Unfinished Business: Securing Canada’s Post-Pandemic Transition
In March 2023, the world entered the fourth year of the global COVID-19 pandemic which has now infected 726.7 million people and claimed the lives of 6.8 million1. The same month, the World Health Organization (WHO) declined to declare an end to the global COVID-19 pandemic even though much of the world had already transitioned out of the emergency phase. Given that Canada’s pandemic recovery had started comparatively early in the global health emergency, Ottawa’s policy preoccupations around that time were mainly about the 2023 Budget announcements and the health of the Canada-United States bilateral relationship, symbolized by the inaugural state visit of President Joe Biden.
The 2023 federal budget that was tabled on 28 March received more public scrutiny than in previous years because of the extraordinary set of circumstances weighing on the short and long-term fiscal decisions of the current government. Although many of Canada’s economic fundamentals are in much better shape than its international peers, the 2023 Budget received public skepticism about the optimistic assumptions underpinning the federal government’s economic forecast. Legitimate questions are now being raised about Ottawa’s capacity for anticipatory leadership and whether it takes seriously its responsibility to ensure that today’s decisions are not the source of tomorrow’s problems.
The international system of multilateral engagement and the steady-state economic model which have been critical for Canada’s values-based domestic and foreign policy are undergoing a profound transition. A week before President Biden traveled to Ottawa on 23 March, Chinese President Xi Jinping and Russian President met in Moscow where they signed a dozen agreements to deepen Sino-Russian political, military, technological, and economic cooperation in the near-term. Geopolitical tensions are likely to escalate consequently. With the global COVID-19 pandemic still unfinished, Canada along with the world’s democracies must now strengthen their strategic alliances against a growing militaristic threat in both Europe and Asia, while finding a common purpose with their strategic competitors to make the world more sustainable and resilient.
Living with the COVID-19 Pandemic
The impact of the COVID-19 pandemic has been politically, economically, and socially disruptive for Canada but the recovery has been relatively fast. As of 28 April 2023, Canada recorded 4.65 million infections and 52,121 deaths due the COVID-19 pandemic. Hybrid immunity from prior infections and the widespread distribution of COVID-19 vaccinations (acquired from the United States starting in April 2021) have helped to limit morbidity and mortality. Nationally, the economy rebounded to pre-pandemic levels within 20 months2. In fact, Canada recorded the second highest employment recovery among the Group of Seven (G7) countries in 2021.
This past winter, Canada avoided another debilitating surge of COVID-19 infections (and deaths) despite the absence of public health restrictions, sub-optimal vaccination levels, and a rapidly mutating coronavirus. Infection rates in Canada have fallen from 70,000 per day in early 2022 to about 50,000 per day. Epidemiological data obtained from urban wastewater testing indicates that although COVID-19 infections are stabilizing across the country, seniors (60 years and older) with comprised health conditions are more at risk3. What this means is that the current level of COVID-19 immunity should provide an elevated level of protection against future waves of transmission. But hospitalizations among older Canadians may remain high in the near-term.
Canada’s economic recovery from the COVID-19 pandemic was largely driven by deficit-financed spending which, at $13,571 per person or about $515 billion in the FY 2021-2022, was the highest level in the country’s history. Nevertheless, the unprecedented infusion of federal funding spending has not been sufficient to reverse the country’s lackluster productivity. Canada’s business investments, which have not returned to pre-pandemic levels, continue to fall behind the United States and other high-income countries. This year, the Parliamentary Budget Office (PBO) is predicting the country’s growth to stagnate in 2023 following a better-than-expected economic performance in 2022. 4 Declining federal government revenues combined with larger than expected deficits will act as another economic incumbrance for the foreseeable future.
The next few years will be critical as Canada adjusts to an increasingly complex world.
