Governments across Canada are spending us into economic misery

Two statistics illustrate Canada’s disastrous economic outcomes in recent years and the bleak outlook. First, as Fraser Institute senior fellow and former Statistics Canada chief economic analyst Philip Cross observes in a recent study, Canada’s 10-year average real GDP growth per capita is at its lowest levels since the Great Depression, evidently a domestic problem since from 2015 Q4 to 2022 Q4, cumulative growth has been about 2 per cent in Canada versus 12 per cent in the United States.

Second, this trend of poor economic growth is unlikely to reverse anytime soon since business investment, which drives growth and productivity, declined 20 per cent in Canada (per worker, inflation-adjusted) from 2014 to 2021, compared to a 15 per cent increase in the U.S. over the same period, as Fraser Institute economists Tegan Hill and Joel Emes document in a separate study. In 2014, business investment per worker in Canada was already 21 per cent below the U.S.—by 2021 it was barely half the American level.

The strategy employed by Canadian governments, both federal and provincial, of trying to achieve economic growth through increasing government spending clearly is not working. Nor should anyone have expected such a strategy to work. Milton Friedman’s adage, “Nobody spends somebody else’s money as carefully as he spends his own” pithily expresses the problem with government spending: it’s done less carefully and less productively than private spending, and since economic resources are limited, government consumption ineluctably takes away from the private sector.

Indeed, empirical studies provide evidence that government spending does not stimulate economic growth (even in recessions), and that government spending relative to GDP is materially higher than the level it should be to achieve the best rates of economic growth, and that economic freedom (of which one indicator is limited government spending) is an important factor to attaining economic wellbeing. And past Canadian experience points to a retrenchment of government as a way to attempt to achieve higher rates of economic growth.

In stark contrast to recent years of rapidly increasing government spending, miserable economic growth and declining business investment, Canada actually led the G7 countries in real GDP growth and business investment growth from 1997 to 2007. These positive outcomes were achieved on the heels of significant spending cuts by the federal government and many of the provinces; notably, Saskatchewan and Alberta whose governments drastically reduced spending and whose citizens greatly benefited from increases to investment, economic growth and living standards.

A key to this success was that spending cuts left more resources to the private sector and enabled tax cuts, particularly to economically damaging business taxes. By contrast, governments today accompany their rapid spending increases with higher taxes. The Trudeau government in particular is annually escalating its carbon tax and recently introduced special taxes targeting financial institutions, banks’ dividend income and corporate share buybacks—all policies that discourage business investment and reduce economic productivity.

To sum up the Canadian experience: aggressive government spending cuts and tax cuts in the 1990s led to economic outperformance relative to other countries and higher living standards; significant government spending increases and new taxes in recent years have coincided with collapsing investment, the worst decade of economic growth since the Great Depression and a real per-capita growth rate that is dwarfed by the U.S. Unfortunately, continuing down this path, as experience and empirical evidence show, will mean more of the same miserable outcomes.