Innovation's Demands on State Capacity

Innovation has a cumulative impact on governments making cuts even more ludicrous

Happy Wednesday! This weekend’s Toronto Star featured a story about the significant cuts across the federal public service. It was mind-boggling to see the range of activities that will be impacted by the loss of 12,000 FTE positions. Then today, there’s another piece about how Global Affairs Canada is laying off its most highly skilled diplomats, despite the concerning geopolitical situation we are in. All of this has got me thinking about the need for state capacity and its connection with innovation, so I thought I would explore that briefly today. 

Last fall, I wrote about how the federal government’s push for austerity is completely out of step with what is needed right now. Despite the widespread belief that we need public service cuts, there is surprisingly little evidence to support such a move and plenty to suggest it would be harmful, especially in our current situation. 

This moment requires a different approach. As Rusty’s dad says in that profound source of modern wisdom, Bluey, when you face a difficult situation in life, you have two choices: back away and get out, or step in front and play a pull shot. Right now, our government is backing away.

Austerity and cuts are often justified by claims that the public service is bloated. When it reached a record size in 2024, with 274,219 employees—40.4% higher than at the end of 2014-15—many of these arguments were frequently used, such as this in the Globe & Mail from the Macdonald-Laurier Institute: “The obvious question from a citizen taxpayer point of view is, ‘We have 40 per cent more people in government, am I getting 40 per cent faster service?’ I don’t think most people feel that value for money.”

This type of argument overlooks the effect of a growing population. When considered on a per capita basis, it becomes clear that the public service levels are nowhere near what could truly be called record levels, and have remained largely steady since the mid-1990s.

Source: https://www.csps-efpc.gc.ca/tools/jobaids/pdfs/spending-reviews-eng.pdf

Setting the bar at 40% faster service during a time of rapid population growth is clearly a ludicrous expectation and self-evidently ideologically driven.

However, these discussions often omit innovation and its impact on state capacity. Including this clearly shows why such cuts are harmful.

In simple terms, as innovation increases, our need for state capacity to handle the outcomes also grows.

Innovation has a cumulative effect on the public service. While it involves creative destruction, it never destroys requirements on governments; instead, it transforms them while consistently adding more. 

This is well illustrated by examining the implications of various forms of communication technology.

The invention of the radio suddenly required governments to take an active role in regulating the radio frequency spectrum. The federal government enacted the first Wireless Telegraph Act in 1905, followed by the Radiotelegraph Act in 1913, began issuing licences to private commercial radio stations in 1922, and established the CBC in 1936. All of this came in addition to numerous other actions at both federal and provincial levels, especially in Quebec.

However, when televisions appeared, they did not eliminate the need for these past forms of government intervention. CBC continued radio broadcasts, and the federal government kept issuing licences to commercial radio stations. Instead, this innovation prompted new demands on governments. It resulted in the St. Laurent government establishing the Massey Commission and amending the Broadcasting Act to support CBC’s development of television programming. In 1958, Diefenbaker created the new regulatory agency, the Board of Broadcast Governors, which was later replaced in 1968 by the Canadian Radio-Television Commission, now the Canadian Radio-Television and Telecommunications Commission (CRTC).

Similarly, the emergence of VCRs and DVDs, satellite and cable TV, CDs and iPods, mobile phones, the internet, video on demand, digital radio, social media, AI, and more has not eliminated the need for the government to regulate these earlier technologies. They may have transformed the government’s role and how it operates, but the core responsibilities still exist. Just as in 1905, the federal government in 2026 still manages the radio frequency spectrum. The difference now is that there are many new responsibilities layered on top of that.

Each new wave of innovation generates additional complexity and new responsibilities for the government to assume.

This is true in practically any area of innovation you examine. Consider advances in healthcare, where there is still a need to ensure the safety of new pharmaceuticals. The federal government first established its role in this field with the creation of the Department of Health in 1919, followed by the 1920 Food and Drug Act and its 1947 amendments, which set many regulations that lasted for decades. However, we have seen waves of innovations that have expanded these roles. Different types of medical technologies also require inspection and approval. Emerging treatments, like genetic therapies, and new fields, such as lab-grown organs, all need different kinds of experts, processes, and increased roles for government and regulators. 

When we say the world is more complex now than it has ever been, that isn't just a shallow remark. It is very true, as the history of innovation shows.

This all puts cuts to the federal public service into perspective, along with the thin, ideologically driven arguments that justify them.¹

Not only is the public service nowhere near reaching a record size when you account for population growth, but when you also consider the wide range of new responsibilities and areas of intervention it must take on due to innovation, you can see that these cuts are harmful to the public interest in a myriad of ways.

Unfortunately, we live in a time that demands a lot of us in oh-so-many ways. This is exactly the kind of moment that calls for us to step in front and play the pull shot. It is a shame this federal government appears determined to back away instead.

1. This also speaks to the damaging impact of efforts such as Harper’s Red Tape Reduction Act, which introduced the “one-for-one rule” requiring that, for every new regulation imposing an administrative burden on business, one must be removed. Such laws ignore the expanding scope of action that innovation demands, which may require new regulatory actions and burdens on businesses. All of that doesn’t mean regulation cannot be designed well to minimize compliance costs, but that is a very different discussion.