INDU Committee Report

There have been at least two dominant economic forces driving structural change of the Canadian economy. Firstly, for more than five decades, the demand for services by Canadians has been growing rapidly, both in absolute terms and relative to that of goods. Secondly, for more than five years, a worldwide “commodities boom” has directly and indirectly forced a restructuring of the economy towards the natural resources and services sectors and away from the manufacturing sector. Together, these two economic forces have been positive for Canada: wealth has been on the rise and the economy has been expanding at breakneck speed since 2002. This economic growth has been widespread throughout the Canadian economy, services-producing and goods-producing sectors alike, except for Canadian-dollar-sensitive industries such as manufacturing and tourism. In turn, employment across Canada has been growing; job creation has been spectacular; and both Canada’s employment rate and unemployment rate have respectively set a 33-year high/low in the process.

Activity levels and employment in Canada’s services sector have also enjoyed long-term robust growth. The services sector has grown, on average, a half of a percentage point more than the overall economy each year since 2002, and accounts for almost 70% of total Canadian economic activity in 2007. Employment in the services sector has also grown, on average, by 2.4% per annum since 2002, and now accounts for more than 75% of total Canadian employment. Indeed, the services sector accounted for almost 93% of the increase in employment in Canada between 2002 and 2007.

Canada’s services sector is not without its challenges, however. The sector faces and will increasingly face a labour skills shortage as Canada’s population ages, the rate of retirement increases, and the labour force shrinks. According to Finance Canada, Canada’s employment-to-population ratio is going to turn negative in 2010, as growing numbers of “baby boomers” retire. As such, the Committee recognizes that slower economic growth induced by a shrinking labour market and a labour skills shortage can be mitigated or countered by taking actions to: (1) increase the participation rate of those not fully participating in the labour force; (2) increase the value of work performed per person of those already in the labour market; and/or (3) increase the skill levels of those entering the labour force. The Committee makes a number of public policy recommendations to address the labour skills challenge that will provide economic benefits beyond the services sector.

Services sub-sectors such as tourism, information and communications technologies, culture, health care and retail trade also face industry-specific challenges, and the Committee has recommended a number of targeted tax measures for dealing with each of their specific challenges. In the end, the Committee believes that the Government of Canada’s timely implementation of these recommendations — timely in the sense of when the federal fiscal situation permits — will help to ensure continued growth and prosperity of Canada’s services sector.