A Decisive Moment
Both Canada and the United States rebounded quickly from the COVID-19 pandemic in 2022. However, core inflation measures are the highest in about 40 years, driven by years of loose monetary policy, especially in the services sector5. Inflation for services is expected to remain elevated for 2023 even though goods prices are stabilizing, indicating that global supply-chain disruptions are starting to ease. Restrictive monetary policy, tightening credit conditions, and volatility in the financial markets (following the banking stress in the United States and Europe) could further restrain Canada’s short-term growth prospects.
Three years into the COVID-19 pandemic, Canada has reached a decisive moment in both the economic recovery and the country’s long-range development. After an unprecedented period of federal intervention to prevent an economic collapse (2020) and to stimulate a strong recovery (2021-2022), a shallow recession starting this year is a high probability. In March 2023, the federal government unveiled the annual budget which proposes $491 billion in program spending in three priority areas: 1) Fiscal support to help mitigate the rising cost of inflation on consumer purchases (so-called “grocery rebates”), 2) Strengthening the public healthcare system and the Dental Care Plan, and 3) Funding the “green” energy transition. The 2023 Budget raises the deficit to $41 billion which is likely to increase over the next few years, especially if the economy grows slower than expected. An economic downturn would further reduce tax revenues to pay for the government’s priorities. In tandem, federal debt interest payments are expected to rise from five to nine percent of government revenues.
Fundamentally, the 2023 Budget priorities reflect a government pre-occupied with two overarching objectives: 1) Winning the next federal election in 2025 and 2) Aligning Canada closer to the United States on a range of economic, national security, and foreign policy issues. Regarding the first objective, the Liberal government is unlikely to call an election before 2025 due to the possibility of a near-term recession. The confidence-and-supply agreement that the Liberal Party and the New Democratic Party (NDP) brokered in 2022 ensures political support for the government in exchange for cooperation on key policy issues like health care spending, housing affordability and childcare, reconciliation with Indigenous peoples, and climate change. While the 2023 Budget may have succeeded on the short-term objective of keeping the Liberal government in power, it has failed on the long-term objective of strengthening the Canada-United States strategic alliance.
A Modest Proposal
The 2023 Budget announcements address several NDP policy priorities. As an example, the biggest share of program spending is reserved for health ($198.3 billion over 10 years) and dental care ($13 billion over five years). Healthcare accounts for 13% of Canada’s GDP, the second highest among OECD member countries, with expenditures predicted to rise by 5.2% for the next decade6. On indigenous reconciliation, the budget provides a new investment of $4 billion over 7 years in an Urban, Rural and Indigenous Housing Strategy as well as $2.8 billion in compensation to address the collective harms cause by residential schools.
The federal government is also committing to improving the efficiency of the environmental impact assessment for large infrastructure projects like critical mineral value chains. Canada has many natural resources, including fossil fuels, forest products and water, which the United States depends on for its military superiority (ie., lithium, nickel, copper, and cobalt), to manufacture and assemble low-carbon emitting technologies (ie., solar panels, electric vehicles), and hasten the “green” economy transformation which is still in the nascent development phase. To that end, the federal Critical Minerals Infrastructure Fund will allocate $1.5 billion in support of clean energy and transportation infrastructure projects essential for critical minerals production.
The 2023 Budget aims to shift the country to a zero-emissions economic growth model by 2050. Canada is unique among advanced countries because 30% of its economic activity still derives from emission-intensive sectors like manufacturing, construction, mining, oil and gas, and forestry7. In fact, Canada’s natural resource and energy-intensive economy produces more CO2 emissions than any other OECD member country. According to independent think tank analysis, Canada’s emission levels increased in 2021 (691 mega tonnes) but did not return to pre-pandemic levels (738 mega tonnes) which suggests that policy measures adopted after signing the 2015 Paris Agreement are having a moderately positive impact8. The 2023 Budget assumes that the green economic transition will cost an average of $60 billion to $140 billion annually. These cost estimates should be considered as preliminary since today’s green technologies are new and untested.
