Agenda to Make Canada More Competitive, Productive, and Raise Its Standard of Living

Commentary, Economy, Ian Madsen

There has been a lot of concern and digital ink spilled over the slow increase in living standards of the average, or ‘median’, Canadian over the past ten, twenty, thirty, forty or more years.  In the long run, economists say that the key to increasing real, i.e., corrected for inflation, wages is to increase productivity of those employed in the labour force. Delving deeper into how to actually do that is complicated, and even harder to implement the potential solutions, which can be politically dicey.

The first thing, and the longest-term thing, is to increase the skill levels of workers.  Canada does a reasonably good job in its public education system of having graduates that are literate, numerate, technically aware and able to absorb further knowledge in the post-secondary system of vocational, technical and university education.  However, some resource misallocation exists: likely surplus people in ‘soft’ humanities and social sciences programs, not enough in so-called STEM subjects: Science, Technology, Engineering and Mathematics. Yet on the whole, Canada’s workforce is well-trained.  At over half of the labour force, the post-secondary-educated are half the total; first or second among OECD nations. So, this factor is handled well, and governments are addressing any ill-served aspects.

Another crucial thing is confidence in the rule of law and ease of doing business in a country, both for foreign investors, and local or national ones.  Here, Canada is mediocre, ranking only 22nd in the World Bank’s most recent assessment, in 2018. Many other developed nations are more attractive. Anyone trying to get a mine, pipeline, or construction project started can attest to this.  Also, several sectors, such as communications, media, transportation and health care are highly regulated, deterring interest.

The other major factor affecting long-term productivity is capital investment, and deploying it for the skilled workforce.  Here, Canada is doing badly. From 2016 through 2018, non-residential private investment grew from $154 billion to $157 billion, or just 3% over the two years, far lower than the growth rate in nominal (not adjusted for inflation) GDP of about 5%.  This, too, is after the drastic drop in 2015 after the oil price drop in 2014; i.e., energy sector woes were not a major factor. Potential rates of return must increase to encourage capital investment. For the productivity improvements and wage growth that follow, policy changes must be made.  One such change is taxation of corporate income.

The new government in Alberta is embarking on such a change.  It will gradually lower its tax rate on corporate income from the current 12% down to 8% by 2023; or 1% per year.  This will make the combined Federal and Provincial rate in Alberta 23%, unless Ottawa lowers rates in the interim. (Quebec has also slowly been lowering its rate.) This will help to make Alberta not just competitive with the rest of Canada, but the United States, too, where the average combined Federal and State rate is about 26%.

However, the US has another advantage:  immediate ‘expensing’ of all capital expenditures, whereas only some sorts of machinery receive such treatment in Canada, not other equipment, instruments, structures, intellectual property or vehicles.  The US reforms have already boosted corporate capital investment and raised productivity and wages, with little effect on revenues to Washington. It should be noted that Ireland’s low corporate rate of 12.5% has been vital to its rise from poverty to prosperity.  

If Canada is not just to wait around for the oil price to recover or oil and gas pipeline projects to receive doubtful approval and finally get built, our leaders should make the country more attractive to native and foreign investors by encouraging investment and resultant hiring and wage increases.  If the higher levels of investment and productivity also improve our trade balance, the loonie will rise, further increasing individual purchasing power. Otherwise, our standard of living will keep rising very slowly.