This article was originally published by the Toronto Star.
By Jon Hartley, May 21, 2024
A recent speech by Bank of Canada Deputy Governor Carolyn Rogers highlighted Canada’s productivity slowdown as an emergency, garnering many headlines.
Productivity growth is a crucial driver of economic prosperity and rising living standards, especially for those below the median income. The International Monetary Fund’s (IMF) Spring 2024 World Economic Outlook Report suggests that these downward trends are likely to continue, at least in the short run. The IMF projects 2024 GDP per capita growth of 1.4 per cent for Canada compared to 2.1 per cent for the United States.
Canada is set to lag behind the U.S., yet again, by more than 30 per cent. Alarm bells should be sounding — Canada’s productivity crisis is set to get worse not better over the next year.
The reality is that Canada’s labour productivity growth has been lacklustre since the global financial crisis of 2008-2009 (even though Canada’s banking system was far better prepared for it than the rest of the world).
Meanwhile, over the same years the U.S. economy has grown at an impressive pace. Canada’s GDP per capita is now a fraction of that of the U.S. In PPP-adjusted 2017 international dollar terms, Canada’s 2022 GDP per capita was $49,296 compared to $64,623 for the U.S.
Canada must grapple with a perplexing productivity puzzle. Canada has been unable to promote innovation and growth at a significant scale, despite a highly educated population and significant amounts of immigration.
This puzzle is made even more complex in that Canadian businesses face constant competition with the U.S. Innovative Canadian companies like BlackBerry were a brief flash in the pan, ultimately losing to a U.S. competitor. Will the same be true for new tech darlings like Shopify?
Canada is not alone in losing its competitiveness. Since 2010, most European countries have experienced a similar productivity slowdown. Former Italian prime minister and European Central Bank governor Mario Draghi is currently leading an inquiry into Europe’s productivity slowdown. The IMF similarly forecasts 0.9 per cent GDP growth for Euro Area in 2024.
The solution is not a simple one, particularly as Canada competes with the U.S. to promote innovation and investment. New investments in innovation like R&D tax credits could help but are unlikely to be enough to get Canada back on track on their own.
The bump in capital gains tax rates, proposed by the Liberal party in their recent budget, will almost certainly make the problem worse instead of better. Shopify CEO Tobias Lutke argued that the Liberal budget will have an anti-innovation effect saying “Canada has heard rumours about innovation and is determined to … leave no stone unturned in deterring it.”
To help revive Canadian productivity growth, we should look to our American neighbour’s success. The Americans have done a lot right when it comes to promoting economic growth and innovation, particularly in relation to policies that encourage a vibrant tech sector.
Strong property rights, rule of law, less regulation on ordinary businesses, and a reasonable tax environment are all part of the recipe and Canada has successfully mirrored U.S. policies to our benefit before; aligning Canada with America’s winning policy environment would be in the proven style of the late former Prime Minister Brian Mulroney.
Canada should also lean into our competitive advantage in the natural resource sector. As Philip Cross and Jack Mintz make clear in a recent paper for the Macdonald-Laurier Institute, “Despite … an increasingly hostile regulatory environment, natural resource industries still account for nearly half of all business investment in Canada.” Decreasing the regulatory burden on our most productive sector will play a role in any serious proposal to address our growth crisis.
Canada’s productivity slowdown must be addressed with some urgency. Failure to do so could perpetuate stagnant wage growth, erode competitiveness and impede long-term economic prosperity and opportunity, especially for the poor.
Policymakers in Canada as well as other countries suffering from a productivity slowdown like in Europe must prioritize this challenge and implement comprehensive strategies to reignite productivity growth, ensuring their economies remain competitive and resilient in an ever-evolving global landscape.
Jon Hartley is a senior fellow at the Macdonald-Laurier Institute and a research fellow at the Foundation for Research on Equal Opportunity.
