Canada accumulated a mountain of debt – private and public – before and during the COVID-19 pandemic. High debt levels make the country more susceptible to future financial and economic shocks.
The best way to reduce this debt is to generate faster economic growth through labour productivity improvements. Canadian policy discussions tend to be preoccupied with juicing topline GDP growth by expanding the population and boosting labour supply. In contrast, higher productivity growth has the advantage of raising average living standards by increasing GDP per capita. It is also the smart solution to the challenges posed by an population aging.
Unfortunately, Canada’s labour productivity performance since 2000 has been poor. Growth in real GDP per hour worked averaged less than 1 per cent per annum from 2000 through 2019. This ranks us 25th out of 36 Organization for Economic Co-operation and Development countries. In 2019, productivity growth slumped to a dismal 0.5 per cent.
Since the 1990s, Canada has lost ground on productivity relative to both the United States and many other advanced economies. Clearly, the policies adopted by governments in Canada have been ineffective in lifting productivity. We need to marshal expertise and devise better strategies. One way to do this would be to establish an Australian-style Productivity Commission.
Australia’s systematic productivity policy framework and institutions contrast with Canada’s haphazard and erratic approach. In 1998, the Australian government merged a number of antecedent bodies to form the national Productivity Commission.
The commission conducts public inquiries at the request of the government on important policy and regulatory issues bearing on the nation’s economic performance and community well-being. It operates under its own legislation, with its own budget and staff, and at arm’s-length from politicians and other public agencies. The Australian government determines its work program, but the commission’s evaluations and recommendations are its own.
With core values of independence, transparency and taking a community-wide perspective, the commission’s activities encompass all levels of government and all sectors of the economy, including social and environmental aspects. For example, in 2019 the commission conducted public hearings on the effectiveness of vocational training programs, natural resources regulation, mental-health policy, Indigenous policy, national transport regulations, airport regulations and compensation of veterans.
The agency benefits from having a permanent staff of respected experts in areas such as microeconomics, economic modelling, competition policy and so on. Their work is overseen by independent commissioners appointed for fixed five-year terms.
Set out in legislation is the commission’s mandate: “Improve the productivity and economic performance of the economy; reduce unnecessary regulation; encourage the development of efficient and internationally competitive Australian industries; facilitate adjustment to structural change; recognize the interests of the community generally and all those likely to be affected by its proposals; promote regional employment and development; have regard to Australia’s international commitments and the trade policies of other countries; and ensure Australian industry develops in ecologically sustainable ways.”
The economies of Australia and Canada are alike in many respects – both are market-driven, trade-dependent, resource-based and with similar institutions and levels of educational attainment. Yet Australia’s productivity growth has eclipsed Canada’s over the past two decades, despite its proportionally smaller high-technology sector.
In 2000, Canadian productivity levels were 82 per cent of U.S. levels, while Australia’s were 80 per cent. By 2019, Canada’s productivity had dropped to 76 per cent of the U.S. benchmark, while Australia’s had improved to 82 per cent.
Canada was the ninth-most indebted country in the world prior to the pandemic, with the combined debt of companies, households and governments sitting at 302 per cent of GDP (just ahead of Greece, in fact). Canada’s indebtedness soared by another 41 per cent of GDP in the first two quarters of 2020 – the biggest jump among the advanced economies.
If Canada is to grow its way out of escalating indebtedness and reduce its susceptibility to future shocks, higher labour productivity growth and innovative thinking about how to deliver it will be essential. Australia’s proven institutional model provides a way forward.
As published in the Globe and Mail.