Fraser Forum

Economic growth crucial for both the private economy and government sector

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Economic growth crucial for both the private economy and government sector

Far too many politicians and bureaucrats ignore a simple economic reality—the private sector creates the resources needed to fund government social programs and cash transfers. If the private sector underperforms—that is, grows slowly—it strains both the private economy and the government sector.

In other words, we must grow the economic pie before slicing it up and distributing (or redistributing) it.

Canada’s dismal economic performance over nearly the last decade coupled with the poor prospects for the future should, therefore, give all Canadians cause for concern including those who want to expand government social programs and income transfers.

For example, a recent analysis showed that Canada’s growth in per-person income (measured by GDP) between 2013 and 2022 was the lowest since the 1930s. And according to the OECD, Canada, despite all its advantages including a highly educated workforce, abundance of natural resources, proximity and access to the U.S. market, and relatively stable institutions, will experience the slowest growth in per-person income (again, as measured by GDP) among industrialized countries from 2020 to 2060.

Specifically, if current trends continue, Canada will fall from 16th place in 2020 to 25th of 32 OECD countries by 2060, meaning that people in countries such as New Zealand, Estonia, Italy, Korea and Turkey will have higher living standards than Canadians.

Weak economic growth will also strain the government sector, and inevitably taxpayers. To illustrate the strain, consider health-care spending. According to OECD data, in 2021 Canada ranked 3rd among 30 industrialized countries in total health-care spending as share of the economy (GDP) at 12.3 per cent yet ranked 7th for per-person health-care spending (US$6,278).

Portugal is an even starker example of the adverse effects of low economic growth—it ranks 10th for health-care spending as a share of the economy (11.1 per cent), but this only translates to US$3,830 per- person in health spending, ranking them 24th out of 30 countries.

Why the differences? In part, it’s because Canada and Portugal are not as prosperous as other OECD countries including Ireland, which offers an alternative example. In 2020, Ireland had the second-highest level of per-person income in the OECD based on more than three decades of strong economic growth. This means it can allocate a much smaller share of its economy to health care (6.7 per cent) but provide almost the same level of per-person spending (US$5,861) as Canada. Put differently, Ireland spends approximately half the amount (as a share of the economy) on health care compared to Canada (6.7 per cent vs. 12.3 per cent) but because its per-person income is much higher, the per-person value of that health-care spending is nearly the same (93.4 per cent). That’s the power of economic growth.

Economic growth is a win-win. It provides higher levels of income and thus higher living standards but also provides more resources for government with a lower tax burden. In other words, a small slice of a much bigger pie is larger than a large slice of a smaller pie.

To return to stronger economic growth, Canada must return to the policies that characterized almost two decades of relatively strong economic performance from roughly the mid-1990s to 2015. Those policies were rooted in limited but prioritized government spending, balanced budgets and declining government debt, lower and competitive taxes, reasonable cost-effective regulations, and freer trade.

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