Canada’s Productivity Problems Are Deeply Rooted

Canada’s relatively weak productivity is one of the most discussed but least resolved economic problems confronting Canadians. The problem is often attributed to inadequate investment, insufficient competition, internal trade barriers […]
Published on January 22, 2024

Canada’s relatively weak productivity is one of the most discussed but least resolved economic problems confronting Canadians. The problem is often attributed to inadequate investment, insufficient competition, internal trade barriers and many other possibilities.

The problem is real: Canadian productivity is the second lowest in the G7, expressed in terms of GDP per hour worked. Canada’s productivity is about 75% of the US level.

The most important single cause of the problem is likely one that is rarely linked to it.

It is Canada’s massive system of regional subsidies.

In 2021, the Fraser Institute described how remarkably large these subsidies are, mainly from taxpayers in Alberta and Ontario.

Taxpayers from contributing provinces provide about $6,900 per person per year to support the people of Atlantic Canada and $3,700 to Manitobans. The per person transfer to Quebec is about $1,500 annually.

These amounts were identified by dividing the difference between federal revenues and expenditures in each jurisdiction by the population of each.

The economic consequences of these subsidy arrangements are much worse than is usually acknowledged. The federal spending deficit in Atlantic Canada in 2019, the last pre-covid year, was $16.6 billion compared with an overall national deficit of $14 billion for that year.

If federal revenues and expenditures were balanced in Atlantic Canada, there would not have been a federal deficit at all.

The link to productivity is also evident. Manitoba, Quebec, New Brunswick, Nova Scotia and PEI all have lower labor productivity than Ontario and Alberta.

This means that Canada’s fiscal arrangements involve large funding flows, each year and each decade, from regions with relatively positive productivity performances to others that are relatively weaker.

The scale of the problem is only part of the story.

Many decisions relating to this system are uninformed. Federal legislators are not exposed to much of it because the many regional subsidies built into programs other than equalization have never been described to the public or legislators.

This is why, by most measures, Ontario has the least accessible provincial programming of all provinces. There are also some program areas in Alberta that have less accessibility than in recipient jurisdictions.

The metrics necessary to manage this system are lacking which is the reason its implications for productivity and program accessibility are not understood in Ottawa.

There are clear signs of the negative impact of federal subsidies on economic development and productivity in Atlantic Canada and Manitoba.

For fifty years, the Atlantic Provinces and Manitoba have relied on massive federal spending as the primary driver of economic development and productivity improvement.

However, after all these years, the ranking relative to other provinces of the Atlantic Provinces and Manitoba – in terms of productivity and income –  has changed little.

The economies of these jurisdictions lack dynamism, in part because of weak productivity.

For example, only two of the 425 fastest growing companies in Canada are in the Atlantic region. There should be about 25 of these companies if they were present in relation to the region’s share of Canada’s population.

The impact of sixty years of subsidizing others is very evident in Ontario.

Over the years since the principal subsidy elements were put in place, Ontario’s productivity, at one time comparable to leading US states, has steadily slipped and it is now behind all of them. Ohio’s per capita GDP is now 27% higher than in Ontario.

The effects on Alberta are different but also negative. There is a substantial sense of alienation in the province.

To some extent this is caused by concern about large financial flows coming from the province and the lack of any reasonable metrics to judge the impact of these on Alberta’s productivity and prospects.

Many steps could be taken to reduce the negative impact of Canada’s regional subsidies on productivity and economic performance.

Population needs – not considered in determining equalization payments – could and should be a part of the calculation of equalization entitlements, as it is in Australia.

The federal and other provincial governments could  insist on external reviews of economic problems in Atlantic Canada and Manitoba with the explicit goals of achieving national levels of productivity  within ten years and dramatically reducing federal regional spending deficits in the same time frame.

Continued provision of some regional subsidies could be made conditional on much greater co-operation among recipient jurisdictions including the aggressive development of shared services to reduce program costs.

It could also be made conditional on the elimination of internal trade barriers.

In conclusion, it is important to change a system that damages productivity and national unity by, as noted previously, taking from Peter to pay Paul so that Paul can have greater access to provincial programming than Peter.

A system with this characteristic should not be a cornerstone of the federation but unfortunately it is. Changing it is in the interests of all Canadians.

 

David MacKinnon is a Senior Fellow at the Frontier Centre for Public Policy.

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