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Becoming Fit for Purpose: Reinventing economies and government after COVID-19

Kai Lakhdar National Pension Fund Sector Leader, PwC Canada 15 February, 2021

We’re hopeful Canada’s soon to re-emerge from a challenging 12 months of health and economic crisis. While we imagine there will be further bumps in the road, the path is now becoming clearer as we continue to vaccinate Canadians through 2021. But the Canada that governments will need to steward through the next few years of economic recovery is a different country from the pre-pandemic one, with clear economic, business and behavioural trauma that must be addressed.

A brief reflection on the characteristics of the economic and societal backdrop today suggests we’re in an environment of:

  1. Increasing levels of public debt. Since the pandemic began, Canada has committed to stimuli worth a cumulative 20% of GDP. That puts Canada far ahead of most other countries. Economists predict the federal debt can be effectively managed and aren’t too concerned. On the other hand, provincial and municipal government debts are an area of concern. Risk to fiscal debt sustainability is pronounced among the three oil-producing provinces of Alberta, Saskatchewan, and Newfoundland and Labrador. In addition, the pressures on provincial governments to enact fiscal reforms to fully fund program spending, like health care, are significant. Likewise, economic development will come to the forefront as all levels of government consider their options for growth.

  2. Damage to populations, assets and productivity. COVID-19 crisis impacts have been felt unevenly across populations, geographies, industries and businesses—exacerbating a polarization that was already an emerging societal crisis. Beyond the devastating health consequences, the economic damage to minority groups and the youngest in our employment base, with a notable disproportionate impact on female workers, has been significant. Small businesses have been impacted much more than large ones, and our projections suggest a shift in the business environment that’s likely to result in more disproportionate pressures on small and medium enterprises than the rest of the business community if significant actions aren’t taken. Exporters have been hurt more than domestic suppliers and urban assets more than non-urban assets, and most concerning perhaps is the fact that many of the unemployment effects may be longer lasting than the pandemic itself. These inequities are a genuine threat to long-term prosperity.

  3. Increased role of government. Governments have stepped in as the responder of last resort, supporting Canadians and businesses, helping to mitigate many of the health and economic consequences of the pandemic. Creative solutions have been produced to enable access to services and funding and to mitigate societal harm. Many government efforts are underway to target, enable and de-risk the economic recovery and begin to build resilience in the long term. All of this means that, overall, trust in government has grown compared to pre-pandemic sentiments.

The path forward

As the pandemic recedes, governments have begun to make recovery plans, and it’s clear that in Canada, along with in most developed nations, the shape of the recovery will be greener and more inclusive, and it will redefine our global role and rethink our economic and industrial portfolio. We believe this will create a new and enduring set of opportunities and challenges for Canadian governments and corporations and should cause governments to ask important questions about whether they’re currently funded, managed, resourced and organized appropriately. 

Looking forward to recovery, Canada has laid out additional plans for an investment-focused stimulus of between $70bn to $100bn, or up to 4.3% of GDP, over the next three years. This is important, as it will make sure economic damage from the pandemic can be gradually reversed and help the economy recover strongly once a vaccine is rolled out. But provincial debt sustainability will need more than an economic catalyst. A fundamental rethink of taxation, expenditure management and major program areas like health and social services will be critical. Measures, such as improving government operations, commercializing assets and improving fiscal arrangements, are going to be critical for productivity.

We’ll also need to enable targeted economic growth that’s supportive to the areas of the economy that need it most. This will mean rethinking regulation, foreign investments and private sector collaboration, as well as upskilling the workforce and investing in disruptive technologies. No area of government will be able to escape from the changes needed to be equipped for the post-pandemic environment, which will likely be characterized by a rising demand for social services at a time of impaired fiscal capacity. Some key questions include: 

  • Education, health and social service: How can we deliver services that meet the needs of the 21st century, polarization realities and demographic demands?

  • Environment, energy and resources: How can we reorient our industrial portfolio to environmental sustainability and maintain global competitiveness?

  • Transport and infrastructure: How do we rethink our infrastructure to serve us well for the future, while balancing economic, social and environmental pressures?

  • Customs, immigration and border control: How do we enable safe and secure borders in a globalized world while winning the global war for talent?

  • Defence, national security and law enforcement: How do we balance complex domestic and international security pressures, while ensuring public safety and trust?

What is clear, given the environment and key headwinds we collectively face, is that organizations will need to rethink their strategic direction. Each of these areas of government will also be faced with a challenging economic climate and an urgent need to transform how they operate, while enabling sustainable economic growth. Conventional strategies, such as across-the-board or narrowly focused cuts, could do irreparable harm to already strained economic and social outcomes. Instead, they need a more effective approach—one that enables them to cut costs and grow stronger simultaneously. This approach, which Strategy&, part of the PwC network, developed for the private sector and has customized for government and the public sector, is called Fit for Purpose.

Driving recovery through “Fit for Purpose” government

“Fit for Purpose” government means embracing strategies and structures that achieve substantial and sustainable reductions in spending, while bolstering investment in the services and initiatives that are essential to the long-term well-being of governments’ constituents. It involves four actions: articulating strategy, transforming the existing cost structure of government services, building the necessary capabilities and reorganizing the government’s operating model for high performance.

There are two enablers of these actions. The first is digital, which drives the digital transformation of government. The second is the development of the talent needed within government and the national economy at large, along with the creation of a change-friendly culture that can support and nurture stakeholders as they undertake transformational initiatives.

Our experience suggests this often starts by:

  • articulating a clear and compelling cost agenda right from the citizen-facing services on the front line through to the back-office operations of government

  • building streamlined and resilient processes, systems, operations and organizational structures

  • institutionalizing capabilities that flow resources to “good” costs, away from “bad” (generally framed as a focusing of cost investments on core capabilities vs. non-core capability areas and programming)

The outcome is a set of differentiating capabilities and high-performance culture repositioned on the path to sustainable growth. This is achieved through a variety of revenue growth and efficiency levers, which will depend on each government’s or department's context and strategic direction. Though this is not a trivial exercise, we believe this process can be used to rebalance the economy, prevent people from being left behind and enable digitization that can create government operations that are fit for the 21st century.

This is a time like no other before it. Governments have a window of opportunity to rethink their strategy and operations and drive the transformations that will enable a sustainable economic recovery. Doing what we have done before won’t be enough—we need to invest and rebuild in a way that creates enduring resilience and creates capacity to take on emerging priorities. Through this crisis, the government and public sector have shown they’re capable of great things. Change is not only now possible in a way it wasn’t, but it’s a critical part of our path to recovery and prosperity.

If you found this interesting, check out our point of view on digital government where we look at how to address constantly shifting citizen expectations

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Kai Lakhdar

Kai Lakhdar

National Pension Fund Sector Leader, PwC Canada

Tel: +1 416 687 8705