Welcome to Ontario, Canada’s Alabama. That’s not much of a marketing slogan, but it does capture the stakes of the massive productivity problem plaguing not just the province, but the entire country.
For decades, Canada’s productivity growth has lagged that of the United States. The problem has grown more dire since the pandemic, with this country’s real economic expansion not even keeping pace with population growth.
The (perhaps to some) shocking result: Ontario’s per capita gross domestic product is the same as that of the not-so-great state of Alabama, as University of Calgary economist Trevor Tombe recently wrote. Ontario’s performance almost qualifies as good news: five of the six poorest subnational jurisdictions are Canadian provinces – only Mississippi prevents Canada from sweeping the least prosperous category. On the flip side, even oil-rich Alberta doesn’t crack the top 10.
Or to look at the productivity challenge from a different perspective: labour productivity – output per hour worked – has declined for the past four quarters, erasing a half-decade of gains. That woeful performance, continued long enough, is a path to national decline, much diminished living standards, and huge pressure to slash social programs. Ontario might not look like Alabama, right now, but that’s where it, and the rest of the country, is headed.
It’s an economic emergency, all right, but one without an alarm bell ringing in Ottawa. Sure, Finance Minister Chrystia Freeland seemed, momentarily, to grasp the seriousness of the productivity problem in her 2022 budget.
But that momentary focus evaporated in 2023. Yes, there was spending aplenty to drive the government’s interventionist agenda for green industry, but there was no sweeping plan of action on the central challenge of increasing productivity, and safeguarding Canada’s future prosperity.
What might such a plan look like? For a start, the productivity problem needs to be framed in less abstract terms, namely – do Canadians want a low-wage or high-wage economy for themselves and their children?
Any plan needs a goal. Prof. Tombe’s analysis provides a handy tipsheet. Ontario could, for instance, set its sights on matching the economic performance of Ohio, with a GDP per capita that is 27 per cent higher. That would be a modest goal, barely pushing Ontario into the top half of North American subnational governments. But it would be a start.
Paying consistent attention to the problem, although a basic step, is a necessary one. The Liberals, proper progressives that they are, already perform a gender- and diversity-based analysis of their policies, on the notion that it will discourage proposals with negative impacts. That same principle can be brought to bear on the productivity challenge, with governments spelling out how new taxes, regulations or other measures will impact economic growth. Governments could take a cue from environmentalists and assess not just the impact of a particular policy, but the cumulative effect of all policies.
At a minimum, such an approach would make it clear what higher taxes and increased regulation cost Canadians. It might even prove to be a disincentive for governments entranced by virtue signalling moves that nibble away at growth. (We’re looking at you, federal luxury tax.)
Of course, turning around Canada’s increasingly dismal economic performance is not only a concern for government. The private sector has played a part in this country’s economic decay, shielded by internal trade barriers, protectionist foreign ownership rules and other regulatory schemes that hinder competition, innovation and investment. Reviving productivity growth will necessarily entail exposing Canadian businesses to greater competitive pressures.
There is a long-standing, and unresolved, debate about the efficacy of broad corporate tax cuts. In any case, the current federal government is particularly unsympathetic to such a policy. Indeed, the Liberals imposed a 2-per-cent tax on share buybacks, arguing that stock purchases divert funds from more productive investments. Rather than take a punitive approach, the Liberals should instead focus on more favourable tax treatment for capital investments, including more extensive use of accelerated capital cost allowances.
Dismantling trade barriers, spurring greater competition, streamlining regulatory approvals: the steps that Canada needs to take to boost prosperity are beyond obvious.
The only real question is whether we’re ready to choose that path – or want to stick on the one that leads to Alabama.