Foreign workers are going to drop by 50% in the short-term: Mascarenhas on business challenges

Key Concepts

• Fiscal Discipline: The practice of managing government spending and revenue in a way that avoids excessive deficits or debt.
• Capital Spending vs. Day-to-Day Operations: Distinguishing between investments in long-term assets (like infrastructure) and ongoing expenses (like salaries).
• Productivity Investments: Spending aimed at increasing the efficiency and output of an economy or specific sectors.
• Tax Credits: Reductions in the amount of tax a person or company has to pay, often used to incentivize specific behaviors or investments.
• Advanced Manufacturing: Industries that use sophisticated technology and processes to produce goods.
• Defense Supply Chains: The network of companies and processes involved in producing goods and services for the defense sector.
• Critical Minerals: Minerals that are essential for modern technologies and economies, and whose supply chains are vulnerable.
• Crowding Out: A situation where government borrowing or spending increases interest rates, making it more expensive for private businesses to borrow money and invest.
• Regulations: Rules and laws established by governments to control or direct economic activity.
• Spillover Benefits: Positive effects that an investment or activity in one sector has on other sectors.

Government Fiscal Projections and Spending

The government is projecting a deficit of nearly $80 billion for the 2025-2026 fiscal year. Over the next five years, the government is planning for up to $1 trillion in various forms of spending and investment.

Signs of Fiscal Discipline and Budget Strengths

Mel Mascarenos highlights several positive aspects of the budget, indicating signs of fiscal discipline:

• Split between Capital and Operational Spending: For the first time, the budget clearly distinguishes between capital spending (investments in long-term assets) and day-to-day operational expenses. This enhances transparency.
• Specific Investment Allocations:
  • Approximately $15 billion allocated to infrastructure.
  • $10 billion designated for productivity investments.
  • About $2 billion earmarked for housing.
• Focus on Growth and Productivity: The budget emphasizes growth and productivity through tax credits, capital spending, and a focus on exports.
• Sectoral Focus: The budget specifically targets strategic sectors, including:
  • Advanced manufacturing
  • Defense supply chains
  • Construction
  • Critical minerals

Mascarenos characterizes this as a "pro-productivity and pro-growth" budget from a strategic standpoint.

Lessons for Business Leaders

Mascarenos offers actionable advice for CEOs:

• Shift from Low-Cost Labor and Domestic Consumption: Businesses can no longer rely solely on low-cost labor or simple domestic consumption for growth. A change in strategy is necessary.
• Prepare for Government Spending: CEOs should not wait for the government to drive the economy. They can proactively prepare to benefit from or tap into the planned government spending in three ways:
  1. Identify Benefits from Investments: Analyze how their companies can benefit from the planned government investments, regardless of their current sector.
  2. Optimize Tendering Processes: Improve understanding of tendering processes and identify opportunities within them.
  3. Enhance Productivity: Focus on improving their own company's productivity, which has been a significant challenge in Canada. This can involve conducting staff audits to identify skill gaps for the next three to five years.
• "Follow the Money": Businesses should equip themselves with knowledge about where these investments are directed and essentially "follow the money" to capitalize on the substantial funds being injected into the economy.

Challenges and Concerns

Despite the positive aspects, Mascarenos also addresses potential challenges:

• Labor Shortages: A significant reduction in foreign worker intake is anticipated, which will create challenges.
• Public Sector Growth: The public sector has grown substantially from approximately 250,000 employees in 2014 to 367,000 currently. While there are plans to scale back by 30,000, this remains a point of concern.
• Government Crowding Out Private Investment: A critic's perspective is that if government-funded projects were truly worthwhile, they would naturally attract private investment. Mascarenos acknowledges this possibility.
• Regulatory Burden: A major, often overlooked, issue is the significant increase in regulations.
  • In 2018, the federal government had 73,000 regulations.
  • This number has risen to 360,000 today.
  • Ontario also has a substantial number of regulations, around 150,000.
  • The estimated cost of this regulatory burden to the economy is about $53 billion annually.
  • Small businesses spend approximately 32 days per year managing these regulatory hurdles.
  • Mascarenos believes a significant reduction in regulations (even by 50%) could unleash major productivity gains by freeing up HR resources for innovation.

Government Investment vs. Private Capital

Mascarenos discusses the dynamic between government investment and private capital:

• Defense Spending Spillover: Historically, defense spending has generated spillover benefits for other sectors, a trend expected to continue with investments in defense supply chains.
• Auto Sector and NAFTA: The auto sector, which has been significantly impacted, may see some benefit from government investment. However, the renewal of NAFTA (or its potential renegotiation as separate agreements) poses uncertainty for Canada's position.
• Critical Minerals: Government investment in critical minerals is seen as particularly beneficial, especially given the Ontario government's focus on this sector.
• Stabilizing Sectors: In sectors like construction, which is experiencing a downward trend, government investment may help stabilize the market.
• Government Role: The government's role is seen as investing in these sectors and then stepping aside to allow for innovation to grow.

Conclusion and Takeaways

The budget presents a strategic focus on growth and productivity, with clear allocations for capital spending and targeted sectors. While there are positive signs of fiscal discipline, businesses must adapt to changing labor dynamics and proactively position themselves to benefit from government investments. A significant challenge remains the overwhelming regulatory burden, which, if addressed, could unlock substantial economic potential. The government's investment strategy aims to stimulate key sectors, with the expectation that private innovation will follow.