Jack Mintz: None of our leaders are talking about the one key issue that affects every person’s wallet
This federal election has lost sight of one of the key issues that affects every person’s pocketbook in the end: Canada’s lacklustre productivity performance. Instead, politicians of all stripes promise a hodgepodge of populist policies to buy votes, not worrying who will actually pay for it down the road. For example, the Liberal plan, just released on Sunday, provides for almost $50 billion of new spending, half funded by tax hikes and other revenue increases, with $93 billion in accumulated deficits over four years.
After all, per capita income growth really matters if we want to keep a high standard of living. Many Canadians do not realize this but Argentina was richer than Canada in 1930 — the 10th wealthiest state in the world after three decades of strong growth. However, with bad luck and poor economic policy decisions, Argentina’s growth lagged so much during the next 90 years that its per capita income is now barely a fifth of Canada’s today. Its economy is still in tatters with the failing Macri government expected to lose October’s election to the corporatist Peronists who may trigger another debt default this coming year.
So due to our solid economic growth this past century, Canada became rich enough to afford a good standard of living and decent health care, education and social assistance programs for our population. Even though we lag the United States in per capita income by almost a fifth, we are one of the wealthiest countries in the world.
So Canadians during this election should be appalled by our recent labour productivity performance especially since 2015 (labour productivity is the growth in output per working hour). As shown in the graph, Canada has had negative 0.2 per cent labour productivity growth across industries in 2018 (labour productivity continues to lag so far in 2019, almost the same in June 2019 as the last quarter of 2018). While productivity growth was somewhat above normal during the years 2011-15 at 1.3 per cent annually, it has changed little since it peaked in 2015. Even more concerning, all of the Atlantic provinces, Ontario and Alberta have had negative industry productivity growth rates in 2018.
Labour productivity also explains differences in provincial per capita incomes. In 2018, Saskatchewan had the highest industrial output per working hour at $80 followed by Alberta at $79 (in 2012 chained dollars). The lowest is Prince Edward Island at $43 with the two most populous provinces, Ontario at $57 and Quebec at $52. The poorest provinces in per capita incomes often have the lowest levels of labour productivity.
Low productivity performance also makes it harder to finance public debt. Some economists argue that Canada can take on larger deficits since the interest rates are so low. What is assumed in their analysis is that the economy forever grows faster than debt charges. However, debt increases as a share of GDP when nominal growth dips below the interest rate on public debt. None of these projections take into account a recession in the near future that will lead to sharply rising public-debt burdens, which is possible given the current global slowdown especially in Europe and Asia.
So why is Canada’s labour productivity performance so lacklustre? A key element has been our falling business investment rates. Investment in non-residential equipment and structures has declined every year from almost 11.7 per cent of GDP in 2014 to 9.2 per cent in 2017. Obviously, the commodity price bust in the capital-intensive resource sector has been one reason for this decline. Yet, business investment has been stagnant as a share of GDP in our two most populous provinces, both averaging 6.7 per cent in the period from 2013-17.
Productivity also depends on innovation and the adoption of new technologies, which is encouraged when companies face competition rather than being protected by government policies (think of banking, telecoms and dairy farming as examples). As well known, Canada has had a poor record, with research and development as a share of GDP falling from two per cent in 2002 to 1.5 per cent in 2017 (World Bank statistics).
Meanwhile our political parties promise pie-in-the-sky new spending programs, populist tax cuts and new hikes on job creators. Want a camp or sports club for your kids? Taxpayers will pay for it. Need cheaper housing? Let’s provide more support to increase demand to push up housing costs rather than increase supply. Want a tax cut to help with the cost of living? Sure, a great idea as long as we minimize benefits by raising marginal tax rates on hardworking middle-income Canadians so they are clawed back on their benefits.
We are not hearing much about improving education, research and the adoption of technology. Few ideas are being proposed to encourage the growth of Canadian companies, which has also been laggard as recently discussed in a Calgary School of Public Policy paper by Pierre Lortie. Canada has been successful at signing new trade agreements with Europe and Asia but few ideas are being proposed to put in place physical and policy infrastructure to take advantage of these agreements. Politicians latch onto GHG emission targets for 2030 or 2050 without a defined path, leaving the public bewildered as to how we will achieve these goals besides hearing radical environmentalist proposals to bury Canada’s non-renewable energy supply.
When it comes to economic policy, this year’s election promises are a major disappointment. The parties have little to offer to overcome our lagging productivity performance. Our leaders should know better.
Jack M. Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy.