Slow growth in Canada and the elephant in the room—bad government policy

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Appeared in The Huffington Post, October 3, 2016

It seems there’s no shortage of headlines claiming that slow economic growth is the “new normal.” The latest stream came from a recent speech in the United Kingdom by Carolyn Wilkins, senior deputy governor at the Bank of Canada.

Like many diagnoses of slow growth, the effects of bad government policies often get overlooked. This matters because unlike commodity swings or global forces, governments can actually influence the direction of policy. But in recent years, we’ve seen an onslaught of growth-hindering policies in Canada such as spending-induced debt increases, higher taxes and increased regulation.

Let’s start with federal fiscal policies. 

The Trudeau Liberals remain committed to spending borrowed money in the hopes of increasing the country’s prosperity. But the evidence shows that growing the economy through increased spending isn’t likely to work. For example, Harvard University professor Alberto Alesina analyzed several cases internationally from 1970 to 2007 where governments tried to increase spending to stimulate growth. The conclusion isn’t favourable: “a one percentage point higher increase in the current [government] spending-to-GDP ratio is associated with a 0.75 percentage point lower growth.”

That does not bode well for Canada’s growth prospects, given that the Liberals plan to increase federal spending as a percentage of GDP by almost two percentage points by the end of next year.

With no end in sight to budget deficits, the government is set to pile on more debt. The likely result: slower growth as growing public debt increases uncertainty for households and investors and leaves the burden of repayment for future generations.

And critically, virtually none of the debt-financed spending is being used to invest in growth-enhancing infrastructure.

On top of increased spending and debt, Ottawa has hiked taxes on our most skilled and educated workers. Canada now has the second highest top personal income tax rate in the G7, behind only France. Such high and uncompetitive tax rates discourage people from working, saving, investing and being entrepreneurial—all things that propel the economy forward.

The federal government also plans to raise taxes on middle income Canadians—contrary to their campaign promise. A looming payroll tax hike to expand the CPP will more than wipe out the reduction to the second lowest personal income tax rate, with negative implications for wages, jobs and overall economic growth.

Regulation is another area where federal policies hinder Canada’s growth prospects. For example, new regulations on the environmental impact of proposed pipelines are unnecessary and add to the growing list of regulatory barriers and compliance costs that prospective pipelines already face. Limiting pipeline development means Canadians will continue to receive less for their resources than they could otherwise. This is hardly pro-growth.

While federal policies undermine growth, they are only part of the story. Several provinces are also pursuing economically damaging policies.

Case in point is Ontario’s Green Energy Act, which ensures that Ontarians pay much more than their American counterparts for wind and solar electricity, resulting in higher prices for both consumers and businesses. A recent survey found that many businesses intend to delay or cancel investment due to rising prices. Moreover, in recent years Ontario has pursued many of the same growth-inhibiting policies as the current federal government including higher taxes, persistent deficits and increasing debt.

Further examples can be found out west in Alberta. In just a year, and at a time when the energy sector has been hit hard by depressed commodity prices, the provincial government has made several policy choices that stand to hinder investment and growth. That includes mushrooming deficits; major personal and corporate income tax rate hikes; minimum wage increases; a new carbon tax; a new costly emissions cap on oilsands production; and much more. 

In any discussion of slow growth, the effect of poor policy choices shouldn’t be overlooked.

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