Canada and the issue of productivity

by Maj (ret'd) CORNELIU. CHISU, CD, PMSC, FEC, CET, P. Eng. Former Member of Parliament Pickering-Scarborough East In the last quarter of century we have observed a slow but continuous deterioration of our living standards. There are many factors that have contributed to this, but one stands out as a major one, and that is the decline in productivity. Today, the majority of Canadians believe that Canada is broken after years of stagnant incomes, affordability challenges, rising crime rates, government failures on basic functions like healthcare and immigration, and a deepening cultural malaise. Productivity refers to how efficiently we use our resources to produce something of value. Productivity growth makes Canada richer, allowing us to access better healthcare, education, living standards, and even environmental outcomes. Decline in productivity is a choice, not a phenomenon that cannot be controlled. Canada can overcome productivity decline through better public policies and political leadership, which are missing in action. It is abundantly clear that Canada’s productivity growth is dismal, but no one in the current political establishment is considering it seriously. Without a drastic change in policy, the OECD forecasts that our productivity growth will rank last among its 38 member countries. Canada’s GDP per capita has advanced more slowly than leading economies in recent years. It has barely reached pre-COVID levels and the gap with the United States has widened. This is strongly linked to a relatively weak productivity growth. A slump in Canada’s resource-sector investment following the 2014 oil-price collapse has been particularly influential in this. Weakening productivity and investment performance echoes longstanding concerns that Canada is tapping less successfully than other economies, into opportunities to increase output through capital investment and innovation in products and processes. A wide range of policy actions can potentially increase business-sector productivity. There are proximate policy levers, such as tax breaks on investment and R&D that deepen capital and technological progress. In addition, there are less direct instruments, such as improvements to infrastructure and market efficiency, and reforms that strengthen vocational education and skills. Influences on market efficiency include competition policy, red tape in setting up businesses and bankruptcy processes. Barriers to foreign direct investment via foreign ownership restrictions continue to be high in Canada relative to those in other OECD countries, particularly in network sectors. For instance, in telecommunications rules state that both ownership and board composition must be at least 80% Canadian in operations with more than a 10% share of the market. Rules applying to the aviation sector also need reconsideration because they are essential to providing better mobility for the work force in a country whose territory is the second largest in the world. Though it has not yet created significant policy issues, teleworking should remain on watch for policymakers. According to Canada’s Labour Force Survey data, as of October 2022, 9% of workers reported that they usually worked both at home and at locations other than home (hybrid working) while 15.8% reported working exclusively from home. A priori, teleworking has widened labour markets and options on where to live. There may also be productivity gains; one survey of Canadian employees has found that 63% of respondents feel they are more productive working from home. The potential downside to teleworking may be losses in productivity from reduced in-person contact. A permanent shift to teleworking may need to be considered in some areas of policy, for instance in transport planning. Data continue to show that movement through transit stations in Canada remains below pre-COVID levels Lowering internal trade barriers remains one of the most effective ways policy can help boost Canada’s productivity and living standards. Canada appears unusual in her lack of universal regulations and technical standards across sub national jurisdictions. This hampers the flow of goods and services and compromises the labour market. Perhaps the best known example is the restriction on the movement of alcohol and tobacco products between provinces. Such barriers extend across many activities, including the dairy sector, engineering, healthcare professionals, legal and accounting services, and many others. The non-recognition of qualifications remains an issue notably in some areas of the healthcare sector and compulsory trades, where only members with the relevant official qualifications (or apprentices) can legally be employed. These include electricians, plumbers and crane operators. The Federal and Provincial governments seem bewildered or are intellectually blocked in dealing with this issue. Evidence continues to mount on the economic cost of internal trade barriers, yet nothing is done to eliminate them; nothing but lip-service.. Furthermore, federal government debt ballooned from $660 billion to $1.37 trillion between 2015 and 2024.. During the same period, the value of machinery and equipment in Canada decreased by 5 percent. Excessive government spending hinders economic growth by crowding out private investment and requiring higher taxes to support increased spending. It leads to a heavier regulatory burdens, which can stifle business activity. Government programs also adjust more slowly to changing economic conditions, reducing economic flexibility. Moreover, larger government expenditures encourage rent-seeking behaviour by businesses, diverting resources from otherwise productive activities. Collectively, these effects reduce productivity and economic growth. Another factor that influences productivity is qualified labour shortages, which cost small and medium-sized businesses (SMEs) over $38 billion in lost sales annually. Meanwhile, between 2015 and 2024, federal public-sector employment has grown 43 percent, nearly three times faster than private-sector employment. m Had the federal public sector maintained the same growth rate as the nation’s population, there could potentially be up to 72,000 more workers available for private sector employment. m Assuming two out of three workers were employed by SMEs, and using an average of $450,000 revenue per employee, SMEs could have generated over $21 billion in additional annual revenue. Taxation policy is another tool that influences productivity. In 2016, the federal government raised the highest federal marginal tax rate by 4 percent. Combined with provincial rate increases, seven out of ten provinces now take over 50 percent of marginal earnings in taxes from high-income earners. This gives Canada the fifth-highest combined marginal tax rates among 38 OECD nations. Compared to the United States, our largest competitor for skilled workers, all provinces except Alberta and Saskatchewan have higher marginal tax rates than any U.S. state. These tax hikes have negative consequences besides spending taxpayers’ money on futuristic and useless projects. Every tax increase makes Canadian entrepreneurs think twice about starting companies in Canada. In conclusion, action on productivity is needed immediately. Let us see if the political class is up to the task. For now it is up to you to ask them. This is about our future. Help secure it!