2016 Letter from Economic Advisor Board Chair

Hon. Wade MacLauchlan
Premier of Prince Edward Island
5th Floor Shaw
P.O. Box 2000
Charlottetown, PE  C1A 7N8

Dear Premier MacLauchlan,

On behalf of the Board of Economic Advisors, I am writing to offer our perspectives on the meetings we held on the morning of March 14 with several of your Cabinet colleagues and senior public servants and on the public meeting that afternoon with a diverse and knowledgeable group of participants. We appreciated the excellent background materials provided to us on the current economic and fiscal situation in PEI and on the strategic focus of your government on labour force development. The panel session with eight of the Island’s business leaders in the afternoon was both insightful and thought-provoking. What follows reflects the Board’s considerations of the questions and issues raised throughout the day.

In our August meeting, the Board applauded the resolve of your government to continue towards the goal of budget balance. At this meeting, we reiterated the importance of achieving that outcome. The PEI economy, while not booming, has nonetheless modestly outperformed a number of the other provincial economies [and the Canadian average] in economic growth in 2015 and may well do so again this year and next. Although employment declined somewhat in 2015, PEI experienced the country’s fastest pace of increase in average weekly wages.

With this kind of relative performance, analysts and rating agencies will likely look askance if the government materially backtracks on its current fiscal targets. It was also noted that the eventual elimination of the deficit will offer the opportunity to benefit from any positive economic surprises or, on a less positive note, to be cushioned against unforeseen shocks to the Island economy. In that vein, we agreed with you and your Finance Minister [as well as Finance officials] that the combination of deficit reduction and economic growth would move your debt/GDP ratio down to a more acceptable level than the current 35%.

However, we also discussed the important distinction between capital and operating expenditures. In a normal economic growth environment, the government should achieve and maintain balance on its operations. This “rule” applies over the business cycle but does not mean the budget has to be in balance annually. What constitutes a normal or underlying trend growth rate is open to some debate. On the other hand, even when growth is reasonably solid, it can be sound policy to borrow to finance capital spending especially if, by improving the Island’s infrastructure, the economy’s productivity is enhanced. Effective spending on innovation and research can have a similar impact. The recent federal budget [released since we met] appears to provide opportunity for the PEI government to make productivity-enhancing capital expenditures over the next two-three years. It is also worth noting that, in your address in the afternoon and in both the roundtable of business leaders and the wrap-up session with the Board, the improvement of PEI’s productivity growth - and thereby its economic performance - was a key topic.

In preparing for the government’s next budget, the Board was asked for its advice on a range of possible revenue and spending initiatives that might be considered. It would be inappropriate to explicitly mention specifics in this communication. However, some general comments from the Board are in order. We noted that any tax or tax expenditure measures have to take into account not only the direct impacts on Island residents and businesses but also the tax levels [sales, personal and business rates] in other jurisdictions with which PEI may compete for investment and workers. We acknowledge that there will, as always, be pressures to increase the pace of spending but that your efforts to contain spending growth below the pace of revenue increases is necessary if you are to accomplish budget balance. Finally, the short-term prognosis for revenue transfers to PEI [and other provinces] - equalization, health and other social transfers - may not be favourable especially given the state of the energy dependent economies in Canada. That only increases the importance of maintaining fiscal discipline and of seeking ways to increase efficiency in government services.

In the session with the Minister and Deputy Minister of Workforce and Advanced Learning, the focus was on the strategic priorities regarding the joint effort to create jobs and retain or increase the working force age population. Of the three factors affecting PEI’s population levels – natural increase/decrease, interprovincial migration and international immigration – only the last has been a net positive in recent years. Part of the government’s workforce strategy is to retain more immigrants and to reduce or reverse the net outmigration to the rest of Canada. In brief, the aim is to “develop, attract and retain an educated, skilled and engaged workforce to grow our economy.”  Among the suggestions from Board members were: ensure that immigrants are effectively integrated into both the community and the workforce; provide HR advisory assistance to employers especially in traditional sectors; and focus on the labour market attachment of young people. We also pointed out that labour force and employment growth are intermediate goals. The ultimate purpose of policy should be to enhance the prosperity of Islanders.

The theme of retain, recruit and repatriate workers to advance employment in PEI also emerged in the afternoon’s public meeting. It was a key element of your address to the attendees and came up in the responses of several panel members to questions from the moderator. You also noted, in your review of the state of the PEI economy, that it was increasingly diversified albeit small and very open to global pressures and opportunities. We took notice of the emphasis you placed on the importance of improving the prosperity of the people of PEI and of the key role that enhancing the province’s productivity will play in achieving that goal. You also indicated that the focus of your government for 2016 will be on working age population growth, shrinking the trade imbalance and promoting private entrepreneurship.

The latter topic then was the focus of the panel session that followed your address. The eight members reflected the impressive age, gender and sectoral diversity of the successful business people in the small and mid-sized firms that have been started and expanded in PEI over the last several decades. As a group, they represented the innovative and risk-taking characteristics that are central to the maturation of successful SMEs, whether in traditional food and tourism activities or less traditional [for PEI] sectors like aerospace, biotech and IT.

It is beyond the scope of this report to try to summarize the viewpoints of the panel participants. However, the compelling comments from them elicited responses from the Board members in the closing roundtable segment that you moderated. We noted the critical importance of product and market development that was a feature of most of the companies whose owners or senior personnel were on the panel. Several of them had referred to the challenges of recruiting skilled people; this in a province with a relatively high unemployment rate especially of young, educated individuals. This led to the suggestion from the Board that a key role for government can be to assist with the matching of people with skills and the jobs firms are attempting to fill.

Reacting to the comments of some panel members that government business support programs are often inflexible in their requirements, the Board suggested the government’s business development programs should have adaptive frameworks. However, we also advised that such programs should be generic rather than sector-specific [i.e., don’t try to pick winning sectors or technologies] and, whenever possible, there should be a competitive element to the funding process.

We also returned to some of the themes of the morning meetings. We urged the government to maintain its commitment to fiscal discipline for the reasons outlined earlier in this note. The importance of enhancing opportunities for the workforce attachment of younger people was reiterated in the afternoon’s concluding segment. We emphasized that international immigrants bring with them not only skills to employ but capital to invest. They also bring new perspectives and culture to the province that will enrich its inhabitants in ways well beyond financial. Finally, it was noted that, while we do not yet know what the precise role of the federal government will be, all the provinces will need to determine how to incorporate carbon “pricing” into their policy mix over the next several years.

The Board was impressed by the fact that, in our discussions, there was considerable attention given to medium-to longer-term topics such as climate change, labour market strategies, future budget options and productivity. It would be tempting to focus only on short-term issues particularly given the fact that your government will soon be delivering the 2016-17 budget.  It is our hope that we will continue to deal with a mixture of current operational and underlying structural concerns in future meetings.

The Board members wish to thank you and your colleagues in the PEI government for a stimulating and informative set of meetings on March 14. I hope that our participation proves to be of value as you prepare the budget for this year and consider longer-term policy initiatives. We have not set the date or themes for our next session but we look forward to meeting again with you and your team.   

Sincerely,

Tim O’Neill

Chair, Board of Economic Advisors
on behalf of Board Members
Elizabeth Beale
Michael Horgan