A Strategic Alliance
U.S. President Biden’s inaugural visit to Ottawa, also in the last week of March, was auspicious given that the 2023 Budget represents Canada’s substantive response to the American embrace of a resurgent industrial policy. The back-to-back events confirmed that Canada and the United States are on a similar trajectory with respect to the COVID-19 pandemic recovery. More importantly, they presage the complex entanglement of geopolitical and domestic economic realities.
President Biden’s visit to Ottawa presented an opportunity to forge a stronger bilateral relationship grounded in traditional democratic values, economic security interests, and a common border. Prime Minister Trudeau and President Biden praised the historic alliance and reiterated their mutual commitment to overcoming today’s challenges and problem solving in shared pursuit of future prosperity. In a joint statement the two North American leaders agreed to bolstering global alliances, strengthen continental security and defense, close loopholes in the Safe Third Country Agreement (STCA), improve intelligence sharing on cross-border threats, encourage private sector investment in support of inclusive economic growth and high-income job creation, and they announced plans to launch a one-year energy transformation task force. 9
On defense and national security, the North American leaders condemned Russia’s unprovoked war in Ukraine, pledged to support Ukraine, and welcomed the first U.S.-Canada Indo-Pacific Strategic Dialogue (on 10 March 2023).10 The United States increasingly views China and Russia as strategic threat to the values-based international order, a viewpoint which Ottawa must diplomatically and financially endorse in preservation of Canada’s cross-border economic partnership with its security guarantor.
The Improvisation Imperative
While Canada has many of the baseline capabilities required to remain a world-class innovator, it lags peer competitor nations across a range of key performance indicators. For instance, Canada’s healthcare system ranks low among the world’s high-income countries11 and the number of newly created businesses has dropped by 50% in the past three decades.12 Meanwhile, global confidence in Canada’s trade infrastructure is falling precipitously which could undermine the ability to attract new business partners in emerging markets.13 Now that Canada is approaching the end of the pandemic recovery phase, decisive leadership is needed to avoid losing the country’s privileged status as a G7 member.
A strategic priority for the Liberal government will be revisiting the core assumptions of the 2023 Budget that work at cross-purposes with existing policy priorities. The federal immigration is a logical starting point since Canada is one of the world’s top migration destinations. Building on its competitive advantage, the federal government plans to welcome about 447,055 new permanent residents in 2023, 451,000 in 2024, and 500,000 in 2025.14 Finalizing the applications of 400,000 permanent residents last year meant that Immigration Refugees and Citizenship Canada (IRCC) had to review about 500,000 cases to ensure they passed on program eligibility, national security, application fraud, and medical grounds. Only 0.02% to 0.03% of new applications are referred to Canada’s security and intelligence community for a security vetting (ie., terrorism, organized crime, crimes against humanity) which may not be sufficient to secure the country against adversarial threats.
Even before 155,000 federal public sector workers began strike action on 19 April, IRCC’s ambitious target setting was derided by economists because of the excessive stress that this would have on Canada’s overloaded healthcare, education, and housing infrastructure. What the 2023 Budget fails to consider is that affordable housing is a precondition for the successful integration of newcomers, along with quality education and accessible healthcare. It is conceivable that Ottawa will be forced to amend its large-scale immigration projections notwithstanding the federal government’s 10-year, $40 billion National Housing Strategy. In the last decade, the ratio of new housing units to working-age population has plunged to an historic low while metropolitan real estate prices have skyrocketed simultaneously. Therefore, designing a more decentralized migration strategy that funnels permanent residents to more affordable, medium-sized cities and towns is essential if the net-positive benefits of immigration flows are to be sustained.
Trading on Infrastructure
Capitalist democracies compete most successfully when they attract global talent while remaining committed to multilateral coalition-building on a range of political, economic, security, and planetary issues. The 2023 Budget departs from Canada’s traditional role as a middle-power broker by suggesting that Canada’s international engagements, including its global trade relations, should be restricted to a network of like-minded democracies.
