Jun 13, 2024

Prime Minister Justin Trudeau’s government and his provincial counterparts must be “laser-focused” on growing the productive capacity of Canada’s economy or risk falling further behind other nations, says a new report co-authored by former Bank of Canada Governor David Dodge.

Gross domestic product per capita in Canada has lagged other advanced economies for decades – cumulatively growing just 6.8 per cent between 2007 and 2023, compared with 21.4 per cent in the U.S., 19.6 per cent in Australia and 11.8 per cent in the euro area, Dodge and his co-authors write in the mid-year economic outlook published by the law firm Bennett Jones.

Yet Trudeau’s government has not prioritized productivity growth during its nearly nine years in power, Dodge said in an interview.

“The overriding objective of federal and provincial governments going forward has got to be to raise the productivity of workers,” said Dodge, who was central bank governor from 2001 to 2008 and now serves as a senior adviser at Bennett Jones.

Dodge and his co-authors, including former premiers Christy Clark of British Columbia and Jason Kenney of Alberta, are the latest to sound the alarm over Canada’s sluggish productivity. The Bank of Canada has called it an “emergency,” with Governor Tiff Macklem warning Wednesday that “everything is going to be more difficult” unless Canada raises output per worker.

The report authors call for a comprehensive strategy to tackle the problem. This plan must have a medium-term horizon and ensure that the actions of government are predictable and coherent to send clear signals to investors, they say.

Investments in energy and resource infrastructure, as well as in research and development and innovation, require a consistent policy framework, they write. Governments must also have credible fiscal plans under which promised services are realistically budgeted for and paid for from current revenues, the authors add.

“Net borrowing over the cycle should be undertaken for the sole purpose of funding investments that grow productive capacity and yield an identifiable stream of revenue,” they say.

The Trudeau government’s recent hike to the capital gains tax inclusion rate, while introduced with a new entrepreneurs’ incentive, does not “directionally nor logically fit” into any strategy or wider tax reform to promote investment, the authors say in the report.

The government has also announced it will phase out temporary accelerated cost allowances that it introduced in 2018 in response to U.S. tax reforms. These measures considerably reduced the marginal effective tax rate on new investment and improved tax competitiveness, the report authors say.

The authors don’t save their pleas for governments alone. Businesses need to reinvest more profits into productive capital, while households need to consume less and save more, they say. Canadians allocate a larger share of their national savings to investment in housing compared with peer nations, even when accounting for population growth, they note.

Of course, all these recommendations come at a time of “difficult” global economic relations, they acknowledge.

Managing Canada’s relationship with China while also building viable supply chains in North America will be an especially delicate task, they say. Canada should resist pressure to match U.S. tariffs on Chinese-made electric vehicles, as that would lessen competition, raise prices for consumers and hike costs for producers, they say.

“We must find our way in a more fractious world without succumbing to protectionism, which would deeply damage our economic prospects.”