From the Fraser Institute

By Jock Finlayson

As the new year beckons, Canadian policymakers, workers and consumers are staring at a turbulent and uncertain economic landscape. While the economy has been growing, the population has been increasing faster—leading to a two-year slide in economic output and real income, measured on a per-person basis. The result has been a visible decline in Canadian living standards amid a largely stagnant economy.

Looking ahead to 2025, Canada faces two big uncertainties. The first is linked to the return of Donald Trump who has made a host of jaw-dropping promises including a pledge to slap a 25 per cent tariff on all merchandise imports from Canada and Mexico on day one of his administration. Should he follow through with that plan, our economy will be plunged into recession.

Last year, Canada sold $593 billion of goods to the United States, along with more than $85 billion in “services,” together representing more than three-quarters of our total international exports. The Canadian industries that will take the biggest hit from possible Trumpian tariffs include energy, automobile and parts manufacturing, wood products, all types of machinery and equipment, consumer products, minerals and metals and agri-food.

While the threatened across-the-board tariffs may never materialize, it’s a safe bet that Trump’s presidency portends rocky times for the Canada-U.S. relationship. The near-certainty of increased U.S. restrictions on Canadian exports, coupled with the likelihood of tax cuts and sweeping regulatory reforms, means many larger and mid-sized Canadian companies will be tempted to redirect their capital and business growth ambitions to the south, thereby dampening domestic investment. In response, governments in Ottawa and the provinces should urgently improve the environment for investment at home.

Another source of economic uncertainty is the federal government’s decision to ratchet back immigration. Ottawa’s about-face on immigration ranks as one of the most dramatic reversals of Canadian public policy in half a century. Under the Trudeau Liberals, Canada has become wholly reliant on immigration-fuelled labour-force growth to drive the economy, as productivity—the other key contributor to long-term economic growth—has stalled. Higher immigration has indeed boosted economic activity, albeit without delivering gains in per-person income.

Now, federal policymakers intend to cut permanent immigration, impose sharp curbs on international students, and somehow engineer the departure of 1.3 million temporary residents currently living in Canada—all over the next two years. Exactly how and to what extent this will play out is unclear. After three years of rapid population growth, Canada could experience a flat or even slightly declining population. Lower immigration is necessary after a period of almost uncontrolled inflows, but zero or negative population growth will detract from economy-wide spending and put a dent in labour supply. The outcome will be slower economic growth in 2025-26 than otherwise would be the case.

Closer to home, the Trudeau government presides over a structurally weak economy where much of the growth has been coming from a ballooning public sector while large swathes of the business community shrink or sit on the sidelines. On Trudeau’s watch, government debt has soared, business investment has been chronically sluggish, and Canada’s ranking on surveys of global competitiveness has dropped. We can do better.

Rather than continuing to expand the size of government, policymakers should aim to revitalize the private-sector economy that still produces most of the country’s output and accounts for the bulk of Canada’s jobs, exports and innovations.

Jock Finlayson

Senior Fellow, Fraser Institute