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Heading into the 2019 federal budget, Canada’s economy is arguably in the best cyclical shape since the financial crisis – oil sector excepted – with the national unemployment rate hovering near multidecade lows. But growth is slowing, concerns about future prosperity are rising and, unless more attention is focused on the fundamentals, these concerns are likely to be realized.

Potential growth measures the capacity of an economy to grow when its resources – labour and capital – are fully employed, and provides the best available gauge of a society’s longer-term economic prospects and future prosperity. Based on the projections contained in the Fall Economic Statement, these prospects do not appear terribly promising: Potential growth over the next five years is estimated at 1.8 per cent annually, dramatically less than the more than 3-per-cent average growth Canadians enjoyed over the past 50 years. And even this may be optimistic.

Why this drop in Canadian potential growth? It all comes down to fundamentals: Labour force and productivity growth have diminished as our population ages and our output per worker sags. To put some numbers on this, Canadian labour force growth is presently about 0.5 per cent and productivity growth is hovering around 1 per cent. Thus, achieving even the 1.8-per-cent potential growth projections of the Government of Canada will require increases in both productivity and labour force growth, something we have not seen for some time.

So, what will it take to restore Canadian potential growth? The answer is relatively simple in concept – more workers and more output per worker – and exceedingly complex in reality.

With the large baby-boom generation moving into retirement, achieving sizable and sustained increases in labour force growth will require real change: a combination of significant and sustained increases in economic class immigration; marked improvements in skills training to better align workers and jobs in an economy going through massive technological disruption; and shifting retirement incentives and pension benefits to encourage longer participation in the work force. None are easy, either economically or politically, but all are essential for our long-term prosperity.

Raising productivity growth is equally challenging but no less important. Nationally, the level of business productivity in Canada is about 30 per cent below that of the United States, despite having highly integrated economies. Even more alarming is the fact that in knowledge-intensive industries (defined as those conducting significant research and development and having an above average share of STEM workers) the gap is 50 per cent and widening. This is particularly worrisome because these industries contribute disproportionately to innovation, productivity and growth.

The causes of Canada’s productivity under-performance are reasonably clear: low capital stock (machinery, equipment and intellectual property) for each worker in the business sector, lagging innovation investment by Canadian business and nascent innovation ecosystems, under investment in strategic infrastructure, and impediments to scale and competition such as internal trade barriers and lack of trade diversification. These shortfalls are certainly not the sole responsibility of government, nor does the remedy lie exclusively in government hands, but government has a unique role to convene and lead.

So, what should we take away from this? Negative economic trends such as slowing productivity growth and weakening labour force growth are stealthy – they drag us slowly but surely into relative economic decline without the visibility or the sense of urgency generated by cyclical shocks to the economy. Complacency is clearly a danger; so, too is short-termism. Canada’s long-term growth challenge cannot be solved by stimulus, either monetary or fiscal. Decisive, focused and structural actions, with an emphasis on appropriate scale, effective execution and expanded public-private partnerships, fit this bill.

Strategic infrastructure is a case in point. Ottawa has allocated substantial funds for infrastructure spending and created the new Canada Infrastructure Bank to enable co-investing with private sector partners. All good, but focus is unclear and execution is slow. Strategic infrastructure projects, such as transportation corridors to move people, goods and data, expanded ports for trade diversification and natural resource pipelines to global markets, should be of the scale, scope and impact to raise Canadian productivity levels. Their design should look to the future, embracing next generation technology for cleaner, more sustainable growth and include the possibility of direct revenue generation to attract private investors. Asset recycling, in which the sale of government assets would provide additional funding to increase Canada’s capital stock, should also be part of a long-term strategic infrastructure plan that provides direction and clarity to business and investors.

Beyond this, policy changes such as corporate tax incentives to encourage greater capital investments by firms, red-tape and regulatory burden reductions including balancing prudential and economic growth objectives formally in regulatory policy, and measures to tackle innovation scale-up and diffusion gaps are all productivity enablers. The recent Fall Economic Statement signalled positive movement in each of these areas, which is to be welcomed. But, they are the beginning, not the end, of tackling the very real structural growth challenges Canadians face in a risky and uncertain global environment.

It may seem counterintuitive that slowing growth is more a sign of supply constraints than demand deficiencies, but fundamentals do matter and nothing is more fundamental to an economy’s long-term prosperity than growth in productivity and an expanding, skilled labour force.

Kevin Lynch is vice-chairman, BMO Financial group

Tiff Macklem is Dean, Rotman School of Management, University of Toronto