This article is based on a recent MLI publication titled, “Doubling GDP by 2050.”
By Philip Cross, October 25, 2021
Targets to guide government actions are nothing new. For decades, the federal government has set annual targets for the number of immigrants it wants. Inflation targeting is the foundation of the Bank of Canada’s monetary policy. Hard budget deficit targets helped governments deal with the fiscal crises of the 1990s and may yet prove indispensable in dealing with today’s record deficits.
Given the demonstrated usefulness of targets, government needs to set a long-term goal for Canada’s GDP. GDP is the key to creating the incomes that drive employment growth and generate the tax revenue to finance most government operations. In a new paper for the Macdonald-Laurier Institute, I argue we should set a goal of doubling Canada’s 2020 real GDP so as to hit $4.0 trillion by the year 2050. Doing so would require annual real GDP growth of 2.5 per cent on average, which is just 0.3 percentage points above what we recorded over the last decade.
People regularly underestimate how small changes in growth rates can produce greatly different outcomes when compounded over long periods. Increasing annual growth by a factor of five (from one to five per cent) results in over seven times more GDP growth after just two decades. Conversely, the reduction in average annual growth from 3.0 per cent in the decade from 1991 to 2000 to 2.2 per cent in the 2010s helps explain the difference between an era of burgeoning budget surpluses, booming investment, and soaring optimism versus today’s chronic budget deficits, faltering investment, and rampant pessimism about the future.