FINLAYSON: The Trudeau government needs to address the performance crisis in the budget

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In a recent speech, the senior deputy governor of the Bank of Canada highlighted the threat of chronically slow labor productivity growth to the country's standard of living. He also noted that stagnant productivity will make it difficult to reduce inflation and keep it at (or close to) the Bank's 2% target.

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Labor productivity is conventionally defined as the value of the economic product of one hour of work. Over time, it is the most important determinant of overall economic growth. In a predominantly market economy like Canada, special attention should be paid to the productivity of the business sector. Unfortunately, the news is not good here.

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In Canada, business sector productivity has declined, with output per hour largely unchanged from seven years ago. This pattern of productivity stagnation is, in turn, the main cause of Canada's stagnating economic output per capita. At the end of 2014, gross domestic product (GDP) per capita totaled $58,162 (adjusted for inflation). By the end of 2023, it was actually quite a bit lower. This means that the standard of living of Canadians has not increased in a decade. This is not a picture that any Canadian citizen or politician would be happy about.

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For many people, GDP is an abstract concept that does not easily correspond to their lived experience. But it is clear that the level and rate of growth of the gross domestic product is important for the well-being of citizens. Academic research confirms that workers' wages are based in part on their employer's level of productivity. Simply put, the most productive businesses tend to pay the highest salaries, wages and benefits.

Moreover, individual and household incomes can only grow over time if the economy itself produces more output per hour worked and per person. When GDP per capita grows by 2% per year (after inflation), average income doubles in 35 years. It takes 70 years to grow at 1% annual GDP per capita. At 0.5% per capita GDP growth, it would take 139 years for average income to double. Canada's GDP per capita has fallen sharply, a disturbing and unusual trend.

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Addressing Canada's productivity crisis should be Job 1 of the federal government's 2024 budget, which the Trudeau government will consider on April 16. In the early 1980s, Canada was about 88% the productivity of the United States, as measured by the cost of output per hour. work on economics. By 2022, this figure had dropped to 71%, and it has continued to decline ever since.

What can be done?

Until now, the Trudeau government has relied on population growth fueled by high levels of immigration to fuel economic growth. This strategy has failed, as the government itself recently admitted (if insultingly) by dialing the numbers of irregular immigrants admitted to the country.

The smart approach is to increase investment in research and development aimed at bringing about innovative products – machinery, equipment, digital tools and technologies, intellectual property, modern transport and communication infrastructure, and the things that increase the productivity of enterprises and workers. bringing ideas to market instead of keeping them in labs or academic institutions. Canada's record is poor in most of these areas, as evidenced by the fact that we lag far behind the US and many European countries in terms of business investment per employee.

This will have to change if we are to up our productivity game and build a prosperous Canada.

Jock Finlayson is a senior fellow at the Fraser Institute.

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