The bulk of Budget 2021’s 270 new programs focus on supporting quality of life and standard of living directly using the borrowing power of the federal government. The ten largest programs account for $100.5 billion (B) or 70% of the $142.9 B net fiscal impacts in Budget 2021 and $4.5 B (4.4%) is designated as economic expenditures while $95.5 B (95.6%) is primarily social spending, according to our analysis.
Of the $77.6 B in proposed new spending over the next two fiscal years, only about $4.7 B, or 6% of the total, is targeted for research, development, and innovation (RDI) initiatives. This is over-and-above the $346 B COVID-19 Economic Response Plan, where approximately $1.5 B addressed COVID-19 R&D. Canada is at almost a half-trillion-dollars in new spending since the onset of the pandemic and just $7 B — or less than 2% — is earmarked for RDI.
Based on our analysis, Canada’s gross domestic expenditures on research and development (GERD) as a percentage of gross domestic product (GDP) has declined 15.8% over the past ten years, while our OECD competitors grew 9.7%. This has resulted in a $22 B gap annually between Canada and the OECD average. Canada would need to increase R&D expenditures from 1.54% to 2.47% (2019) to close this chasm.
In isolation, the Budget’s allocation to RDI seems large; however, when compared to Canada’s R&D deficit it will do little to close Canada’s GERD shortfall.
Our analysis conducted prior to the Budget’s release showed that Canada is lagging in labour productivity, competitiveness, and in business expenditures on research and development (BERD). Canada’s BERD as a percentage of GDP is more than 50% below the OECD average, while Canada is 27% less productive compared to the United States when it comes to GDP per hours worked.
The Budget does a few things well when it comes to RDI investments. There are substantial funds for skills development. Approximately $4.8 B over five years to create nearly 500,000 new work-integrated placements and training opportunities will help address Canada’s highly-qualified personnel shortages, support career transition, and better position organizations for post-COVID-19 recovery and growth.
The Budget also concentrates on horizontal and enabling technologies, such as quantum, artificial intelligence, genomics, and cybersecurity. These are cross-sector investments that will help address technology challenges facing Canada’s traditional sectors such as agri-food, natural resources, health and life sciences, defence and security, transportation, and manufacturing.
The Budget also moves towards promoting Canadian enterprise and innovation. The Strategic Innovation Fund’s $7.2 B top-up over seven years, of which $5 B is earmarked for the Net Zero Accelerator, signifies targeted initiatives to expedite decarbonization projects and help Canada achieve its net-zero target by 2050.
Where Budget 2021 falls short is that it does not include a plan for long-term economic growth. The Budget contains the words and numbers of government’s intention for 270 new programs yet does not offer any insights on how it will harmonize these with its existing programs.
Effective collaborative and consultation structures, such as the Economic Strategy Tables, could provide the government with the needed direction to achieve a better economic outlook through targeted industrial support. Together, government and private sector can establish national objectives, such as an investment plan to achieve 2.5% of GDP on RDI by 2030 and trade targets that would expand exports.
Further, Canada needs to move from “start-up” to “scale-up” to “scale-out” by focusing on applied research, development, and technology adoption to increase productivity and competitiveness. As a partner at the table, the government should establish a plan to align its departments, agencies and federally funded not-for-profits through an integrated strategy for R&D, industry, trade, and skills.
Canada must rationalize its plethora of innovation programs and provide its RDI ecosystem rational direction. Both actions are necessary, and neither is sufficient on its own.