.

Sometimes, the world works in mysterious ways.

A lot of ink has already been spilled about Mr. Flaherty’s unexpected decision to publicly repudiate family income splitting, the day after tabling a budget that set up the Conservative government to deliver on precisely this tax cut. After all, it’s not every day that a finance minister chooses to oppose a key electoral promise of the prime minister.

Mr. Flaherty’s comments immediately split the Conservative caucus, forcing Prime Minister Stephen Harper to cast doubt publicly on what was expected to be the core goody in the Conservative’s re-election arsenal.

While the political questions surrounding Mr. Flaherty’s decision to speak out are intriguing, it is the precise words that Mr. Flaherty used to articulate his opposition to income splitting that matter most.

“It benefits some parts of the Canadian population a lot. And other parts of the Canadian population virtually not at all,” Mr. Flaherty said. Earlier, he had mused that the tax measure needed “a long, hard, analytical look” by experts “to see who it affects in this society and to what degree. Because [he wasn’t] sure that overall it benefits our society.”

Given this government’s clear track record of introducing boutique tax initiatives that favour the wealthy, this sudden concern with equity is striking.

Mr. Flaherty, of course, is right about this $3-billion Mad Men giveaway.

Family income splitting would benefit only a small minority of families, giving a significant tax break to high-income traditional families with one earner and a stay-at-home spouse, while delivering little or nothing to middle- and lower-income families and nothing to single parents.

According to the Canadian Centre for Policy Alternatives, the top 5 per cent of all families would see more benefit from this tax change than the bottom 60 per cent – and 86 per cent of families would see no benefit at all. It would, in effect, actively make income inequality, not to mention gender inequality, worse.

But the Conservatives surely knew these troubling facts when they made the promise (emphatically and repeatedly) to introduce income splitting back in their election platform in 2011. So something changed in the world around Mr. Flaherty.

And that something, I believe, is the maturing of income inequality as an issue in the imagination of the Canadian public and, as a result, in the considerations of the politicians that serve us.

It is this maturing that allowed Mr. Flaherty not only to recognize that income inequality is a serious problem deserving of attention; but also to acknowledge that government – even Conservative governments – should not enact tax policy that deliberately makes the situation worse.

The story of how this change came about is yet to be told, but it no doubt has its roots in the tireless work and advocacy of citizen and civil society groups, academics, brave politicians and other equity-seeking voices. This change remains a tentative victory, as Conservative cabinet ministers continue to pop up this week to split with Mr. Flaherty and defend family income splitting and its genesis in the determined lobbying of social conservative pressure groups.

And the unfortunate reality is that we are still becoming ever more unequal, a trend due in large measure to political choices. Many countries have found ways to mitigate the growth of income inequality, while in Canada the policy response has tended to reinforce rather than offset the trend.

We know that since the mid-1990s, the social role of government has been dramatically cut back and its redistributive impact has faded. According to the OECD, government taxes and transfers lowered the gap between rich and poor most in Canada, Denmark, Finland, and Sweden in the late 1980s and the early 1990s. By the early 2000s, we joined Switzerland and the U.S. as the countries with the smallest redistributive impact.

That’s why I take caution not to overstate things here. But I do believe Mr. Flaherty’s remarks signal some hope that there is growing public support and political will to address income inequality. At the very least, important public policy will now be tested against a simple and compelling principle: Does this make income inequality better or worse?

This article originally appeared in the Globe & Mail.

Photo: Just a Prairie Boy. Used under a Creative Commons BY 2.0 licence.

Progress Summit keynote Julia Gillard to head international education fund

Broadbent Institute congratulates Gillard, looks forward to her participation in the Summit

OTTAWA—The Broadbent Institute is delighted by the news that former Australian Prime Minister Julia Gillard was named yesterday to lead the Global Partnership for Education, an international initiative to provide quality childhood education in developing countries. Gillard is giving the keynote speech at the Institute's Progress Summit in Ottawa on March 29th.

Gillard will be joined as a keynote speaker by economist and author Mariana Mazzucato, Canadian-born French MP Axelle Lemaire, and Human Rights Campaign's Director of Marketing Anastasia Khoo. A dynamic roster of panel speakers will also add their voices to the debate on fairer and more sustainable approaches to building a prosperous 21st century Canadian economy.

"Progressives like Julia Gillard will offer unique perspectives on cutting-edge ideas," said Broadbent Institute Executive Director Rick Smith. "The summit is all about bringing together top-notch policy experts to provide an innovative and tangible contribution to the Canadian public policy debate."

