Thank you very much.
Good afternoon. Thanks for the invitation to appear today on behalf of the Macdonald-Laurier Institute.
It's no secret that Canada's economic performance has been mediocre over the last few years. Living standards have stagnated, with real income per capita growing at only 0.4% per annum between 2015 and 2023. That's only a third of the growth between 2005 and 2015, which is a period that includes the financial crisis.
The culprit is Canada's anemic growth in productivity, which is the amount of output each worker produces an hour. Indeed, productivity and growth in the business sector seem to have gone into reverse, with productivity in the second quarter of this year slightly lower than it was in the first quarter of 2019. This is in stark contrast to the United States, where productivity is now 10% above 2019 levels.
It also means that Canada is now close to the bottom of the advanced country productivity league table, with productivity levels well below not just the United States but all of the northern and western European countries, such as the U.K., France and Germany, and even slightly lower than Italy. It's no wonder that Carolyn Rogers, senior deputy governor of the Bank of Canada, made it clear in a speech in March that Canada faces a productivity emergency.
What should the federal government do to respond to this emergency?
The regulatory burden on business is a huge drag on investment in innovation. It's particularly true in the resource sector—it can now take 10 to 15 years to build a mine in Canada—but it's something that affects the whole economy. The government should be more aggressive in requiring new regulations to be less onerous than the regulations they replace, make greater use of mutual recognition so that products approved in other jurisdictions are automatically improved in Canada and streamline the environmental assessment process to be more efficient and less vulnerable to legal challenges.
Canada's tax burden is high and has been growing. Federal tax revenues rose from 13.4% of GDP in 2015-16 to a projected 15.1% in 2024-25. Cutting taxes, particularly personal income taxes, would increase incentives to work and invest, as well as encourage our best and brightest to remain in Canada.
Meanwhile, the size of the government has been growing significantly. At the federal level, the number of civil servants has grown by more than 40% since 2015, and total expenditures have risen from 14.9% of GDP in 2015-16 to a projected 17.9% in 2024-25. This very significant increase in the footprint of the government takes resources, both people and capital, away from the private sector.
Because expenditures have grown even faster than tax revenues, Canada has gone from a virtual balance in 2015-16 to a projected $40-billion deficit in 2024-25, with public debt charges of $54 billion. That is equal to all GST revenues. While deficits were appropriate during the recession, when the economy is largely in balance, as it is today, they make it easy for governments to avoid difficult trade-offs and push the burden of spending into the future.
This means that putting Canada's fiscal house in order should be a high priority. The government needs to reduce the size of government so that taxes can be lowered and the federal budget can be brought back to balance. An obvious place to look for savings would be subsidies to businesses, which have risen massively with no appreciable effect on productivity. Another place to look is areas where the federal government is intruding into provincial jurisdiction. Governments should stick to their constitutional lanes, which make it clear who is accountable for what.
Accelerating immigration, particularly of temporary foreign workers, is another important contributor to our recent productivity problems. A rapid influx of new workers means less capital per worker and, therefore, lower productivity. Furthermore, many of these incoming workers have lower productivity than the average Canadian worker, which also pulls down productivity. This is in addition to the strain the rapid increase in immigration has put on public services, such as health care and education, and on the housing market. It's therefore imperative to reduce levels of both permanent and, especially, temporary immigration and refocus the system on highly skilled permanent residents.
Finally, there is one area where higher government spending is not only warranted but urgently required, and that is defence. Whoever wins the U.S. presidential election next week will expect Canada to rapidly attain our 2% target, and I expect that the U.S. will use the CUSMA renegotiation discussions to put pressure on us in this regard. Canada should make a virtue of necessity and have a credible plan to meet the 2% target by 2028 and ensure that the increased spending is directed toward promoting innovation in Canada's defence industry. It is a sector where Canada has many strengths that can be built on, and it is the source of many high-paying jobs.
To conclude on an optimistic note, Canada has many advantages that other advanced countries would love to have. The world desperately wants what we produce, from oil and natural gas to agricultural products, nuclear power technology, aircraft and defence material.
We are also next door to and have privileged access to the world's largest economy. We should be doing so much better than we are, and we can, but it will require a federal government that is smaller, interferes less in the economy and is more focused on delivering its core responsibilities.