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Uzelman: Negligible economic growth forewarns enduring economic malaise

A column by Bruce Uzelman
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Eight years in, the federal Liberal government remains oddly detached from its failure to grow Canada’s prosperity. The government has had no consistent or credible policy to grow Canadians’ real income. GDP per capita from 2015-2022 grew by only a 0.3% annual rate, according to the C.D. Howe Institute in a November 7 report. In July, TD Economics advised GDP per capita had already declined the last three quarters, and forecast it would continue to decline consistently to the end of 2024.

In an oft-quoted report, the OECD projected that Canada would have the lowest growth of all advanced economies in GDP per capita at 0.7% from 2020-30 and at 0.8% from 2030-2060. It advised the primary cause is low growth in labour productivity (total output for one hour of labour). Productivity levels, in turn, depend primarily on business investment, and that is the source of Canada’s economic problems.

The C.D. Howe report explains, “Business investment in Canada has been so weak since 2015 that capital per worker has been falling – an ominous problem that has been stagnating productivity and living standards.” The report reveals that new business investment per worker is only $.57 in Canada for every dollar per worker invested in the United States, and $.75 for every dollar invested in all other OECD countries. Moreover, the gap has grown markedly since the mid-2010s.

Plainly put, much lower business investment in Canada than abroad means that our commercial technology, infrastructure and equipment is less efficient, which results in weaker growth in domestic income than in income elsewhere. C.D. Howe appropriately concludes, “The key message from our 2023 report is that Canadian governments, particularly the federal government, need to make policies that promote investment and productivity growth a much higher priority.”

Ahead of the federal Finance Minister’s Fall Economic Statement (FES), the financial press and think tanks proposed constructive economic and fiscal policies for the government to advance.

- Introduce a new fiscal anchor. After the government failed to adhere to its pledge to reduce the debt to GDP ratio, the Business Council of Canada, amongst others, have suggested the government limit debt service costs to a maximum of 10 % of revenue. “More deficit-financed spending at higher interest rates will eventually and inevitably lead to levels of indebtedness that will force future governments to cut spending and reduce taxes.” Positively, the government in the FES has adopted a new fiscal anchor, pledging deficits will not exceed 1% of GDP in the future.

- Reduce inflationary, deficit spending. There has been intense pressure on the Liberals to exercise fiscal responsibility. It has come from the Conservative leader Pierre Poilievre, experts and the media. Jeffrey Simpson phrased it best, “Help a central banker out.” Indeed, the Bank of Canada commented, “By adding to demand at a faster pace than the growth of supply, government spending could get in the way of returning inflation to target.” New spending announced in the FES is largely deferred to future years.

- Develop “a long-term plan for economic growth.” The Coalition for a Better Future offers three policy “guardrails” to expand growth: First, “do no harm.” Absent energy exports, the dollar would be weaker and inflation and interest rates higher, the coalition notes, implying the government should not hobble the oil and gas industry. Second, the government “must foster a stable environment” for investment in clean industries to occur. Third, “get macroeconomic policy right,” to achieve low and stable inflation and grow investment. The FES did not substantially adjust policies in these areas.

- Reduce immigration and temporary admissions to reduce pressure on housing. The immigration minister announced recently that the government will continue to grow immigration to 485,000 in 2024 and 500,000 in 2025, after which it will “stabilize” levels at 500,000. The minister made no commitment to cap temporary foreign worker or student admissions. The federal government instituted the historically large immigration and temporary admissions as the housing supply gap expanded dramatically. This situation is unchanged after the FES.

- Stimulate business investment, productivity and real income. As we have seen, the C.D. Howe Institute strongly advanced this argument, but so have numerous other organizations. After the failure of the government’s Super Clusters program, their strategy to grow business investment has largely focused on expanding clean industries. These programs have been slow to arrive, and to date have failed to meaningfully advance investment, productivity and income. No significant measures were introduced in the FES to address these problems.

The OECD in a 2023 report stated categorically, “for Canada to escape years of low investment and tepid productivity growth, reforms to improve the business climate are long overdue.” Only additional reforms, fiscal discipline and economic focus can return Canada to prosperity.

bruce

Bruce W Uzelman, based in Kelowna, holds interests in economics and political science.

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