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If there's one key economic takeaway from the federal government embarking on new era of budget deficits, it's that the country has a productivity problem it can no longer ignore.

The Liberal government's plan for multiyear deficits, unveiled in last week's budget, isn't really about providing a fiscal stimulus to a Canadian economy that largely stalled last year in the face of a severe oil shock, even if that's how many pundits have described it. Nor is its foundation in dramatically increased infrastructure spending merely a matter of addressing an area that has long suffered from neglect, though there's little doubt the plan has that effect.

Rather, it boils down to leaning fiscal policy against the forces that threaten to choke off Canada's productivity growth – a critical ingredient to our economic well-being.

Finance Minister Bill Morneau said as much in an interview with Bloomberg TV on Wednesday in explaining the philosophy behind the plan. "We do believe that taking fiscal measures is appropriate in the face of a low-growth environment … taking the decisions that governments can take in order to enhance the productive capacity of their country."

Productivity (as defined by economic output per worker) is fast becoming the hot economic topic of 2016, and not just in Canada. That's what happens when the global economy has stumbled for the better part of a decade, and productivity growth has lagged historical norms in nearly every major economy, both advanced and developing, since the 2008-09 financial crisis. Last month, the Organization for Economic Co-operation and Development focused its annual global growth report on the need "to relaunch productivity growth." On Thursday, the International Monetary Fund will release a new analytical report on "fiscal policy, innovation and productivity growth."

All this comes at a time when Canada, long a laggard among advanced economies in productivity growth, has actually been doing relatively well among its global peers – it has at least been able to maintain its productivity pace since the financial crisis. Canada's average annual productivity growth in that time was actually a touch higher than it was in the six years prior to the crisis. Its growth trend has moved above that of the United States for the first time in two decades.

That could reflect the relative health of Canada's financial sector and housing market, which, unlike those of many other advanced economies, weathered the financial crisis largely unscathed. This may have helped to sustain business formation, by making it easier for individuals to use their homes as collateral for loans to set up small businesses. (The growth in both homeowner line-of-credit debt and self-employment in Canada, which has increased by nearly 100,000 in the past two years, may be evidence of this.)

But the sharp declines in oil and other commodity markets may end Canada's relative outperformance. First, as we have seen dramatically over the past year, investment in the battered oil sector has plunged in the face of low prices, starving it of the capital that typically drives productivity gains. Even as that capital, as well as labour, gradually gets redeployed to healthier sectors of the Canadian economy, the Bank of Canada noted (in footnotes to a speech delivered by deputy governor Lynn Patterson on Wednesday) that the resource sector actually has higher productivity levels than the rest of the economy; a reallocation away from commodity production would thus tend to lower the country's overall productivity growth.

Globally, solving this productivity puzzle has become a more pressing issue the longer the growth slump continues. Some of the factors involved may be, to a significant degree, cyclical. The financial crisis and Great Recession sapped capital investment at a time when the biggest productivity gains from the earlier revolution in Internet technology are now behind us.

But the bigger issue looming over productivity in the longer term is the demographic one: Aging populations, in Canada and most other advanced economies, will serve as a huge headwind to economic growth in the next couple of decades. Not only will the proportion of retirees in the population grow, relative to the working population, but, as Peter Berezin of BCA Research noted in a report this week, the proportion of workers in their 40s – "the age cohort when people are most productive" – is destined to decline

Facing a relatively smaller producing work force to support the population, countries will have to find ways to get more productivity from each worker – or face economic stagnation and, with it, a stalling of living standards.

The favoured solution of Canada's Liberal government – to pour money into public infrastructure that serves to enhance productivity – is just one of many possible actions. The section of the OECD's report specific to Canada suggests several others, including regulatory reform to remove barriers to business entry and to increase competition, particularly in telecommunications; tax reforms to derive a smaller portion of revenues from "direct" taxes such as personal and corporate income taxes, which may discourage innovation; and increased supports for education and research and development.

None of these proposals should be viewed as an either/or choice; Canada and other countries are going to need to employ numerous tools to rev up productivity growth. But the increasing message to policy-makers is that there's no time to waste, lest the downward drift decay into an irreversible problem.

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