Premised on a simplistic democratic-autocratic binary view of the world, the proposed “friend shoring” doctrine has multiple flaws. First, adopting the “friend shoring” thesis would undermine the trade-facilitating mandate of the World Trade Organization (WTO) even though open and transparent trade rules are vital for the global economic recovery. Second, it neglects to consider that Canada, as a trade-dependent nation, needs to capitalize on emerging market opportunities as a hedge against protectionist “Buy American” policies that could be an enduring aspect of the Canada-United States bilateral relationship. Another major concern about the proposed strategy is that it could discourage diplomatic engagements with “unfriendly” countries when our national interests coincide on existential threats like public health pandemics, global warming, and climate migration.
A more practical undertaking in the near-term would be to dismantle interprovincial trade barriers (ie., standards, technical standards, occupational licensing, and residential obligations) since the cost of interprovincial trade barriers to the national economy is estimated at 3.8% of GDP.15 In the medium-term, Ottawa needs to formulate a strategic vision about its international role augmented with a pragmatic action plan. To that end, the federal government is relying on a suite of new tax incentives to crowd-in private sector investment that will finance the infrastructure build-out for the “green” economy. A large-scale “green” energy grid (ie., hydro, nuclear, wind, and solar) would help to power the country’s largest green house gas producers in a more sustainable and less expensive manner. It would also help to reduce Canada’s trade dependency on the United States while positioning the country more strategically in the Indo-Pacific region.
Previous experience with the Asia-Pacific Gateway Corridor Initiative should provide Canadian policymakers with a baseline understanding of the infrastructure build-out that will best serve Canada’s trade, economic, and security interests. Federal infrastructure investments are already slated to reach $32.4 billion by 2026-27, but this commitment is insufficient for the pace and scale of change prescribed by the Intergovernmental Panel on Climate Change (IPCC). According to one study, $2 trillion worth of investment in the next three decades will be needed to advance Canada’s net-zero transition. 16
Gambling on Security
Canada is internationally respected because of the integrity of its governance institutions, its high-quality research facilities, livable cities, and its openness to newcomers. Geographic proximity to the United States also provides Canada with a competitive advantage and a security guarantee that is coveted around the world. However, there are two high probability scenarios in which the bilateral relationship could soon get incredibly complicated for Ottawa: 1) The United States grows more nationalistic and protectionist as geopolitical competition with China and Russia intensifies and, 2) Washington becomes exasperated with Ottawa’s incoherent foreign policy approach and disregard for its collective security responsibilities.
Ensuring that Canada’s military can execute its national security and public safety functions at a high level of operational performance is an urgent policy priority. Both the United States and the North Atlantic Treaty Organization (NATO) have been privately and publicly pressuring Canada to raise its defense spending to the 2% of GDP target established by NATO nearly a decade ago. After years of neglect, Canada must prioritize spending for national security and defense (ie., NORAD modernization)17 with a view to fortifying North America’s territorial sovereignty (ie., Arctic region) and Canada’s position as a global competitor in next-generation technology (ie., 5G infrastructure). According to National Defense estimates, total defence spending will reach $40 billion by FY 2026-27 or 1.59% of GDP, rising moderately from 1.33% in FY2022-23. 18
The 2023 Budget proposes funding for new capabilities including two Over-the-Horizon Radar systems and northern forward operating bases that the Royal Canadian Air Force (RCAF) needs for its 88 new F-35 fighter jet aircraft. However, the Royal Canadian Navy (RCN) is unlikely to get the requested 12 submarines which are critical for asserting Canada’s arctic sovereignty and enabling it to participate effectively in the Indo-Pacific region.19 Regrettably, a final decision about whether the Liberal government will honor the NATO spending target or approve new defense funding is not expected before the completion of the on-going defense policy update. Ottawa, it seems, is willing to accept the political and security consequences of falling short of NATO’s spending target.
