Canadians face 40 years of stagnant incomes – government’s economic strategy is failing

Open this photo in gallery:

David Williams, DPhil, is vice-president of policy at the Business Council of British Columbia. Jock Finlayson is the council’s senior policy adviser.

The House of Commons resumes sitting Sept. 18. One of its first orders of business should be to debate the government’s economic growth strategy, which is failing and needs a rethink.

In the five years to 2019, Canada’s real GDP per capita growth was an anemic 0.5 per cent per annum. Since 2019, it has been the fifth-weakest of 38 OECD countries – and per capita GDP growth has even turned negative over the past year.

For the second quarter of 2023, year-over-year GDP growth was 1.1 per cent. But population growth was 3.1 per cent, the highest since 1957-58, after the Hungarian Revolution and the Suez Crisis. Thus, in per capita terms the Canadian economy is shrinking by 2 per cent year-over-year.

Canada is one of the few advanced countries where real incomes are lower than before the pandemic. Real GDP per person is $55,170, compared with $56,379 in 2019, meaning the economy is generating $1,200 less income per person, or $2,830 less income per household, than it was four years ago.

We estimate Canada will not recover its 2019 income per capita until at least 2027, based on the federal budget’s projections for GDP growth and likely population growth. The OECD forecasts that Canada will be the worst-performing advanced economy over both 2020-30 and 2030-60, with the lowest growth in real GDP per capita. The principal reason is that Canada is expected to rank dead last among OECD countries in productivity growth over most of 2020-60.

Young and aspirational Canadians face 40 years of stagnant average real incomes. The only way to feel confident about future living standards is to avoid looking at the data.

Several of the government’s core policy beliefs are misguided. The first is that freewheeling government spending, untethered by the defined limits of a credible fiscal anchor, is not “consumption” but rather “investment” that raises real incomes. The data say otherwise.

A related belief is that government programs are what entice companies to become more innovative and productive, rather than signals from well-functioning, competitive product markets and discerning customers. The government has relied on households and business taxpayers to fund subsidies for preferred recipients and has massively expanded the bureaucracy without much to show for it other than shrinking the relative size of the private sector. That is a recipe for a low-productivity, low-wage economy.

A third belief is that “ever-increasing” immigration is an economic panacea. The academic literature overwhelmingly finds that the level of immigration has a negligible or neutral overall impact on indicators that determine a country’s living standards: labour productivity, real wages, the employment rate, the population’s age structure and, crucially, GDP per capita.

Ramping up immigration to fill low-wage jobs instantly increases demand for things that take years to build, such as housing (especially rentals), roads, schools and hospitals. We have no idea how provinces and municipalities can be expected to quickly address the needs of 800,000 extra temporary residents arriving in the past two years – people they did not know were coming – along with 920,000 additional permanent residents. Our concern is compounded by the revelation that Statistics Canada has undercounted – by one million – the number of temporary residents already here. The federal government’s immigration strategy is like believing Christmas dinner will be made easier if you invite more people because they can help with the washing up.

“It ain’t what you don’t know that gets you into trouble, it’s what you know for sure that just ain’t so,” wrote Mark Twain. Demonstrably, federal policies are yielding “prosperity-free” economic growth.

We believe Canada needs an economic policy agenda focused on raising average living standards. The country would benefit from modest (and co-ordinated) fiscal and monetary policy restraint to dampen inflation, alongside a productivity-focused agenda to expand the economy’s supply-side capacity, expedite business investment and innovation, scale domestic firms and ensure Canada can supply the world with responsibly produced natural resources and manufactured goods.

This will require overdue reforms to our inefficient tax and regulatory systems. Such a policy agenda would aim to cool demand and enhance supply, bringing them into balance. Critically, this would lift rather than reduce or stagnate average real incomes, as is happening under the federal government’s current approach.