A version of the following report was published by RBC Economics on Dec. 8, 2021 under the title The Great Canadian Restart: How 2022 can spark an era of greener, more robust growth.

If 2021 was the year Canada rounded the corner on the pandemic recession, 2022 is the year it can accelerate out of a decades-long pattern of slowing growth. Though a pandemic recovery is in sight, a slow-growing labour pool and lacklustre record on investment and innovation have set a low speed limit for the economy.

The greener, more digital and tech-enabled society accelerated by COVID-19 has opened new pathways for growth that could ignite spending, investment and innovation. Businesses and households are lined up to propel this change, but their efforts are likely to be hampered by near and long-standing obstacles.

As it starts its new mandate, the federal government can help set a new course. Growth-oriented federal and provincial government policies can be the foundation for the increased private investment needed to boost Canada's growth trajectory.

Other countries are already remaking their economies in a bid to reverse the secular trend of low and declining economic growth rates. Canada does not want to be left behind. With a skilled workforce, strong record as a tech and energy innovator, and investment opportunities, it doesn't have to be.

A six-point growth plan

Past policies have struggled to change the course. The increasingly green, knowledge and services-based economy could represent a new growth trajectory for Canada, but it needs a push.

There's no single policy solution. Canada needs to confront the big challenges of the new economy, like climate policy, IP framework, and skills strategy, and realign the longstanding policy frameworks of the old one, including tax, competition and regulatory policy.

A growth-focused government strategy would encourage increased capital investment in technology and process innovation, helping Canadian firms scale to global markets. It would also enhance outcomes for Canadians in untapped talent pools, promote systems of lifelong learning, and support labour market transitions.

1. Embrace new approaches to innovation policy

Canada's poor performance on business R&D investment has persisted in spite of above-average government support. Its approach to innovation—providing support through the tax system skewed heavily towards small and medium-sized firms—may be a barrier to innovation output and scale. Meantime, the U.S. and other countries are increasingly pursuing strategies to build economic capacity and compete for geopolitical dominance in new industries.

Canada should test alternative innovation policies, including providing more support within core programs for larger, growth-oriented firms. More focused, de-politicized and resourced industrial strategies focusing on green and advanced technologies within North American supply chains may de-risk projects and draw private capital. Government procurement and targeted business supports may also accelerate technology adoption.

2. Forward-looking policy, public infrastructure and blended finance for climate action

The gap between green financing commitments and investments—and emissions targets and emissions—reflect a lack of projects with clear financial returns. Given the long time horizon, uncertainty is high around paths to decarbonization and underlying technology costs. Smaller markets for greener products mean firms may not be able to pass on abatement costs to their customers, challenging competitiveness for those that cut emissions.

Governments could prompt more climate action. Carbon pricing should continue to be a key pillar of the plan, rising predictably and applying more broadly. Hard infrastructure like EV-charging networks and carbon pipelines can help make it easier for households and firms to invest in emissions cuts. Canada should push for international cooperation on border carbon adjustments to protect domestic industry while furthering international progress on climate goals. Policy strategies can lay out a clear pathway for individual sectors, from oil and gas to agriculture, and promote blended finance pools of public, private and Indigenous capital for the early stage technologies we may need by 2050.

3. Promote services trade and Canadian platforms; protect intellectual property and data

Canada is a net exporter of R&D services and also a net importer of IP, suggesting Canada is not retaining ownership of its IP and is instead leasing it back from foreign companies. And foreign tech companies are monetizing Canadian data assets. With scalable, intangible assets driving tremendous value, this could be a missed opportunity to drive the scaling of Canadian firms and services exports. A broad range of services, from health care to software to the digital services embedded in the Internet-of-Things, are primed for growth.

Canada needs to consider forging trade agreements that address barriers to expanded global services trade. It needs to review its intellectual property regime to incentivize IP retention and outline data rights. Global platforms should be taxed at the same level as Canadian intermediaries, while multinationals should see time limits on tax benefits, with public money focused on local procurement over employment. Policy can support the development of Canadian platforms featuring local commerce, education and travel.

4. Increase competitiveness with tax, competition, and regulatory policy

Expectations of more public spending are raising concerns over future tax increases and creating uncertainty that may be limiting investment. Canada's tax system has not been reviewed since 1967, and deviates in important ways from core tax policy principles like efficiency and simplicity. Canada's low international rank in openness to foreign direct investment could be holding back innovation, while interprovincial trade barriers may be subtracting up to 3.8 per cent from the economy per year.

Canada should undertake a tax policy review to streamline tax expenditures, ensure competitive rates of personal taxation (including for international skilled talent), encourage more public-private investment, incentivize re-investment and longer investment horizons, and target tax supports for newer and growth-oriented firms. Regulatory policy, especially in the context of interprovincial trade, also needs attention.

5. Attract, develop and retain new sources of talent

Affordable childcare and flexible working hours have long been identified as major barriers to women's participation in the workforce. Meantime, challenges in integrating newcomers into labour markets, and opportunity gaps for Indigenous and some visible minority groups, have left other rich sources of workers underutilized.

National child care can have a big impact by targeting the largest affordability and accessibility gaps, while national standards within the early learning system can help expand the next generation of talent. Making the higher annual immigration target of around one per cent of the population permanent, updating special visa programs with a more forward-looking assessment of labour market gaps, recognizing foreign credentials and providing greater pre-arrival labour market support can increase the participation of immigrants. Underrepresented groups should be encouraged to develop new green and digital skills.

And good housing market policy is good labour market policy. Governments of all levels need to coordinate a systematic review of housing policy to address supply-side constraints, rationalize demand-side policies, address inequality, and ensure financial and economic stability.

6. Education and labour market policy for lifelong learning

Despite a relatively high share of adults participating in on-the-job training, Canada has some of the largest participation gaps in the OECD. Workers who are highly-skilled, of prime-age (25 to 54 years) and employees of larger firms are most likely to get training.

Canada should explore redesigning income support programs to enable more reskilling while working. Policy makers should update the skills strategy and Canada Training Benefit for green skills and explore national tuition standards to balance access and revenue needs. Provinces should study rapid reskilling programs in various sectors to scale what works, accelerate the incorporation of skilled trades and digital and coding skills into their K-12 curriculums, and provide support for collaborative approaches and common platforms for helping small and medium-sized employers better prepare for their skill and training needs.

Find the full report at thoughtleadership.rbc.com.