The Progress Summit will take place from March 28-30 in Ottawa. The latest speakers list, including keynote speaker biographies and photos, is available online at


For more information, or to request media accreditation, please contact:

Mike Fancie, Broadbent Institute
613-866-3606 or mfancie at broadbentinstitute dot ca

Media advisory: Broadbent Institute Executive Director Rick Smith available to comment on 2014 budget

OTTAWA—Broadbent Institute Executive Director Rick Smith will be available in Ottawa to react to the 2014 federal budget. The budget is widely expected to contain few measures that address growing inequality.

DATE: Tuesday, February 11, at 4 pm EST

LOCATION: Reaction Room (Room 253-D Centre Block, Parliament Hill)

WHO: Rick Smith, Broadbent Institute Executive Director (613-866-3606) The Broadbent Institute recently launched a campaign reduce inequality in Canada. Learn more:


For more information, please contact:

Mike Fancie, Broadbent Institute
613-866-3606 or

How a tax change would help voters that Conservatives want

Joe Friesen / Globe & Mail

When Jim Flaherty introduces his budget next week, he may trumpet a long-promised policy that would allow parents with children at home to split their income to reduce the amount of tax they pay.

Income splitting is a tax policy that would allow a higher-earning person to assign some of his or her income to a spouse, effectively lowering what tax bracket he or she is in. The policy brings the most benefit to a couple in which one spouse works while the other stays at home with the kids, and could cost the treasury a few billion dollars of lost tax revenue a year.

But the policy can also be seen as a tailored appeal to voters in the constituencies the Conservatives need to hold to keep their majority.

Family income splitting was first promised back in the 2011 election campaign, with the caveat that it wouldn’t be introduced until the budget was balanced. Three years later Mr. Flaherty is expected to announce that the government is on course to get out of the red by next year, just in time for an election-year budget.

The Broadbent Institute launched a campaign this week, calling the income-splitting proposal a $3-billion Mad Men giveaway. They describe it as a misguided policy that favours the wealthy and is based on an early 1960s concept of the traditional family. On the other side of the coin, University of Calgary economist Jack Mintz and lobby groups such as the REAL Women of Canada have long argued for such a measure, on the grounds that it would remove a tax penalty for those families that want to have a parent stay at home but struggle to make it work financially.

Kevin Milligan, an economist at the University of British Columbia, said the policy would benefit only a small subset of families. For one, single parent families are ruled out. They make up 16 per cent of all families. What’s more, nearly 14 per cent of the population aged 15 and over lives alone, a rate four times higher than it was in 1961. About one in five people did not live in a census family in Canada in 2011.

So having removed all those millions of people from eligibility, the policy would also be of little or no benefit to those families where each parent earns roughly the same amount, or even those cases where they’re in the same tax bracket. It would be of most benefit to those families with a very-high earning breadwinner and a spouse who stays at home and earns nothing. That’s a relatively small group.

“Imagine it was your goal to transfer resources to families that choose to have a stay-at-home spouse and are struggling with their finances, then this is an odd policy to hit those people,” Prof. Milligan said. “If I had a couple billion to spend on remedying the inequities in our society, spending it on lowering the taxes of a $200,000 and $0 [incomes] couple is not where I would spend it.”

So why pursue it? It represents a marriage of ideological and strategic goals. One clue comes from the accidentally leaked Conservative strategy document about the ethnic vote in the last campaign. It said of certain ethnic groups “they live where we need to win.” The same is true of families with children. The key seats that are vulnerable to a Liberal resurgence are those suburban ridings around big cities, primarily in the Greater Toronto Area. The Conservatives need to hold on to them and they are rich with families with young children.

Take, for example, Brampton West, a Conservative gain in 2011. Roughly 54 per cent of families in that riding have children at home, much higher than the Canadian average of 36 per cent. The same is true for many other similar ridings, such as Mississauga-Brampton-South, Ajax-Pickering and Pickering Scarborough-East, which have above-average numbers of families with children at home.

The Conservatives will still have to work hard to get them to the polls though. A StatsCan study of the 2011 election found that “the presence of children was negatively associated with 2011 voting in all family types.” Single parents with kids under five had the lowest turnout figures at 36 per cent. Couples with children under five voted at a 60 per cent rate, very close to average.

Photo: bcgovphotos. Used under a Creative Commons BY-NC-ND licence.

Broadbent Institute launches campaign against costly, unfair income splitting plan

OTTAWA—As the Conservative government prepares to introduce a Mad Men-style tax giveaway after the federal budget is balanced, the Broadbent Institute today launched an information campaign against the proposed $3 billion handout for Canada’s wealthiest families.

"It’s absurd that the Conservatives plan to take a $3 billion surplus and spend it on a tax giveaway to high-income families — it’s as though the government is trying to recreate a society straight out of an episode of Mad Men," said Executive Director Rick Smith. "Today we are taking the first step in speaking out against the proposed Conservative family income splitting plan that will exacerbate inequality in Canada."

