From the Fraser Institute

By Jake Fuss

Policymakers are slowly acknowledging the problem, but their proposed solutions are troubling.

According to Carolyn Rogers, senior deputy governor of the Bank of Canada, it’s time to “break the glass” and respond to Canada’s productivity “emergency.” Unfortunately, the country is unlikely to solve this issue any time soon as politicians are doubling down on the policy status quo rather than making sorely needed reforms.

Worker productivity—the level of output in the economy per hour worked—is a crucial indicator of a country’s underlying economic performance. When productivity increases, we not only increase our output and efficiency, but worker wages typically rise as well.

According to Statistics Canada, the country’s productivity dropped for six consecutive quarters before eking out a small gain in the final quarter of 2023. Rogers is right, this is an emergency, and it’s unsurprising that living standards for Canadians are falling alongside our productivity. Since the second quarter of 2022 (when it peaked post-COVID), inflation-adjusted per-person GDP (a common indicator of living standards) declined from $60,178 to $58,111 by the end of 2023—and declined during five of those six quarters, now sitting below where it was at the end of 2014.

Policymakers are slowly acknowledging the problem, but their proposed solutions are troubling. Federal Finance Minister Chrystia Freeland, for instance, recently emphasized the importance of making “investments in productivity and growth.” Yet, the federal government increased taxes on capital gains in its recent budget, which will disincentivize investment in Canada. Usually, when a politician says the word “investment” this is a fancy way of saying we need more government spending.

And in fact, more government spending appears to be the popular solution to every problem for most governments in Canada these days. Canadian premiers and the prime minister already support this approach in health care even though it’s been tried for decades. The result? In 2023, the longest wait times for health care on record despite having the most expensive system (as a share of GDP) among high-income universal health-care countries.

And now, these same policymakers are advocating for the same approach to boost productivity—that is, throw taxpayer money at the problem and hope it will somehow go away.

But there’s hope—governments have other options. For starters, governments from coast to coast could eliminate interprovincial trade barriers, which limit productivity improvements by (among other things) shielding inefficient local businesses from competition from businesses in other provinces. Governments also effectively prohibit the entry of foreign-owned competitors in crucial industries such as telecommunications and air travel. There’s less incentive for Canadian firms to innovate or improve when there’s no threat to shake things up.

Moreover, if governments reduced regulatory red tape and subsequent compliance costs, firms could allocate more resources towards training their workers, investing in equipment, and producing new and better products. And if governments reduced tax rates on families and businesses, they could make Canada more attractive to productive businesses, high-skilled workers and investors. Our current relatively high tax rates on capital gains, personal income and businesses income discourage capital investment and scare away the best and brightest scientists, engineers, doctors and entrepreneurs.

The Trudeau government, and other governments in Canada, seemingly want to spend their way out of our productivity emergency. While some level of government spending can help improve productivity, continued spending increases reallocate resources from the private sector to the government sector, which is by nature less productive. Governments should impose credible restraints (i.e. fiscal rules) on the growth of government spending to prevent this crowding out of private-sector investment.

There are plenty of ways Canada can boost productivity. We just need policymakers to be on board.

From the Fraser Institute

By Tegan Hill and Jake Fuss

From 2014 to 2022, inflation-adjusted total business investment (in plants, machinery, equipment and new technologies but excluding residential construction) in Canada declined by C$34 billion. During the same period, after adjusting for inflation, business investment declined by a total of $3,748 per worker

According to the recent federal budget, the Trudeau government plans to increase the inclusion rate from 50 per cent to 66.7 per cent on capital gains over $250,000 for individuals and on all capital gains realized by corporations and trusts. Unfortunately, this tax hike will be the final nail in the coffin for business investment in Canada, which likely means even harder economic times ahead.

Canada already faces a business investment crisis. From 2014 to 2022, inflation-adjusted total business investment (in plants, machinery, equipment and new technologies but excluding residential construction) in Canada declined by C$34 billion. During the same period, after adjusting for inflation, business investment declined by a total of $3,748 per worker—from $20,264 per worker in 2014 to $16,515 per worker in 2022.

While business investment has declined in Canada since 2014, in other countries, including the United States, it’s continued to grow. This isn’t a post-COVID problem—this is a Canada problem.

And Canadians should be worried. Businesses investment is key for strong economic growth and higher living standards because when businesses invest in physical and intellectual capital they equip workers with the tools and technology (e.g. machinery, computer programs, artificial intelligence) to produce more and provide higher quality goods and services, which fuels innovation and higher productivity. And as firms become more efficient and increase profits, they’re able to pay higher wages, which is why business investment remains a key factor for higher incomes and living standards.

The Trudeau government’s policies—increased regulation, particularly in the energy and mining sectors (which makes Canada a relatively unattractive place to do business), higher and uncompetitive taxes, and massive federal deficits (which imply future tax increases)—have damaged business investment.

Unsurprisingly, weak business investment has correlated with a weak economy. In the fourth quarter of 2023, real economic growth per person ($58,111) officially fell below 2014 levels ($58,162). In other words, Canadian living standards have completely stagnated. In fact, over the last decade economic growth per person has been the weakest on record since the 1930s.

Instead of helping fix the problem, the Trudeau government’s capital gains tax hike will further damage Canada’s economy by reducing the return on investment and encouraging an exodus of capital from the country. Indeed, capital gains taxes are among the most economically-damaging forms of taxation because they reduce the incentive to invest.

Once again, the Trudeau government has enacted a policy that will deter business investment, which Canada desperately needs for strong economic growth. The key takeaway for Canadians? Barring a change in policy, you can expect harder times ahead.