Thank you.
A consensus is emerging that Canada’s weak economic growth and low productivity constitute a national crisis. It is hard to avoid that conclusion when real GDP growth in the last decade has been the slowest since the 1930s. As population growth surged, real GDP per capita slumped to levels last seen in 2014.
Bank of Canada's deputy governor Carolyn Rogers recently called Canada’s lagging productivity “an emergency”, saying that “it’s time to break the glass”.
Concern about our flagging growth is not new. A Senate committee warned in 2018 that Canada is falling behind as our competitiveness languished. Former cabinet ministers Lisa Raitt and Anne McLellan, in 2023, formed the bipartisan Coalition for a Better Future to lobby for stronger economic growth. Based on current trends, the OECD predicts Canada’s growth over the next quarter-century will be the slowest in the region.
While faltering growth is widely lamented, the diagnosis of its causes is often off base. The interaction of three variables determines growth: the supply of labour, the stock of capital and the efficiency with which they are combined and deployed—what is called total or multifactor productivity. Canada has relied too much on raising labour inputs. Raising labour inputs in the absence of more investment and productivity likely contributed to lower GDP per capita. Business investment has fallen 21% since 2014, inevitably lowering productivity.
Rogers pinpointed weak investment as the main source of Canada’s poor productivity. The U.S. demonstrates high investment and productivity are achievable in a society that rewards risk-taking and encourages disruptive innovations. U.S. business investment surged 33% since 2014, the same period over which it fell 21% in Canada.
Optimism about the potential productivity benefits of artificial intelligence has sent the U.S. stock market soaring on increased confidence. Higher productivity can simultaneously boost growth while slowing inflation.
Lagging growth in Canada is a national crisis. As our incomes fall further behind the U.S, the temptation increases for our most productive and ambitious people to emigrate. The late Michael Bliss, Canada’s leading historian of business, warned “the one sure prescription for the eventual failure of the Canadian experiment in nationality would be to create an ever-widening gap in standards of living between the two North American democracies.” Avoiding this outcome should be our national priority. One solution is to encourage not restrain the development of our natural resource sector, which is by far Canada’s leader in investment and productivity.
Distracting from our focus on growth is the controversy surrounding the recent hike to the carbon tax, which provoked its advocates to mount a last-gasp defence. Three hundred supporters signed a petition backing the tax, buttressed by numerous op-eds and media appearances. However, rather than being persuasive, advocates mostly demonstrated how little they have learned from their long-standing failure to sell the tax to Canadians.
Proponents like to say the tax is the most efficient way of reducing carbon emissions while limiting the economic losses. This ignores that technological change is even better at lowering emissions while boosting economic growth, as the U.S. has demonstrated. The credibility of carbon tax advocates was damaged when academics claimed B.C.’s small 2008 carbon tax triggered a sharp drop reduction in gasoline sales. Supporters saw this drop as evidence emissions could be slashed with a small carbon tax, an exercise of hope triumphing over experience that economists are supposed to be immune to.
Today, proponents acknowledge a carbon tax needs to be painful to meaningfully lower consumption. However, the demonstrated willingness of supporters to assert the tax had magical properties severely undermined their credibility and reputation for impartiality.
Proponents quote the Bank of Canada’s calculation that the annual carbon tax increases of $15 a tonne contribute 0.15 percentage points to inflation. This sounds trivial when inflation is running at 8%, but represents a sizable 7.5% of the bank’s 2% target. Moreover, the bank said its estimate does not include second-round effects. Arguing that the carbon tax impact is trivial is risky for advocates, since its impact on behaviour also would be limited, making the tax more an exercise in signalling than a serious attempt at lowering emissions.
Christopher Ragan, head of the Ecofiscal Commission, recently decried public debate about the tax as having degenerated into a “dumpster fire”. The reality is that an open and honest debate was never what carbon tax advocates wanted. When supporters were on the ascendant, the poor level of debate, including assertions that carbon taxes would be painless despite mountains of contrary evidence and a naive faith that governments would return all revenues to households, was ignored. Now that support for a carbon tax is waning, it is hypocritical to lament that public discussion is abysmal.
Thank you.