Ottawa delivering economic stagnation—not progress

The Trudeau government was first elected in 2015 based in part on a new approach to government policy, which promised greater prosperity based on temporary borrowing to finance a limited increase in government spending, lower taxes for most Canadians (except higher-income earners) and a more active approach to economic development. However, the government has not only failed to live up to some of its policies like reducing taxes and limiting borrowing, but the overall mix of policies have not led to the prosperity promised and Canadians have instead largely experienced economic stagnation.

Since taking office, the Trudeau government has greatly increased federal spending (excluding interest costs) from $256.3 billion in 2014-15 (the year before the Trudeau government took office) to $448.2 billion in 2022-23—an increase of 74.9 per cent. After adjusting for inflation, the Trudeau government has recorded the five highest years of federal spending per person in Canadian history. Put differently, the Trudeau government has consistently spent significantly more than past governments did during the Second World War and the 2008 financial crisis, and the post-COVID levels of spending have not returned to pre-COVID levels. This enormous increase in spending has financed a marked increase in the number of federal bureaucrats, while expanding existing government programs and implementing new ones such as dental care and $10-a-day daycare (which are both in provincial jurisdiction).

The federal government has used large increases in borrowing to finance much of its spending. After producing eight consecutive deficits during its term, the latest fiscal projections show the government expects to run deficits for at least the next six years. In addition to accumulating nearly $1 trillion in new federal debt, the Trudeau government has burdened Canadians with an immediate cost through rising interest payments that are paid through tax dollars. Federal debt servicing payments currently stand at $46.5 billion in 2023/24 and account for more than one in every 10 dollars of revenue the federal government collects annually. This is money that is unavailable for government programs or tax relief. For perspective, the federal government spends significantly more on interest costs than it does on total childcare benefits (Canada Child Benefit and $10-a-day daycare) and almost the same amount as it provides the provinces through the Canada Health Transfer (CHT) (see chart below).

Tax increases have also been used to finance growing federal spending. In 2016, the federal government increased the top personal income tax rate imposed on entrepreneurs, professionals, and business owners from 29 per cent to 33 per cent. Consequently, the combined top personal income tax rate (federal and provincial) now exceeds 50 per cent in eight provinces (with the remaining provinces only slightly below 50 per cent) and in 2022 Canada had the fifth-highest tax rate out of 38 OECD countries. This represents a serious competitive challenge for Canada’s ability to attract and retain entrepreneurs, investors, skilled professionals and businesses.

And while the Trudeau government reduced the second lowest personal income tax rate, it also eliminated several tax credits. Despite promising to lower taxes for Canadians, 86 per cent of middle-income families are paying higher personal income taxes than they did before.

Lower-income families have also seen an increase in their tax bills. Specifically, 60 per cent of families who are in the bottom 20 per cent of earners are paying more in personal income taxes following the changes made by the current government.

If the analysis is extended to include increases to the Canada Pension Plan contribution rate, almost all Canadians now pay higher taxes. As a further illustration, the average Canadian family spent more of its total income on taxes in 2022 (45.3 per cent) than it did in 2014 (42.8 per cent). Clearly, the pocketbooks of Canadians are increasingly being squeezed.

Most measures of economic performance show this approach to increased taxes, spending, and borrowing has not produced greater prosperity for Canadians.

The broadest measure of living standards for Canadians is GDP per person (adjusted for inflation over time), which calculates the total value of all goods and services produced in the economy in a given year (adjusted by the population). Between 2016 and 2019 (pre-COVID), growth in per-person GDP (inflation-adjusted) was an anemic 0.9 per cent. According to one study, among the last five pre-recession periods in Canadian history, the Trudeau period (again, 2016 to 2019) recorded the weakest economic growth. Another study found that Canada’s per-person GDP growth from 2013 to 2022 (0.8 per cent) was the weakest on record since the 1930s (see chart below).

