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On Nov. 3, the federal government released its fall statement to assess the economic conditions and near-term outlook, consider remedial policy measures and summarize the state of public finances. The economic statement is a prelude to the spring budget, laying the groundwork. A cautious, restrained tone was expected, to dampen expectations of increased spending and tax relief, and to shore up confidence of the public, business community and international financial markets in public finances.

Concerns about public finances include the projected large budget deficits over the next four fiscal years and record public debt burden (debt-to-GDP ratio), the significant risk of further fiscal deterioration from slowing and possibly recessionary growth, high borrowing rates and heightened sensitivity of global markets to public finances (exhibited by the severe market reaction to the U.K. mini-budget last month).

The pressing task for the spring budget, in the midst of weak economic conditions and constrained fiscal options, is to build confidence to encourage business spending, especially for small and mid-sized businesses, and provide fiscal support, such as tax breaks, to reverse a more than decade-long slide in business investment and related productivity.

A new policy approach is needed when many fiscal programs have clearly failed. The starting point in the spring budget is to initiate a comprehensive review of federal government programs, ranging from grants, loans and tax breaks, in terms of effectiveness to support small business to raise capital, improve productivity and innovate. The review could be done in consultation with the private sector.

The failure to improve productivity, despite many initiatives, means the criteria and decisions to allocate government funds missed many of the right investments and companies. The review would likely result in eliminating programs, renovating and streamlining existing programs, and introducing new policy measures, such as tax-assisted programs that shift investment discretion to individual Canadians and their advisors, and to small private equity funds.

This public consultation review will strengthen incentives for small-business capital spending and growth, inspire confidence in federal business programs and improve their transparency, benefiting small businesses and investors.

It should also be noted that reforms in securities regulation over the last several years, significant advances in financial technology and structural adjustments in retail markets like private equity trading platforms will help investors and their advisors take advantage of tax-assisted investments and make the program successful.

The allowable size of tax-assisted investments (typically a tax credit on purchases of eligible small business shares) should be limited, to mitigate risk to investors and restrain federal tax expenditure.

In this regard, the federal government could consider the successful Enterprise Investment Scheme in the U.K. Many investors in that program invest in local businesses that are known and well understood. The program therefore becomes a vehicle to channel local capital to local enterprise, stimulating communities across the country.

The prolonged collapse in business investment, productivity and innovation undermines economic growth and the competitiveness of the Canadian economy. The gravity of the economic problem and evident failure of policy measures call for a new approach. The existing policy framework to support capital-raising for small and mid-sized business should be dismantled, renovated and replaced with new innovative policy ideas tied to market-driven incentives.

Ian Russell is a partner with Russell Deacon & Company and past president of the Investment Industry Association of Canada.