I want to pick up where I left off on budget day. But first, I’m going to rewind the tape to Oct. 20, when I interviewed Koho chief executive and founder Daniel Eberhard on stage at a Canadian Lenders Association event in Toronto.

Eberhard is a thinker. His reading list could be the foundation of a good university course. So, given the times in which we live, I asked him what he finds himself thinking about most. “It’s soft and squishy, but I really do think about the culture of Canada a lot,” he said. 

Thanks to the folks who award Nobel Prizes, it’s now acceptable to talk about soft-and-squishy culture in an economics column.

Northwestern University’s Joel Mokyr shared this year’s Nobel Prize in economics with Canadian Peter Howitt, whom I recently interviewed, and French economist Philippe Aghion. Mokyr’s primary contribution to the field is an exhaustive qualitative analysis of why the Industrial Revolution happened in Europe and not China or somewhere else. The great difference wasn’t colonization, cheap labour or some other material factor of production. It wasn’t low taxes, free trade or government spending. It was a culture that allowed ideas to flow throughout the continent and into the minds of a relatively well-educated class of tinkerers. 

Culture is the dark matter that fills the gaps in the models, and it probably explains why Canada frustrates so many economists and technocrats. We humans aren’t so different from each other. We’ll respond to the same incentives. But the force of that response is determined by culture.

This is what a narrow interpretation of economics misses. A society formed by people who fled the American Revolution will have a different set of expectations than the one formed by those who thrived in its eat-what-you-kill environment. “I broadly think that the future is the one that we build and the one that we earn,” Eberhard said on that stage in Toronto. “I don’t think we’ve done a good job socializing that in Canada.” 

Back to the present, and Carney’s first budget. It was both historic and anti-climactic. As The Logic’s David Reevely wrote, if all that Carney has done to date had been revealed this week, the document would have been “monumental.” The list includes a massive increase in defence spending and new federal offices that will oversee the development of major infrastructure projects, the purchase of military kit and the rapid construction of affordable housing, while also trying to help stand up a modular housing industry. 

The budget added some items to the “build, baby, build” agenda, including a $2 billion Critical Minerals Sovereign Fund that will have the power to take equity stakes in miners, something that might have become necessary to offset the U.S. government’s growing influence over a strategic industry. 

But much of what was new in the budget was also incremental. The new Productivity Super-Deduction is a bundle of previously announced tax incentives that make sense on paper, but have done little to jumpstart chronically weak business investment. A rebrand won’t hurt, but how much will it help? Same for the revamp of the Scientific Research and Experimental Development (SR&ED) tax credit. The $1-billion budgeted to recruit world-class researchers also had a least-you-could-do feel to it. 

Maybe it was wise to avoid another big bang. William Cornelius Van Horne, the American executive who saved the Canadian Pacific Railway from ruin in the 19th century, didn’t salvage the project by focusing first on the Rockies. He laid track in the Prairies to build momentum, and tackled the hardest terrain later.  

The country might not be ready for the type of disruption that will be required to revive animal spirits that have been tranquilized for two decades. Ottawa has been focused on consumption-led economic growth since former prime minister Stephen Harper cut the GST a generation ago. Carney is popular, but he’s also the leader of a minority government in a polarized political environment. Too much change at once could result in no change at all. 

But Van Horne had to tackle the Rockies eventually. Similarly, shock therapy might be what’s needed to bring about the cultural shift required to end a couple of decades of economic drift. 

Ahead of the budget, Toronto-Dominion Bank economists Beata Caranci and Francis Fong published a report that argues that overly complex regulation and ill-conceived tax policy are smothering the country’s entrepreneurial spirit. Among their evidence was a calculation showing that the business equity share of total assets held by households with net worth greater than $10 million dropped to 16.2 per cent in 2023 from about 40.3 per cent in 2016. 

In other words, wealthy people are finding easier ways to generate wealth than taking on the stress of starting and building companies. That’s good for those individuals, but bad for the rest of us because it implies that fewer new companies are joining the economy—and that’s a recipe for stagnation. 

Caranci and Fong recommend an overhaul of tax and regulatory policy. That aligns with GeoComply co-founder David Briggs’s take on the budget. He likes much of what he’s seen from Carney, including the $5 billion Strategic Response Fund, a pool of money that’s meant to help companies adjust to technological and geopolitical upheaval. 

Still, Briggs worries that a culture of overweening regulation has created a culture of dependency that has caused too many entrepreneurs to lose their edge. For the Strategic Response Fund to succeed, “it must break the mould of traditional government funding,” he said. “The government should not be funding 100 per cent of anything. It should be asking, ‘Who is willing to put their own capital on the line first?’” 

GeoComply is a cybersecurity unicorn based in Vancouver. Briggs attributes its success to making the “hard choice” to forgo SR&ED grants because meeting the program’s requirements would have forced the company to change its strategy.  

The point is that an ill-conceived attempt to stir creative destruction can result in the opposite. GeoComply has succeeded because it chased customers instead of subsidies, while too many others became “zombie” companies kept alive by SR&ED credits and other subsidies. “We cannot out-spend or out-subsidize our global competitors, but we can out-strategize them,” Briggs said.

Federal budgets have a unique power to change the weather. That’s what happened in 1995, when then-finance minister Paul Martin gutted public spending to stave off a sovereign debt crisis. It was harsh. It also reset the culture, creating the foundation for a decent run of economic growth. 

The root problem of Canada’s present crisis isn’t debt, nor is it even Donald Trump. Our problem is that we risk becoming a zombie economy. To snap out of it might require a bigger shock than this budget delivered. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.