Since the Trudeau government was elected there’s been 32 quarters with data on per-person GDP growth (up to the third quarter of 2023). For thirteen of those quarters, Canada experienced negative per-person GDP growth adjusted for inflation. The quarterly declines in real per-person GDP have occurred before, during and after the pandemic so the government cannot lay the blame solely at the feet of COVID. Moreover, the latest numbers show that we haven’t recovered to peak pre-pandemic levels, as inflation-adjusted per-person GDP in 2023 was still 2.2 per cent below the levels in the second quarter of 2019.

Overall, inflation-adjusted GDP per person has only grown by a mere 1.9 per cent since the Trudeau government took office in 2015. In other words, the living standards for Canadians have barely budged.

Weak performance on this measure is especially concerning when we compare Canada to our southern counterparts. Inflation-adjusted GDP per person in the United States grew by 14.7 per cent during that same timeframe. Put differently, living standards are improving much faster for Americans than for Canadians.

Prospects for the future, given current policies, are not encouraging. Not only are we falling behind our most important trading partner, but the Organisation for Economic Cooperation and Development (OECD) projects that Canada will record the lowest rate of per-person GDP growth among 32 advanced economies from 2020 to 2030 and from 2030 to 2060. Countries such as Estonia, South Korea and New Zealand are expected to vault past Canada and achieve higher living standards by 2060.

Canada’s economic growth crisis is due in part to the decline in business investment, which is critical to increasing living standards because it provides the resources needed to create new companies and expand existing ones, and equips workers with tools and technologies to produce more higher-quality goods and services. This, in turn, fuels innovation and improved productivity. Business investment (inflation-adjusted), excluding residential construction, declined by 16.3 per cent between 2014 and 2022, or by 1.9 per cent on average annually.

According to a 2023 study, between 2014 and 2021, business investment per worker (inflation-adjusted, excluding residential construction) decreased by $3,676 (to $14,687) in Canada compared to growth of $3,418 (to $26,751) in the United States (see chart below). Put differently, in 2014, Canadian businesses invested 79 cents per worker for every dollar invested in the United States. By 2021, that level of investment had declined to just 55 cents per worker.

The flow of funds into Canada by foreigners compared to the outflow of investment by Canadians to other countries tells a similar story. In 2008, the two levels were roughly comparable—$65.7 billion in foreign direct investment (FDI) in Canada vs. $84.6 billion in investment by Canadians outside of the country. However, a sizeable change began in 2015 (see chart below); by 2022, the amount of FDI ($64.6 billion) was significantly smaller than the amount of investment by Canadians outside the country ($102.3 billion).

There are obvious explanations for the decline in business investment including regulatory barriers, particularly related to the energy and mining sectors and government deficits, which imply future tax increases, dampening investment today. This is a problem brought on by policymakers.

Since 2015, the federal government has implemented Bill C-69, which instituted a complex and burdensome assessment process for major infrastructure projects (i.e. pipelines) and, Bill C-48, which prohibits producers from shipping oil or natural gas from British Columbia’s northern coast.

These regulations and direct decisions by the Trudeau government have had tangible negative effects on projects such as the Northern Gateway pipeline, the Energy East pipeline, the Mackenzie Valley pipeline, Teck Resources’ proposed Frontier oilsands mine in Alberta and Kinder Morgan’s Trans Mountain pipeline.

Investment in the Canadian oil and gas sector fell from $95.5 billion in 2014 to $35.1 billion in 2023 (adjusted for inflation)—a drop of 63.2 per cent. This means less money and resources available to develop new energy projects, infrastructure and technologies, and ultimately less product available for exporting.

More recent policy proposals to proceed with large-scale regulation of electricity production, implement clean-fuel standards, ban single-use plastics, and impose a hard cap on GHG emissions in the oil and gas sector will only further weaken investment in Canada. While there are many contributing factors in the eyes of energy investors, the country’s unattractive policy environment continues to be a major deterrent to investment.

In the Canada-US Energy Sector Competitiveness Survey 2023, senior executives in the petroleum industry in Canada pointed to uncertainty regarding environmental regulations, as well as duplicative and inconsistent regulations, as deterrents to investment. Indeed, 68 per cent of respondents for Canada are deterred by the uncertainty concerning environmental regulations and 54 per cent of respondents are discouraged by regulatory duplication and inconsistencies. Less than half of American respondents were deterred by those same factors in their jurisdictions.

