Canada’s growth rate should top our priority list

Canada is currently experiencing anemic economic growth, meaning there is a slowdown in the total production of goods and services per capita. The real GDP growth forecast for 2024 is 0.7 per cent.

Despite this, American economist Tyler Cowen recently wrote that Canadians have nothing to worry about when it comes to the economy. While the Canadian economy is not growing as rapidly as the United States, he argued, few are. “Yes, Canadian performance could be better,” he wrote, “but there’s no reason to be pressing the panic button.”

This is not an opinion shared by Canadian policymakers. Canada’s anemic growth rate is worrying and why politicians and their advisors believe, almost unanimously, that economic growth is a policy imperative.

Their reasoning boils down to this: in an economy that isn’t growing – one in which per capita incomes are stagnant in real terms – any budgetary adjustments to meet emerging priorities are zero-sum.

The requirement that Canada increase its commitment to NATO, for example, cannot be achieved without raising taxes or removing some $18 billion from elsewhere in the budget.

When it comes to reallocating what we already spend, most federal government spending is assembled under the heading “transfers to individuals,” and much of this spending is statutory, which means it can’t be reduced simply by adjusting the annual budget.

Spending on employment insurance and pensions is required. Similarly, transfers to other governments – the Canada Health Transfer and Equalization payments, for example – are legal requirements.

While legislative changes are possible, they come with political risks and uncertain economic payoffs. The age of eligibility for the Canada Pension Plan could be increased and Old Age Security could be clawed back at a lower level of income.

Reducing transfers or increasing taxes might improve the government’s balance sheet, but whether these changes will have a positive effect on the economy is another matter. Reductions in spending or increases in taxes are austerity measures and austerity has so far produced limited, if any, payoffs in terms of economic growth.

One possible solution is for Canada to simply borrow more. Debt is not an inherently bad thing. Short-term debt to manage cyclical downturns is better than raising taxes to balance budgets and long-term debt has a Keynesian logic to it.

When growth is strong and interest rates are low, debt is manageable. As long as the social rate of return from government spending is greater than the real interest rate, fiscal deficits help maintain output at potential.

But right now, interest rates are higher than growth rates. As recently as 2017, interest on 10-year government bonds was 1.8 per cent, while the economy was growing at a rate of 3.1 per cent per year. At the time, interest payments on the debt consumed 7.04 per cent of the federal budget.

Even when borrowing conditions are favourable, the social rate of return on government spending should be positive. To ensure spending is productive, many academics support periodic reviews of government programming. In theory, this involves getting rid of programs that aren’t working and replacing them with ones that will, all while saving money in the process.

There are other economic goals with intuitive appeal, including price stability, lower levels of inequality and happiness. Some (non-economists typically) have gone as far as to argue that we should welcome degrowth – the shrinkage of our collective economic footprint to better serve other species and the environment as a whole.

Short-term quarrels over carbon taxes, for example, detract from long-term questions of economic sustainability. We need to produce what the world needs and do it efficiently. Improved productivity, in both the public and private sectors, is another way of saying more sustainable economic growth. Without it we are standing still while our needs increase and our neighbours – not just the United States – leave us behind.