Next prime minister should eschew interventionist ‘industrial policy’

Over the past six years, the federal government has made significant use of industrial policy, otherwise known as crony capitalism, state economic planning or other names. Ottawa ramped up spending to boost the clean technology industry, for example, and regional development agencies continue to receive handouts. The stated intention of such programs is to improve economic growth by having government support certain industries. The results have not been good.

Canada’s recovery from the COVID recession is stalling, as seen in the latest GDP numbers. In the second quarter (Q2) of 2021, real GDP per capita fell to 2.9 per cent below fourth quarter 2019 levels (the last full pre-pandemic quarter). By contrast, in the United States in 2021-Q2, real GDP per capita had risen higher to pre-pandemic levels.

Notably, Ottawa’s industrial policy failed to deliver strong economic growth even before COVID. In Canada, real GDP per capita increased by only 3.3 per cent from 2015-Q4 to 2019-Q4, compared to 7.5 per cent in the U.S. over the same period. Critically, business investment has been especially poor, actually falling (on a real per capita basis) during the four years before the pandemic.

Despite these unfortunate outcomes, on the campaign trail there’s political consensus for these sorts of economic strategies. Based on their recent promises, the Liberals seemed poised to double-down on trying to increase employment and economic growth by increasing government spending and government economic planning.

The NDP, meanwhile, proposes untold billions in new spending and a dramatic expansion of the regulatory state, including plans “to develop a national industrial strategy to build an advanced low carbon manufacturing economy in Canada.” Like the Liberals, the NDP’s economic policies rely on the fallacy that government planners—not the private sector—can put economic resources to better use.

The Conservatives, too, place great confidence in the supposed benefits of government economic planning. Most of their platform consists of plans for increased intervention—for example, by “unleashing innovation” with a new government agency that will “invest” $5 billion in various sectors over a five-year period.

And yet, it seems unlikely that the economy would be more innovative and productive if investment decisions are transferred from private businesses to the government where the people doing the investing did not earn the money and do not pay a financial price for investing poorly. Cutting corporate taxes, not increasing government spending, would make much more sense.

Indeed, the Canadian experience clearly demonstrates the significant economic benefits to reducing government economic planning and leaving more resources in the private sector. In the 1990s, the federal government, along with many provincial governments (most notably Saskatchewan and Alberta) significantly cut spending.

For example, Ottawa’s program review in 1995 proposed a 38 per cent reduction to industrial, regional and scientific programs, and a 31 per cent reduction to the natural resources department over a three-year period. These and other spending cuts paved the way for tax cuts including significant reductions to the corporate tax rate.

The result? Unlike the underwhelming economic outcomes of the past six years, from 1997 to 2007, the Canadian economy flourished. Among G7 countries during this decade, Canada was first in business investment growth and second in real GDP per capita growth. A retrenchment of interventionist industrial policy is surely the best path back to a strong economy. The private sector, not the government, is best equipped to drive economic growth, post-election and beyond.