Inflation has been a scourge. For the first time since March of 2021, the annual rate of inflation in June fell within the Bank of Canada’s target range of 1% to 3% (2.8%). The bank wants to see it at 2%. The bank’s favored core rates are more than 3.5% and are sticky, but are trending in the right direction.
The inflation hangover remains. Food inflation persists at 9.1%, and interest rates are painfully high. Economist David Rosenberg notes that mortgage interest cost has “surged” by 30%. He says, “That is the key: strip out the mortgage costs, and the other 95% of the pricing pie is down to the bank’s target of two percent.” He says for the BofC to continue to raise rates would be a mistake. Many economists think the bank will back off. The inflation related problems of the past and present are destined to fade.
Canada’s most consistent economic problem this century has been anemic growth in both productivity and real income. World Bank data shows under the Conservatives (2006 to 2015), growth in real GDP per capita was about 5% over the entire period. Under the Liberals (2016 to 2022), it grew by only 3.2%. Real GDP per capita has still not recovered to its pre-pandemic peak. Over the last three quarters it has declined, and TD Economics forecasts it will consistently fall through to quarter four, 2024.
This perhaps explains the Liberals fixation with increasing immigration. A growing population builds GDP and the illusion of progress and prosperity, though living standards have not improved. There are many good reasons to expand immigration, but enabling the PM to tout GDP growth is not one of them. The benefits must be balanced with our ability to offer sufficient housing and services for the new residents.
Canada’s feeble income growth is caused by low productivity, which in turn is due to meager business investment in buildings, equipment and technology, particularly since 2015. The Business Council of BC noted, “the average Canadian firm invests far less per available worker than do average firms in other developed countries – and the gap is increasing.” William Robson of the CD Howe Institute noted, “for every dollar of new capital per US worker, a Canadian would get only 53 cents.” Real capital stock per worker has been declining since 2015. That’s unprecedented. It’s wearing out faster than it’s replaced!
None of this will change under current federal policies. The OECD projects that Canada will have the lowest productivity and income growth of all developed countries through to 2060. The Liberal government has thrown many programs and tens of billions of dollars at the problem. From the Global Innovations Clusters (“superclusters”) early in their first mandate to the Clean Technology Investment Credit (CTIC) in the 2023 Budget, the government has been providing finance, grants or investment tax credits. The strategy has been a spectacular failure. The macroeconomic data proves that.
The CTIC alone has a budget of $60 billion over ten years, the Environment Minister said in April. This program was a response to the large US incentives for the clean energy industry. The logic seems sound: ensure Canada does not lose investment in clean energy to the US. But given the government’s record, Canadians should be skeptical the CTIC will sufficiently increase investment, productivity and real income relative to the huge cost. We can hope the credits will at least help to meaningfully grow Canada’s clean energy sector and help reduce emissions. If not, it will be a total failure, a remarkably expensive one.
Experts have been suggesting alternatives to these government incentives for years: Ensure taxes and regulation are competitive, and simplify both. Shorten and simplify project approvals for mines and other large projects, and make outcomes more predictable. Remove inter-provincial trade barriers, and develop a more competitive economy, rather than protecting industries. It is not a complex strategy.
“The federal government needs to switch course.” The CD Howe memo says it best, “Debt-financed consumption, populist tax policies, and industrial-subsidies are not fostering stronger investment. Nor are ever changing and expanding regulations …. Spending and regulating less, and smarter, is the route to stronger business investment – investment Canadians need if they want to escape the low-income trap Bill Morneau [the former Finance Minister] warns about.”
Expanding productivity is much more than an academic obsession. It will engender a more prosperous Canada. VP David Williams of BCBC calculated that had the productivity growth rate after 2000 matched the rate from 1961-2000, the average Canadian’s pay would have been $13,550 higher in 2019. (That would have admittedly been a difficult feat. Productivity growth was very strong in the earlier period.)
For coming years and decades, meaningful productivity and income growth remain a realistic aspiration – if Canada’s leaders commit to it and capably pursue it. Alas, the Trudeau government is recognized neither for its commitment nor for its capabilities.
Bruce W Uzelman
I attended the University of Saskatchewan in Saskatoon.I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.
I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.