Under the Conservative plan, a two-parent family with children under 18 will be allowed to split up to $50,000 of their income for tax purposes.

"An analysis of the plan shows 86% of Canadians, including single mothers and low-income parents in the lowest tax bracket, will receive no benefit whatsoever from the scheme," added Smith. "And the top 5% of families would see more benefit than the bottom 60% of families."

As part of the campaign, the Broadbent Institute is launching a contest asking Canadians how they would invest the money lost to income splitting. "The Broadbent Institute will be making it a priority over the months ahead to draw attention to income inequality and the terrible ways income splitting threatens to make this problem much worse," said Smith.

Learn more about the Broadbent Institute's income splitting campaign at

National recognition keeps fight alive for Nunavut food activist

David Murphy / Nunatsiaq News

Leesee Papatsie doesn’t think of herself as a political citizen — not even an activist.

“I’m just a mom that doesn’t want kids hungry,” Papatsie said.

A year-and-a-half ago, Papatsie created the wildly popular Facebook group to demonstrate the high cost of food in the North, Feeding My Family.


Read more

Income splitting a tax gift for the affluent

Click here to visit the Mad Men tax giveaway campaign page.

From deepening income inequality to rising unemployment, Canada faces a wide range of pressing economic challenges that ought to be addressed in next week’s federal budget. Yet little is expected in the way of, for instance, sorely needed measures to address our jobs crisis. Instead, the Conservative government is focused on balancing the budget so it can deliver on its highly political and expensive promise of a pre-election tax break.

According to the C.D. Howe Institute and the Canadian Centre for Policy Alternatives, the Conservative plan to introduce family income splitting will mean some $3 billion per year in lost federal revenues, and some $5 billion per year if the provinces follow suit.

What services and programs will be cut to finance this?

The ongoing slashing in Ottawa holds unsettling clues. Federal cuts to science and our social safety net, as well as the squeeze on transfers to the provinces that support programs like health care, are bound only to get worse. And all this in order to balance the budget for what amounts to a tax gift for the affluent.

Family income splitting would benefit only a small minority of families, giving a big tax break to high-income traditional families with one earner and a stay-at-home spouse, while delivering little or nothing to other families.

The move would allow couples with children under 18 to share up to $50,000 for tax purposes. That translates into a tax cut of more than $6,000 per year for a couple with one person in the top tax bracket. In the case of someone earning more than about $185,000 per year, income-splitting would allow the full amount of $50,000 to be shifted from the top to the bottom tax bracket, thus cutting the tax rate on that money nearly in half.

Single-parent families, already more vulnerable, account for more than one in four children, yet would receive nothing from the tax break. Nor would there be a benefit for working couples with children in which neither parent earns more than about $45,000. That is because both earners are already in the lowest tax bracket.

The math of income-splitting is such that there would be only small savings, if any, where both parents earn between about $45,000 and $135,000. In fact, according to the Canadian Centre for Policy Alternatives, the top 5 per cent of all families would see more benefit than the bottom 60 per cent — and 86 per cent of families would see no benefit at all.

This tax measure will be sold as a way to support families who choose to have one parent (usually the mother) stay at home to care for children.

If the Harper government really wanted to expand choices for families with young children in a fair way, it could improve maternity and parental benefits under employment insurance. This program allows for up to one year’s paid leave from work, but benefits are so small — on average, just over $400 per week — that many families have to cut the leave short.

Alternatively, the government could increase child benefits for lower-income families so that families choosing to work fewer hours, and thus to earn less, get more support through higher child tax credits.

The $3 billion that income splitting will drain from federal coffers would be enough to increase federal spending on child tax credits by more than 25 per cent. Or to double current spending on maternity and parental leave benefits. Or to make a significant contribution toward enhanced access to quality child-care programs.

But none of those policies would achieve what the family income splitting proposal is designed achieve: to prop up the traditional family model by encouraging one parent to stay home. Call it Harper’s $3-billion Mad Men giveaway.

No wonder the policy has been actively promoted by social and religious conservative organizations such as REAL Women and Focus on the Family Canada, which have opposed public child care and are strong believers in the traditional single-earner family.

While income splitting will be advertised as a boon to the middle class, it is in fact a gift to the well-off and a surreptitious sop to the socially conservative. It will benefit almost no one else.

It is a sad statement that the No. 1 priority of the government’s upcoming budget is to lay the groundwork to introduce a tax measure that will further increase income inequality while failing to meet the needs of the vast majority of families with young children.

This article originally appeared in the Toronto Star.