Kevin Lynch and Paul Deegan

March 10, 2023

The “new normal” for Canada is slow economic growth – our trend growth is now mired well below 2 percent, barely half of what we averaged over the last half century. This is a slow-burning crisis in the making, but where is the public discussion about this threat to our living standards, our public finances and our international clout in the lead up to the 2023 Budget?

For the UK, another growth laggard, The Economist recently warned: “Britain’s stagnation also holds lessons for other slow growing countries … Lower GDP means declining global influence, faltering faith in free markets and less money for public services. A struggle over fixed resources fires the populism that turns politics into an ugly fight about identity. The shortage of funds for investment entrenches tired and inefficient institutions. Worst of all, the lack of growth limits Britain’s scope to flourish.”

Simply replace “Britain” with “Canada” and the warning is equally applicable.

For anyone who doubts such a dark prognostication, a few facts tell a rather somber tale of Canada’s growth prospects unless we are able to tackle our productivity and competitiveness deficits.

First, Canadian productivity, which is a key determinant of our competitiveness and our standard of living, ranked 18th among OECD countries in 2019, having grown more slowly than any other OECD country over the preceding decade. Crucially, compared to the US which is our key export market by far, Canadian productivity, or GDP per worker, had fallen to only 69.8 percent that of the US by 2021.

Second, innovation, which is a key driver of productivity and future competitiveness, is a weakness — Canada ranked a paltry 21st, according to the global Bloomberg Innovation Index, despite start-up hotspots in Waterloo, Montreal, Vancouver and Toronto. The problem: Canadian businesses are laggards among the Organisation for Economic Cooperation and Development (OECD) countries in investing in R&D, new technologies and new products.

Third, Investment, also a key propellent of productivity, is another area where Canada lags badly on international comparisons of corporate capital spending, employee training and digital adoption.

Fourth, our relative living standards are in decline. The OECD forecasts Canada will have the weakest growth in living standards, or GDP per capita, of all 38 OECD countries over the next 10 years.

…compared to the US which is our key export market by far, Canadian productivity, or GDP per worker, had fallen to only 69.8 percent that of the US by 2021.

Being last in growth over the coming decade is not a terribly comforting economic picture. Nor a secret —  international investors have bid down the value of the Canadian dollar and moved their foreign investments elsewhere. And yet, where are the political and public voices clamoring for a Canadian “growth plan”?

Even some government insiders recognize the scale and scope of the problem. Former Finance Minister Bill Morneau has stated: “my years of experience in office convinced me that productivity improvement is the most important issue on our agenda, and we are not focussed on it.” Rather belatedly, Morneau is now calling for a “Canadian Productivity Commission.”

The headwinds confronting Canadian growth are not all home grown. Canada has always been a trading nation, relying on markets and influenced by actions beyond our borders. The global context matters, and today the global context in which we trade is in dramatic flux. Nationalism and protectionism are on the rise, populism is reshaping politics, the allure of national industrial policies is on the ascent, globalization is stalled, pandemics are a global reality, geopolitics has moved to a dangerous plane, and climate change is a planetary threat.

These intertwined developments and risks will impact Canada’s long term growth prospects and economic policy choices, whether we like it or not. This underscores the intersection of long-term growth prospects, domestic competitiveness and the external environment.

For example, the Canada-US Free Trade Agreement (FTA) signed by Prime Minister Mulroney and President Reagan reshaped both Canadian competitiveness and Canadian foreign policy in an earlier era. Today, both the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Canada-Europe Trade Agreement (CETA) have the potential to invigorate Canadian trade and competitiveness, but the government has not done much to capitalize on them — execution has been poor. And similarly, the new Indo-Pacific Strategy is long on the obvious – that China is a less reliable trade partner – but remarkably skimpy on the how and where we might grow our Asian markets.

What can and should be done? In today’s dynamic and volatile global environment, there are several key determinants of productivity, competitiveness and growth that deserve urgent attention.

The headwinds confronting Canadian growth are not all home grown. Canada has always been a trading nation, relying on markets and influenced by actions beyond our borders.

We have to up our innovation game. Innovation capacity is key if as a country or company you want to be on the leading, not trailing, edge of new products, services and production processes. The stark trade-off is between selling commoditized products at the lowest price, competing with low wage countries, or selling innovative products at premium prices. The choice should be clear, but where is a focussed Canadian innovation strategy?

Scale matters for economic success. This puts a premium on securing market access to other countries through trade and investment arrangements. Here, competitiveness is closely tied to foreign policy – enforceable trade agreements in a protectionist world, clear rules of the trading game so that might does not trump right, digital access in an era of splinternets, “membership” in critical supply chains in a new era of industrial policies, and active trade promotion programs

Get taxation right. Taxation today is moving beyond the traditional table stakes of reasonably competitive corporate and personal taxes and into the international domain of global corporate minimum taxes, tax havens, border carbon adjustment taxes, and digital taxes. It is how we tax as well as how much we tax that influence our productivity and competitiveness.

Excessive and inefficient regulation is a growth killer. Regulation is an area where Canada is increasingly viewed as a difficult place to build anything –a gas pipeline, a rare earth mine, an electricity transmission line, an LNG export facility, an upgraded port, a new factory. The villain is process, not standards: overlapping jurisdictions, conflicting regulations, lengthy regulatory processes and uncertainty about outcomes rather than predictability. In setting domestic regulations we cannot ignore international benchmarks: global capital has choices and abhors uncertainty.

High-quality public goods boost growth. Public goods such as an efficient immigration system which attracts the skilled knowledge workers an innovation-intensive economy needs, strategic public infrastructure which boosts private sector productivity, a quality public education system and world class institutions of higher learning which improves the labour force,  the rule of law which reduces private sector risks, and the removal of internal (interprovincial) barriers to trade and mobility, all spur innovation and improve productivity.

And, a nimble foreign policy in a world littered with geopolitical risks improves everyone’s chances. Parochialism is always a danger in policy making, and certainly for a middle power like Canada in a polarizing world.

The World Economic Forum’s (WEF) 2023 Global Risks Report, released at Davos, highlights these geopolitical risks. “Geoeconomic confrontations” –the expanded use of trade sanctions, investment screening on national security grounds, tech export restrictions related to US-China tensions, strategic supply chain exclusions, digital barriers and exclusions, delisting of foreign companies on stock exchanges and exclusionary industrial policies — are all on the rise, and all will affect global growth prospects. Canada needs to be able to respond quickly, cleverly and consistently.

Looking at Canadian policy choices through a global competitiveness lens, not a local political lens, is needed if we are to rebuild Canadian growth. But a public discussion on productivity and competitiveness is difficult to sustain: the issue is complex in a world consumed by simple narratives, it is long-term in a world dominated by short-termism, and a global perspective is often lost in the daily churn of domestic politics and events.

And yet, a strong, resilient and competitive Canadian economy, with the resources to invest in the future not borrow from it, is the surest way to achieve higher living standards, greater social cohesion and more geopolitical influence. Let’s not emulate The Economist’s projection for Britain. Rather, let’s be a counter example of an agile middle power, able to develop a robust economy and the capacity to be an effective foreign policy partner with allies in the challenging decade ahead. This will take public discussion and political will, and should begin with the 2023 Budget.

Contributing Writer Kevin Lynch is a former Clerk of the Privy Council and former Vice Chair of BMO Financial Group.

Contributing Writer Paul Deegan is a former public affairs executive at BMO Financial Group and CN Rail, and served in the Clinton White House.