OPINION: Canada’s debt load a burden on the country’s financial well-being

September 23, 2021
Ken Peacock

An unnecessary election call followed by a dispiriting campaign hasn’t created a favourable environment in which to consider the longer-term issues that will impinge on Canada’s economic prospects. That much is clear as we await the outcome of the September 20 federal election.

We have been struck by the absence of substantive economic debate during the campaign. It’s as if political leaders across the spectrum are united in the belief that Canada today is exceptionally well-positioned for the future. We don’t share that sanguine view, particularly given the unprecedented build-up of government debt amid the ongoing COVID-19 crisis.

We see three interrelated challenges that must be tackled to strengthen the foundations for Canadian prosperity in an increasingly unforgiving and competitive world.

The first and most important is improving upon the feeble gains in living standards that Canada experienced in the years leading up to the COVID-19 shock in 2020.

For economists, real gross domestic product (GDP) per person is the metric commonly used to measure living standards for the broad population. It is more informative than total “nominal” GDP because unlike the latter, it accounts for both inflation and growth in the population.

Over 2015-19, Canada’s growth in real GDP per person was generally sub-par and trended steadily lower to just 0.3% by the end of 2019 – resulting in one of the slowest half-decade gains in living standards seen in the last 75 years. Justin Trudeau and his ministers like to opine on Canada’s supposedly strong pre-COVID economy. The economy did grow and employment did rise over 2015-19. But the population and the workforce expanded almost as quickly as economic activity, resulting in very limited progress in “personal prosperity” as captured by real GDP per capita.

Growing GDP per person is crucial to delivering higher incomes. If Canada’s performance over 2015-19 continues, it will take more than 150 years to double the level of real income per person. In contrast, at a 2% annual growth rate in real per capita GDP, national income would double in 35 years – like what the country managed to accomplish during the 1961-2000 period. This goal should guide policy decision-making by the next federal government.

That brings us to a second priority: reversing Canada’s pattern of lacklustre productivity growth.

Pre-COVID, Canada’s economic growth strategy relied overwhelmingly on increasing the size of the population and workforce, not on boosting productivity. Thus, immigration jumped sharply from 2015 through 2019, helping to grow the economy but doing little to elevate GDP per person. The Trudeau government seems committed to a population-centric approach to economic growth, even though it hasn’t yielded broad gains in living standards.

In the long term, higher productivity is the only reliable way to increase real GDP per person. Unfortunately, this is where Canada has struggled. From 2000 to 2019, Canada ranked 25th out of 36 advanced economies in average annual productivity growth. Compared with the United States, we have fallen far behind in business productivity since the early 1980s, with the gap now standing at approximately 25 percentage points (that is, business productivity in the U.S. is, on average, about one-quarter higher than in Canada).

To advance Canadian prosperity in the next decade, we must find ways to accelerate productivity growth. This will require increased business investment, improved competitiveness, a stepped-up pace of innovation and scaling-up more Canadian firms so they are better equipped to compete and succeed globally.

Central to any agenda to rev up the productivity engine is attracting business investment and fostering capital formation. This includes investment in plant and equipment, machinery, digital and other advanced process technologies, intellectual property products and engineering and other physical infrastructure.

Canada has been lagging in non-residential investment. Per worker, Canadian firms collectively invest less than 60% as much as their American counterparts, according to the C.D. Howe Institute. Canada also trails many other advanced economies in capital spending per employee. As a result, Canadian workers are often competing without the tools and other benefits provided by an up-to-date capital stock.

Looking ahead, there is an urgent need to shift Canada’s economy away from excessive dependence on housing and debt-fuelled consumer and public spending to sustain growth. To this end, we hope the next federal government will turn its attention to reversing the country’s disappointing record on productivity and business investment.

Jock Finlayson is the Business Council of British Columbia’s senior policy adviser; Ken Peacock is the council’s senior vice-president and chief economist.

As published in Business in Vancouver.

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