A refocus on the country's spending may address its slow productivity growth
Prime Minister Justin Trudeau’s government should refocus its spending on boosting investments instead of consumption in order to address the slow growth in Canada’s productivity, said David Dodge, the former Bank of Canada (BoC) governor, as reported in an article by Bloomberg.
A report released by Bennett Jones, a law firm, found that the country’s productivity has chronically suffered since the mid-1990s.
“We have to shift from relying excessively on the expansion of the labor force and hours worked to grow the economy,” said the report’s authors which included John Manley, former Liberal cabinet minister, and Christy Clark, former premier of British Columbia.
A change of pace to jumpstart productivity growth
With Canada’s gross domestic product per capita falling to a 0.5% annualized pace since the beginning of 2020 in contrast to the 1.6% annualized increase seen in the US, the report added to the criticisms of how the Canadian economy has become too reliant on population growth and government spending as it falls short on business investments in productive capital and skill development.
It also found that the government’s latest budget outlook is unsustainable as it adds $20.8 billion in spending over six years. The report’s authors said that federal spending is still aimed towards transfers and services. It argued that this reinforced consumption when fiscal policy should be geared towards boosting spending in infrastructure, housing, skills development, research and development, and national security.
“We have to shift the burden of taxation towards consumption and away from investment,” said the authors of the report, adding that additional revenue can be made through user fees for public infrastructure or dedicated taxes that will fund new and expanded services like health care.
In addition, the authors believe that the tax system should incentivize private funding in research and development, as well as intellectual property. The distributional burden of fiscal policy should also be analysed through the perspective of each demographic, it was suggested.
“It may be appropriate to rebalance the tax and transfer system to provide fewer advantages for retired Canadians and more for workers, especially young workers with families,” the authors said.
The report featured an economic forecast showing annual inflation nearly reaching the central bank’s 2% target by the end of 2025 with interest rates in Canada and the US expected to settle within the 3-3.5% range. According to the authors, the estimate revolved around a new neutral rate where the theoretical level of borrowing costs neither stimulated nor restricted the growth of the economy.
