Yahoo Finance Opinion: The budget got one thing right — living standards are slipping. Then it made things worse
This week’s federal budget paid passing lip service to the challenge of Canada’s dismal productivity and falling living standards. In an over-long and mostly self-congratulatory preamble, the budget acknowledged: “Canada has struggled with productivity growth — how much more income we are able to generate with each hour worked. This has led to a longstanding productivity gap, notably with the United States. Expanding the productive capacity of the Canadian economy and overcoming Canada’s productivity challenges are essential.”
Important words, but whoever wrote them seems to have had no influence over what came next. The budget’s projections and measures prefigure nothing but more handouts, higher taxes, mounting debt and interest costs: in sum, a fiscal environment that will exacerbate the problem its preamble so effectively described.
An eye-catching chart in the Bank of Canada’s most recent monetary policy report showed that GDP per person fell for six consecutive quarters from mid-2022 until the end of 2023, and that the Bank expects two more quarters of decline in the first half of 2024. No wonder people are feeling squeezed — less able to cover the cost of food, housing and paying taxes, let alone going out for entertainment or donating to charities.
The most important thing we could do to turn this deterioration around would be to boost business investment. Capital investment creates the tools that make people more productive, making and earning more for each hour they work. Business investment in Canada has been so weak since 2015 that the stock of capital is failing to keep pace with the growth of the workforce. Capital per worker in Canada has been falling for eight years. That hasn’t happened since the 1930s and the Second World War.
It would be one thing if low investment, stagnant productivity and falling living standards were a global problem. But nothing like this is happening in other developed countries, and, as the budget could usefully have highlighted further, nothing like it is happening in the United States, either. Last year, while real (price-adjusted) non-residential business investment slid almost three per cent in Canada, it rose almost four per cent in the U.S.
My C.D. Howe Institute colleague Mawakina Bafale and I track business investment per member of the workforce in Canada versus other countries, adjusting the numbers for differences in different currencies’ purchasing power. Canadian workers have never enjoyed the same level of investment as their U.S. counterparts, but over the past decade, the longstanding gap has widened to a chasm. In 2014, the typical U.S. worker got about C$20,700 of new investment support, while the typical Canadian worker got C$14,400 — about 70 cents per dollar that the U.S. worker enjoyed. By the fourth quarter of 2023, the typical U.S. worker was getting the equivalent of C$27,800 annually in new investment, while the typical Canadian worker got just $14,500 — only $100 more than in 2014, a huge decline in inflation-adjusted terms, and just 52 cents per dollar enjoyed by the average U.S. worker.
Even worse, the Canada-U.S. gap is wider in the categories of investment we look to for innovation and better jobs in the future: machinery and equipment (M&E) and intellectual property products (IPP), such as software. For every dollar of M&E investment per U.S. worker at the end of 2023, the typical Canadian worker was getting only 41 cents. For every dollar of IPP investment per U.S. worker, the typical Canadian worker got a pathetic 29 cents.
Not only are Canadian workers enjoying little, if any, improvement in their productivity and living standards, they are falling behind workers elsewhere — and especially workers in our closest neighbour, biggest trading partner, and most intense competitor. Our crisis of productivity and earnings is also a crisis of competitiveness.
The 2024 budget got one thing right. We have a problem. But it got just about everything else wrong. A decade of bloated spending increases, populist tax hikes and chronic borrowing has left Canadian workers less equipped than they were and Canadian households struggling to make ends meet. We need federal budgets that promise, and governments that deliver, leaner more efficient public services, growth-friendly tax reforms and lower debt. Instead of bemoaning our declining living standards, future such budgets might actually celebrate our success in raising them.
Financial Post
William Robson is CEO of the C.D. Howe Institute.
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