Most commentary missed hidden budget assumption

The federal budget has swollen to a staggering half-trillion dollars in annual spending — yes, a whopping $538 billion this year, roughly $13,233 per Canadian — and the document presenting it now stretches to over 430 pages. Big plans (such as the economically damaging capital gains tax increase) are easy to spot and comment on, but the budget's scale and complexity make it hard to properly evaluate within a single news cycle. Not surprisingly, most post-budget analysts missed a critically important assumption that underlies every number in the budget: the Liberals' assumption of productivity growth.

Canada is in the midst of a productivity crisis. “Canada has seen no productivity growth in recent years,” said Carolyn Rogers, senior deputy governor at the Bank of Canada, in a recent speech in Halifax. “You've seen those signs that say, `In emergency, break glass.' Well, it's time to break the glass.”

Normally, the word “productivity” puts most people, diehard economists excepted, to sleep. Or worse, it prompts a reaction of “You want us to work harder?” As Rogers noted, however: “Increasing productivity means finding ways for people to create more value during the time they're at work. This is a goal to aim for, not something to fear. When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers.”

The media gave Rogers' stark warning wide coverage. It should have served as a wake-up call, spurring the government to immediate action. At the very least, this budget's ability (or more accurately, inability) to increase productivity growth should have been a core focus of every budget analysis. But it wasn't.

The omission is at least partly understandable. The federal government's assumption about labour productivity growth is buried deep within the budget (in Annex 1, on page 385, to be exact). The government assumes the economy will grow at an average of 1.8 per cent over the next five years (2024-28), with half that growth coming from an increase in the supply of labour (that is, population growth) and half from labour productivity growth, which the government assumes will stay at its 19742019 average of one per cent a year.

But labour productivity hasn't been growing at its historical average over the past few years. In fact, it hasn't been growing at all. As Statistics Canada puts it, “On average, over 2023, labour productivity of Canadian businesses fell 1.8 per cent, a third consecutive annual decline.” Labour productivity isn't growing, it's declining. Over the Trudeau government's time in office (2015 to 2023, omitting 2020 because of the pandemic), labour productivity has declined by an average of 0.8 per cent a year. How can the government, then, base the entirety of its budget plan on, by recent standards, strong labour productivity growth? It's a “fudget budget” — make up the numbers to make it work.

The fudget budget notwithstanding, how can we increase productivity growth in Canada? According to the Bank of Canada, “When you compare Canada's recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property.”

To increase productivity, we need businesses to increase investment. From 2014 to 2022, Canada's inflation-adjusted business investment per worker (excluding residential construction) declined 18.5 per cent, from $20,264 to $16,515. This is a worrying trend, considering the vital role investment plays in improving economic output and living standards for Canadians.

But the budget actually hurts — not helps — Canada's investment climate. Higher taxes on capital gains will deter investment here and encourage a greater outflow of capital. Moreover, the budget forecasts sizable deficits for at least the next five years, which increases the likelihood of future tax hikes and creates more uncertainty for entrepreneurs, investors and businesses. Such an unpredictable business environment will make it harder to attract investment to Canada.

This year's federal budget rests on fanciful assumptions about productivity growth and actively deters the investment needed to increase living standards for Canadians. That's a far cry from what any reasonable person would call a successful strategy. Beyond the budget news cycle, the government will have trouble burying that fact.