Oh, Canada! We’ve Got a Productivity Problem

“Why isn’t Canada an economic giant?” This was the headline of a Financial Times article highlighting our “vast potential” but suggesting we “underperform on the global stage.”¹ It’s a valid perspective. With the second-largest land mass globally and an abundance of resources, including oil and natural gas, minerals critical to the green energy transition and a strong agricultural industry, “by any measure, Canada’s geography suggests it could be an economic powerhouse.”¹

We also boast a highly educated population and a strong standard of living. Yet, despite these advantages, Canada has had little productivity growth over recent decades, falling second to last among G7 nations, ahead of only Italy. Canadian workers produce only 70 percent of our U.S. counterparts’ output, based on 2022 figures.¹

Productivity is crucial for economic growth, as reflected in Statistics Canada’s latest report of real GDP per capita now lagging seven percent below its long-term trend.² The Bank of Canada recently voiced its concerns, suggesting we have a “productivity problem” and highlighted three elements key to driving highly productive economies: i) capital intensity, including access to better machinery and new technologies to improve efficiency and output; ii) labour composition, improving skills and training; and iii) multi-factor productivity, using capital and labour more efficiently.³

How can we improve our productivity problem? Two recent op-eds published in the Globe & Mail provide some notable perspectives:4
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• Encouraging capital investment, including in machinery and equipment, as well as intellectual property and skills training for workers to drive output. This may be fostered by lowering barriers to capital formation, such as tax rates.
• Increasing competition by loosening restrictions, including foreign investment controls, interprovincial trade barriers, foreign entry constraints and protectionism, as examples.
• Reassessing current government spending, including evaluating subsidies for industries, research and innovation that have not contributed to growth.
• Increasing the supply of labour. Immigration has helped, as have changing demographics that have increased the participation of women over recent decades. However, when normalizing labour participation as a proportion of the total population, employment rates have dropped from 75 percent to around 61 percent, a similar level to 1988.

Lessons from the Past: From (Almost) Worst to First

Let’s not forget that it was just 30 years ago when Canada was referred to as “an honorary member of the Third World.” At that time, we had the second worst fiscal position of the G7 (Group of Seven of the world’s advanced economies), suffering from a “vicious debt circle” — ironically, similar to today, only Italy was worse.⁵

Yet, 1994 would be the turning point. Then-Prime Minister Jean Chretien and Finance Minister Paul Martin orchestrated one of the most dramatic fiscal turnarounds in history, with the greatest reduction in government spending since post-WWII. Canadian debt shrank from 68 percent of GDP in 1995/96 to 29 percent by 2008/09 and the budget was in the black for 11 consecutive years. Our fiscal position became the best of the G7. While it wasn’t without significant sacrifice that the deficit was finally controlled, it is notable that Canada did not fall into recession during this time. In fact, “after wrestling the deficit to the ground,” what followed was “the payoff decade” when Canada outperformed the rest of the G7 in growth, job creation and inward investment.⁵

History is a reminder that profound change is possible, perhaps a lesson relevant to the situation in which we find ourselves today. While there’s much work to be done, leadership from the top can drive transformation. Now it’s time for us to get started.

^1. https://www.ft.com/content/67e97cc4-6ab0-4e78-b4a8-7c97b8e52ada;
^2. https://www150.statcan.gc.ca/n1/pub/36-28-0001/2024004/article/00001-eng.htm;
^3. https://www.bankofcanada.ca/2024/03/productivity-problem/;
^4. https://www.theglobeandmail.com/opinion/article-what-might-a-serious-growth-agenda-look-like-more-labour-more-capital/; https://www.theglobeandmail.com/business/commentary/article-the-budget-needs-bold-change-to-fix-canadas-falling-productivity/;
^5. https://financialpost.com/uncategorized/lessons-from-canadas-basket-case-moment