Both China and Russa are determined to undermine the US-led economic, financial, and security order that was instituted after the Second World War and consolidated after the end of the Cold War. Russia’s unprovoked invasion of Ukraine last year prompted harsh economic sanctions and export controls waged by 41 countries, including Canada. But the economic sanctions have mostly failed as an effective deterrence strategy. In the past year, Ottawa has donated a paltry sum of $1 billion in military assistance to Kiev.20 More donations of weapons and military equipment will be necessary since the war shows no signs of slowing despite staggering troop and material losses on both sides of the conflict. This spring, Ukrainian forces are preparing a major counter-offensive and Russia is conducting a mass mobilization of army conscripts, notwithstanding the domestic labour shortage that could be created. Before too long military deterrence may also be necessary to defend Taiwan, which provides almost all the world’s advanced computer processor chips21, against an economic blockade or an illegal invasion by China, a soon-to-be global superpower.
In the current geopolitical context, preparing for a worst-case scenario is prudent even if it is unlikely. Security trade-offs may be unavoidable in the near-term if Canada allows itself to become overextended militarily, immobilized by procurement paralysis, or surprised by a catastrophic cyber attack. For that reason, strong government-defence industry relationships and security forums are critical for Canada’s peacetime (and wartime) security. Fortunately, Canadian defence industry, cyber security, and critical infrastructure providers can mobilize effectively when they have sufficient policy guidance and advance notice.
The 2023 Budget is unremarkable in many respects, but it assures that the Liberal government remains in power until the next federal election, probably in 2025. In addition to preserving the political status quo domestically, the federal budget has allowed the Liberal government to introduce some preferential policy measures without over stimulating the economy and stoking higher inflation rates. Although politically practical, some of the federal government’s fiscal aims are premised on simplistic policy assumptions which weaken rather than strengthen Canada’s competitive advantage regionally and globally.
For decades, chronic under investments in Canada’s healthcare, national defense, critical infrastructure, and other strategic areas have gradually eroded the country’s ability to withstand a massive external shock. The experience of the global COVID-19 pandemic should serve as a warning about the dangers of outsourcing Canada’s vaccine manufacturing, strategically important for its public health security, to another country.
A major failing of the 2023 Budget is that it lacks a comprehensive strategy to pay for the strategic capabilities necessary to sustain a North American security perimeter. Delayed strategic action until the 2024 Budget is a risky proposition given the fast-approaching electoral cycle in both United States and Canada. Furthermore, allowing domestic political interests to overshadow public security in all strategic domains (space, cyber, air, land, sea) is a short-sighted gamble on Canada’s future which it cannot afford.
1World Health Organization (WHO), “WHO Coronavirus (COVID-19) Tracker,” (12 April 2023). https://covid19.who.int/.
2Office of the Auditor General of Canada, “COVID-19 Pandemic: Specific COVID-19 Benefits,” Report 10 (December 2022). https://www.oag-bvg.gc.ca/internet/English/parl_oag_202212_10_e_44176.html.
3COVID-19 Immunity Task Force (CITF), “Pediatric Infections and Vaccination Since Omicron,” CITF Monthly Review (March 2023). https://www.covid19immunitytaskforce.ca/.
4 Office of the Parliamentary Budget Officer (PBO), “Economic and Fiscal Outlook,” (March 2023). https://www.pbo-dpb.ca/en/publications/RP-2223-025-S–economic-fiscal-outlook-march-2023–perspectives-economiques-financieres-mars-2023.
5Bank of Canada, Monetary Policy Report (April 2023). https://static.bankofcanada.ca/uploads/pdf/mpr-2023-04-12.pdf.
6Canadian Medical Association (CMA), “Healthcare Funding in Canada,” News (18 October 2022). https://www.cma.ca/news/health-care-funding-canada.
7Environment and Climate Change Canada, “Canada’s Eighth National Communication on Climate Change and Fifth Biennial Report” (2022). https://unfccc.int/sites/default/files/resource/Canada%20NC8%20BR5%20EN.pdf.
