Productivity should lead next year’s federal budget
Canada’s struggles with productivity are nothing new, they have been around for decades. Despite our incremental efforts through the years, we have not changed the tides. By most metrics, Canada’s recent performance is far from ideal. Labour productivity, despite the pandemic blip, has yet to show any growth from 2019 levels.
Investments, captured by gross capital formation, has declined to recession levels. Not only is investment going too heavily into housing, but now we no longer have enough. All of this is impairing our capacity to create wealth, and is reflected by a gross domestic product (GDP) per capita that is back to 2017 levels.
The current model of growth relying mainly on demographics, i.e., having more people and ultimately workers, is clearly faceplanting. The economy is unable to create sufficient jobs for newcomers resulting in significant increases in unemployment for them. The pressure exulted on housing is pushing rents up to uncomfortable levels, especially for newcomers.
It is not necessarily more people that we need but more capital and a productivity-led growth. It is currently being done across the world and many countries are better for it. In Europe, several countries (Finland, Germany, Sweden, Belgium, Austria, Denmark, Norway) create similar or more wealth than Canada per capita while on average working less. The result is wealthier countries better able to fund public services and a similarly if not better paid workforce with more weeks-off every year.
There are structural challenges to address
The issues behind Canada’s low productivity and innovation are partly structural. The makeup of our economy and its recent changes have not been particularly conducive for productivity growth. The production of high value-added goods has been impacted by a stagnant manufacturing sector. Our most productive industries, that is natural resources, are still under an investment drought significantly impairing their productivity growth. Instead, our economy is gearing towards consumption and housing leading to the growth of sectors extracting value from within rather than creating and exporting economic value. More recently, the public sector has seen a job growth that doubles the private sector since 2023, not helping our positioning on productivity.
Canada’s closest economic partner is the United States. This is highly beneficial from a trading perspective: we have access to a much bigger and richer market leading to a positive trade balance that surpassed 100 billion dollars in 2023. Goods, services and people can therefore move relatively freely across both countries. It brings about challenges to attract or keep talent and capital. Our business environments and economic policies have must compete with those of our U.S. counterparts. Currently, we are falling short with capital concentrating south of the border. Investment per worker has grown by 35 per cent less in Canada while GDP per capita, which used to hover around 80 per cent of the U.S., has recently fallen to 70 per cent.
The country, or the federation, requires high levels of coordination. All levels of governments have significant and overlapping funding and responsibilities. Incentives being rarely aligned complicate collaboration across many areas. Economic and industrial policies could certainly benefit from greater coordination. The sheer number of government initiatives to improve productivity or innovation reflects the lack of a coordinated effort. Additionally, interprovincial trade barriers remain significant seven years after the signing of the Canadian Free Trade Agreement. It seems peculiar to fear potential protectionism repercussions of the US elections while maintaining barriers limiting the movement of goods, services and people within our country.
If the fix for decades of low productivity was easy, we would have implemented it by now
There are so many moving parts that individual and incremental initiatives are not sufficient to turn things around as evidenced by the lack of significant results in the face of years of announcements. As we argue in our pre-budget submission, we need a government-wide productivity agenda with accountable and central stakeholders. To greatly simplify it, we need to lift the constraints holding back the private sector and have a singular focus on where we want our economy to go.
A few constraints are top of mind and have been mentioned by the business community for years: reducing red tape, simplifying the tax system, streamlining environmental assessment. These are multi-year processes that span over an election cycle. We have begun work on some of them, but still lack significant progress. Governments have shied away from significant change of the tax or regulatory systems. They do not have the same hesitance when it comes to adding tax measures or regulations. So much so that governments have managed to increase uncertainty for businesses. Ultimately, we want to foster “ideal” business conditions to let the private sector compete and innovate.
Regarding the direction we want our economy to go, Canada is too big, yet too small, to support many large-scale initiatives as Robert Asselin eloquently argued. We need to concentrate our financial support in certain industries, subsectors or technologies to have a significant impact. The current ad hoc approach to subsidizing large investment projects is politicizing economic policy and has not generated the desired outcomes from a productivity standpoint. Instead, public financial support must be based on strategic orientations and be directed where they are needed to incentivize additional investments.
Public sector and services cannot be left out
A quarter of our workforce is in the public sector and their contribution to productivity growth is important especially with the population surge of the recent year pressuring public services. The way forward for the public sector also relies on productivity gains. For some services, mainly health and education, we have high standards for the service providers (nurses, teachers, doctors, etc.). Either they must give services to relatively more Canadians, or they must provide higher quality services. However, I am not convinced we hold the administrative side of public services to the same standards.
As automation and AI get more and more ingrained into white-collar work, a smaller workforce should be able to do more and administrative processes, which are a big part of government work, should be streamlined. We should be able to deliver building permits faster, it should take fewer resources to process an immigration file, and the paperwork burden for health care workers should be reduced.
Along with a government-wide productivity agenda, we must have productivity lenses when looking at public policy, service delivery and public sector spending. Afterall, this is the only way we can maintain living standards across generations.