Canada has also largely failed to pursue policies that build a more productive economy so the value of what’s produced increases per hour worked by residents. The key to increasing prosperity is improved labour productivity. Economic research finds a clear and strong link between labour productivity growth and gains in hourly compensation for workers.

Canada’s labour productivity grew by close to 2.0 per cent annually between 1961 and 2012. Over the most recent ten-year period of data available from 2013 to 2022, the growth rate has been cut in half and averaged only 1.0 per cent annually. Furthermore, labour productivity growth was actually negative in both 2021 and 2022. This is a trend that needs to be reversed quickly if living standards are going to improve.

While Canada’s labour market has consistently demonstrated aspects of strength and resilience, the labour market top-line numbers hide some concerning trends. For example, between February 2020 (when the pandemic began) and June 2023, private-sector job creation (net) was fairly weak at 3.3 per cent compared to 11.8 per cent job growth in the government sector (see chart below). In other words, the recovery and growth in the private sector following the pandemic has not been as strong as expected.

Another concern is the labour force participation rate (number of labour force participants as a percentage of the population aged 15 and over) is declining because of the country’s aging population. Since 2014, Canada’s labour force participation rate has decreased from 66.3 per cent to 65.6 per cent. As the population ages, Canada’s labour force will continue to shrink and cause the unemployment rate to be lower than it otherwise would be with stable participation rates. For perspective, there are 3.0 million Canadians aged 15 to 24 in the labour force compared to 3.5 million Canadians aged 55 to 64, which represents a ratio of 0.87—down from 0.97 in 2014.

Declining participation rates, rising government sector employment, and weak private sector job growth do not equate to strong labour market performance.

Median total income (inflation-adjusted) for couples with children grew at a compound annual rate of 1.3 per cent between 2015 and 2021 (latest year of available data). However, this measure not only includes wages and salaries, but also transfers from government. There is now a growing dependency on government transfers to drive income growth, rather than actual gains in employment wages and salaries, which is not a sign of a well-functioning economy. In 2014, government transfers accounted for 6.7 per cent of total income for couples with children. Government transfers have since grown and represented 11.8 per cent of their total income in 2021 (see chart below).

This increase in government transfers is concerning because it’s been financed by government debt. In other words, Ottawa is borrowing money to increase the amount of money it transfers to households. This is burdening households with debt that will be paid for through future tax increases imposed on them and/or spending reductions on programs and services at a later date.

A narrower measure of income growth for Canadian families is to look at the income of households before taxes and government transfers, referred to as market income. As shown in the table below, median market income for couples with children has grown by a meagre compound annual rate of 0.6 per cent between 2015 and 2021. For perspective, the growth rate in median market income from 2005 to 2014 was almost triple (1.7 per cent) the current rate. As another point of comparison, government transfers for couples with children have grown at a compound annual rate of 13.6 per cent during the Trudeau government’s time in office. Simply put, the income gains for couples with children in recent years are limited to government transfers funded through borrowed money rather than actual gains in market income, which is not a sustainable way to improve the living standards of Canadians.

Median employment incomes for individuals—which looks more narrowly at wages and salaries—in Canada trail our American counterparts by a significant margin. In an analysis that compares 141 metropolitan areas in Canada and the United States, the authors found only two Canadian cities in the top half of the overall rankings. The performance of Toronto is particularly concerning, as median employment income in Canada’s most populous metropolitan area ranked 127th among the 141 jurisdictions analyzed. Vancouver and Montreal ranked 131st and 134th, respectively.

Median employment income for Torontonians and Montrealers are nearly $20,000 below those of individuals in the New York/New Jersey metropolitan area whereas Vancouverites trail Seattle residents by nearly $24,000.

The Trudeau government’s track record thus far can largely be characterized by record-high government spending, increased taxes and debt for Canadian families, anemic economic growth, collapsing business investment, an overburdensome regulatory environment and stagnant living standards. That does not match any reasonable or informed definition of economic progress.

The first step in solving any problem is to admit there’s a problem. It’s time for federal policymakers to quit pretending we’re on the right track.