8Canadian Climate Institute, “Early Estimate of National Emissions Shows Canada Steadily Separating Economic Growth from Emissions,” (23 February 2023). https://climateinstitute.ca/news/early-estimate-of-national-emissions-shows-canada-steadily-separating-economic-growth-from-emissions/.
9Government of Canada, “Prime Minister Trudeau and President Biden Joint Statement,” News (24 March 2023). https://pm.gc.ca/en/news/statements/2023/03/24/prime-minister-trudeau-and-president-biden-joint-statement/
10Government of Canada, “Prime Minister Trudeau and President Biden Joint Statement,” News (24 March 2023). https://pm.gc.ca/en/news/statements/2023/03/24/prime-minister-trudeau-and-president-biden-joint-statement/
11Eric Schnieder et al., “Mirror, Mirror 2021: Reflecting Poorly,” The Commonwealth Fund (4 August 2021). https://www.commonwealthfund.org/publications/fund-reports/2021/aug/mirror-mirror-2021-reflecting-poorly.
12Richard Archambault and May Song, “Canadian New Firms: Birth and Survival Rates Over the Period 2002-2014,” Innovation Science and Economic Development Canada, Small Business Branch (May 2018). https://ised-isde.canada.ca/site/sme-research-statistics/sites/default/files/attachments/2022/CNF_BSR-NEC_TNS_2002-2014_May2018_eng.pdf.
13Canada West Foundation (CWF), “Shovel Ready to Shovel Worthy: The Path to a National Trade Infrastructure Plan for the Next Generation of Economic Growth,” (May 2022). https://cwf.ca/wp-content/uploads/2022/05/CWF_ShovelReadytoShovelWorthy_Report_WEB.pdf.
14Government of Canada, Immigration, Refugees and Citizenship Canada (IRCC), “New Immigration Plan to Fill Labour Market Shortages and Grow Canada’s Economy,” New Release (14 February 2022). https://www.canada.ca/en/immigration-refugees-citizenship/news/2022/02/new-immigration-plan-to-fill-labour-market-shortages-and-grow-canadas-economy.html.
15Jorge Alvarez, Ivo Krznar, and Trevor Tombe, “Internal Trade in Canada: Case for Liberalization,” International Monetary Fund (IMF) Working Paper (July 2019). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442872.
16Royal Bank of Canada, “The $2 Trillion Transition: Canada’s Road to Net Zero,” RBC Thought Leadership (12 October 2021). https://thoughtleadership.rbc.com/the-2-trillion-transition/.
17James Fergusson, “Putting North American Defence on the Agenda,” MacDonald-Laurier Institute (30 August 2019). https://www.macdonaldlaurier.ca/norad-summer-political-puzzle-james-fergusson-inside-policy/.
18Office of the Parliamentary Budget Officer (PBO), “Canada’s Military Expenditure and the NATO 2% Spending Target,” (9 June 2022). https://www.pbo-dpb.ca/en/publications/RP-2223-010-S–canada-military-expenditure-nato-2-spending-target–depenses-militaires-canada-objectif-depenses-2-otan.
19David Pugliese, “Royal Canadian Navy Pitches 12 Submarine Purchase for $60 Billion, Say Defense and Industry Sources,” National Post (4 April 2023). https://nationalpost.com/news/national/defence-watch/royal-canadian-navy-pitches-60-billion-submarine-purchase-say-defence-and-industry-sources/wcm/9d5c4585-f198-4081-a049-8bb82ca8045c.
20Government of Canada, National Defense, “Canadian Donations and Military Support to Ukraine,” (3 April 2023). https://www.canada.ca/en/department-national-defence/campaigns/canadian-military-support-to-ukraine.html.
21Chris Miller, Chip Wars: The Fight for the World’s Most Critical Technology (2022). New York: Simon and Schuster.