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analysis

The Liberals sought to portray their budget last spring as a blueprint for galvanizing economic growth – after all, it is titled, in part, “A Plan to Grow Our Economy.”

The federal government’s fiscal plan was peppered with investment funds, tax credits and spending initiatives that would supposedly reverse Canada’s decades-long slump in productivity. But the most recent forecasts from the fall economic statement tell a much different story of continued, indeed worsening, decline.

Back in April, the Liberals were forecasting that labour productivity would grow at 1.1 per cent a year between 2022 and 2026, matching the average growth rate between 1970 and 2021.

That projection was always highly suspect. One of the biggest economic challenges facing Canada is the long-term slowdown in productivity growth since the halcyon days of the 1960s and 1970s. Pretty much everything is pulling down growth: an aging population, perennially low capital investment, and the shift away from the capital-intensive oil and gas sector, to name just a few.

Someone at the Finance Department appears to have acceded to that reality. The fall economic statement sharply reduced the near-term forecast for productivity growth. Now, the government is forecasting average annual growth of just 0.7 per cent between 2022 and 2027. That is lower than both the 1971-2021 average, of 1.1 per cent – and even the more recent performance of the Canadian economy between 2015 and 2021, when productivity rose an average of 0.8 per cent a year.

In a statement, the Finance Department said that labour-productivity growth is expected to rise gradually before reaching its long-term average, noting that there was a large increase in 2020 followed by a huge decline in 2021.

Essentially, that is the inverse of the enormous job losses of 2020 – when a shrunken cohort of workers were on average producing more output – and the national hiring spree of 2021, which diluted those productivity gains.

However, that upward jump and subsequent plunge largely cancel each other out. Average productivity growth between 2015 and 2019 is nearly the same as between 2015 and 2021.

The differences between the old and new projections may seem tiny, mere fractions of percentage points. But another way to look at them is the degree of change. On that front, the differences are quite large. The government is now forecasting that labour productivity growth will drop by a third from its post-1971 average, rather than staying even.

If this most recent projection turns out to be accurate, it points to a half-decade of middling growth in Canadians’ incomes.

That alone would be bad enough political news for the Liberals. But the next five years is also the time span in which the Trudeau government’s supposed productivity-boosting measures are supposed to bear fruit. Tens of billions of dollars are to spent on subsidized national child care, industrial innovation funds and subsidies for green technologies.

The net effect of those billions is, according to the government’s own estimates, a decline in productivity.

One bright spot (or unrealistic assumption, take your pick) remains: the longer-term productivity forecasts haven’t changed. From 2028 to 2055, the government is forecasting that productivity growth will zoom back up to the levels of a half-century ago, averaging 1 per cent annually over those 28 years. That means that the rate of growth will accelerate by more than two-fifths, representing a stunning economic renaissance, were it to come to pass.

So, however ineffective the Liberals’ high-spending, higher-tax, interventionist strategy is over the next five years, it will prove to be a roaring success – starting in 2028.

Taxing questions

Responding to recent coverage of Bank of Canada Governor Tiff Macklem talking about the need to cool off the labour market, one online reader wondered if the message was that companies should start laying off workers.

That is one way – the most painful way – to lower the temperature, but there is a different statistic that the bank is also monitoring: job vacancies. The number of unfilled jobs, adjusted for seasonality, rose past one million in May – a clear signal of an overheating labour market. The number of vacancies has started to retreat a bit more recently, declining to 921,000 in August. Still, that is 60 per cent more than October, 2020, when there were 572,000 vacancies.

Pushing the number of vacancies down sharply will reduce bidding wars for workers, reducing the rate of increase of wages, without necessarily leading to job loss. It was once hoped that simply reducing vacancies might be enough to tame inflationary pressures, but Mr. Macklem clearly signaled this week that will not be enough.

That still doesn’t mean that layoffs are the only option. Widespread hiring freezes could get the job done. But from the perspective of someone looking for a job, that won’t be much comfort.

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Exodus exposition: A recent report from the C.D. Howe Institute debunks much repeated claims that an exodus of health care workers is behind emergency room closures and other strains on the system. The data in the report clearly show that employment has risen, including during the pandemic, even for nurses and residential-care workers. Work absences have increased modestly during the pandemic, but not enough to fully offset the increase in employment.

But there are a rising number of vacancies, the report says, indicating that demand for the services of health care workers is is growing even faster. Another contributing factor: a modest shift of staff away from the front lines of health care.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.