David Dodge describes the economic times we’re in as “an interesting period, in the Chinese sense of the word.”
And even as we start to see the light at the end of the long pandemic/inflation/interest rates tunnel, the former Bank of Canada governor thinks things aren’t going to get much less “interesting” in Canada’s future.
In a new economic outlook report to be released Monday by law firm Bennett Jones LLP – which employs the 80-year-old economist as a senior adviser – Mr. Dodge and his colleagues argue that the country needs to overhaul its economic policy model to address its serious productivity problems.
He believes we need to spend “a few years” reallocating our spending away from consumption – which we’ve leaned on for economic growth for far too long – and toward capital investment, if we want to secure the building blocks for prosperity over the longer term.
“That’s a hard message for people to accept, but that’s the world we live in,” Mr. Dodge said in an interview last week. “It’s not necessarily bad, to step back for a few years in terms of consumption, to make more room for investment.”
While inflation and interest rates have garnered all the headlines in the past couple of years, Canada’s lack of productivity growth has emerged as one of the biggest fundamental problems plaguing the economy as it enters 2024. While Ottawa continues to boast about delivering the strongest job recovery from the COVID-19 recession in the G7 – employment is up nearly 1.1 million from its prepandemic level – the disturbing reality is that each worker has produced less and less as the job count has grown.
Last week, Statistics Canada reported that labour productivity – as measured by real gross domestic product per hour worked – shrank by 0.8 per cent in the third quarter, marking the sixth consecutive quarterly decline. Over the past two years, labour productivity has fallen by more than 3 per cent.
The overall economy has managed to eke out growth, but that’s only because the population and labour supply have increased, thanks largely to the highest immigration rates in more than 60 years. On a per-person basis, the economy has been shrinking. The amount being generated per Canadian is moving backward.
That is a recipe for an eroding standard of living, if left unchecked.
“We can add jobs up the ying yang, and still get poorer – unless we raise productivity of the people that are working. That, fundamentally, is the problem,” Mr. Dodge said.
There is, without question, a need in this country to direct more money toward investing, rather than simply spending. We’re good at spending. Household consumption has been the major driver of economic growth in this country for many years. And governments have stoked that engine, often – too often – directing their fiscal policy toward stimulating consumption. That only accelerated during the pandemic, when major federal programs were very transparently designed to sustain consumer demand as the means of delivering the country from a recession.
Mr. Dodge notes that since 2019, the federal government’s real spending (i.e. adjusted for inflation) is up 6 per cent. But most of that additional spending has gone toward consumption – through a combination of increased transfers to individuals, and expansion of services. Critically, the expanded fiscal footprint in that time has not included substantial additional investment in capital – the infrastructure and technology that fosters productivity growth.
This is not a call for Ottawa to increase its spending in order to make these investments. Mr. Dodge has built a reputation over decades as a staunch advocate for fiscal prudence. He was, after all, a key architect of Ottawa’s dramatic deficit- and debt-reduction efforts in the mid-1990s, when he was deputy minister of finance.
Rather, what Mr. Dodge would like to see is a serious rethinking of government spending priorities.
“The first step is reallocation,” he said. “We’ve got to devote more of our resources to investment in physical capital, in human capital, in intellectual capital.”
“We are really worried about the fact that the structure of our spending and the structure of our revenues is not going to generate the growth in the future that we really need. And is not going to generate the investment today that we need in order to generate rising productivity for the future.”
The private sector doesn’t escape Mr. Dodge’s wrath. The Bennett Jones report notes that Canada spends only 1.6 per cent of GDP on research and development, far below the OECD average of 2.7 per cent. That “represents a gap of $30-billion, year after year,” the report says.
When I ask Mr. Dodge if Canadian businesses habitually rely too heavily on hiring when they need to increase their capacity, rather than investing in more machinery, equipment and technology, he concurs. What’s more, he believes Ottawa’s pursuit of historically high immigration levels is exacerbating this problem – “filling every hole that’s there, rather than allowing the market to work.”
That not only provides a disincentive to invest and innovate, he suggests, but it props up our least-productive companies.
“The last thing we want is a bunch of low-productivity businesses hanging on because we provide them cheap labour. That’s not the way we’re going to raise national income.”