I'd like to thank the committee today for their invitation on this important and ongoing issue of fiscal sustainability and economic growth.
It is unfortunate that five years after the recession we are here still talking about economic growth and the lack of a full recovery in either GDP growth or the labour market. I think that growth is exacerbated by federal government austerity as well as by provincial government austerity. While government spending was a significant driver of economic growth in the year after the recession, that influence has now waned. The federal and provincial government cutbacks inevitably mean lower growth and less employment, both within the public service and in private sector companies that contract with governments for service.
As well, many of the other drivers of economic growth in the past year have been muted. For instance, the balance of trade since 2009 has turned negative, meaning that we import more than we export, and trade becomes a drag and not a driver of GDP growth in Canada.
Increased resource exports have not made up for a collapse in the manufacturing sector. Every year, we are exporting our national wealth and no longer using international trade to our advantage. Instead, other countries are using us to their advantage.
Business investment has added little to economic growth over the past year. Instead, the cash holdings of corporate Canada continue to grow, and appear to continue to grow, in good times and in bad.
Economic growth over the past year has come almost entirely from consumers, through household consumption, although interestingly this is not through housing construction, which has been the case previously. Given stagnant wages for most households, the increase in consumer spending in the past year has come almost entirely from an increase in household debt. This increase comes as households already have historically high debt levels.
Fiscal sustainability at the federal level is often taken in isolation from the rest of the economy. For instance, federal fiscal sustainability is presently defined as reducing the federal government's debt-to-GDP ratio from its present level of 33% down to 25%. Even at 33%, Canada's federal government has the lowest debt-to-GDP ratio of any federal government in the G-7. There's no pressing economic need to further widen this gap. Moreover, there are much more pressing sustainability issues in the Canadian economy outside of the federal government's relatively small and manageable debt.
As I mentioned earlier, households have been doing the heavy lifting in terms of economic growth since the recession. The federal government is concerned with its small 33% debt-to-GDP ratio while households have a record debt-to-GDP ratio of 95%, up from the 50% levels in the 1990s. If any sector in the Canadian economy is over-leveraged with debt, it is surely the household sector, not the federal or provincial governments. Household incomes have been constrained, among other things, by a labour market that has still not seen a full recovery, either in the unemployment rate or, perhaps more importantly, in the employment rate or the percentage of working-age Canadians who have a job.
While there has been a decline in the unemployment rate, part of this is due to discouraged workers simply giving up looking for a job. Excluding this effect by using the employment rate, there has been much less recovery in the percentage of working-age Canadians that have a job compared to pre-recession levels. Moreover, those that have jobs don't see the sort of regular wage increases they saw in previous decades. In Canada's largest cities of Montreal, Toronto, and Vancouver, the average real income of the bottom 90% is lower today than it was in the 1980s. For lower-income Canadians, programs like the temporary foreign worker program likely further suppress wages. In fact, about 10% of all the jobs created since the recession went to temporary foreign workers.
Stagnant incomes mean that increased consumer spending comes from debt accumulation and not from rising incomes for middle-class households. This should be the target of federal government policy. Real wage increases in the middle, better support for low-income Canadians, and more job creation, particularly for youth, should be the federal government's goals. These broad strokes will hopefully result in an orderly de-leveraging of households, by and large the largest sustainability threat that Canada currently faces.
Thank you.