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How to boost Canada’s economy: A few ideas for Ottawa

Pedestrians cross Wellington St. West while walking on Bay St. in Toronto’s financial district.

Fred Lum/The Globe and Mail

Once again, the Canadian economy is living through a year of mediocre economic growth. For the fifth consecutive year, annual growth in Canada's real gross domestic product (GDP) will be well below 3 per cent. The Conference Board of Canada had earlier expectations of up to 2 per cent for 2016, but even those modest expectations have progressively diminished. Growth of less than 1.5 per cent in is now expected.

Many resource prices remain low, frustrating private investment and keeping energy-dependent provinces – Alberta, Newfoundland and Labrador, and Saskatchewan – in or near recession. Consumer and business confidence are below 2014 and 2015 levels and export growth is still sluggish.

So, what actions could lead to stronger growth? The federal government formed a growth commission last spring, led by Dominic Barton of McKinsey, to examine how to promote economic growth. The Conference Board examined much the same question in detail a decade ago in one of our research studies. That analysis, updated by recent research, provides a useful framework for policy.

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Let's look at the fundamentals. The labour force – more specifically, the availability of workers – is the foundation for any country's economic growth, combined with the knowledge and skills of the work force. Due to an aging population, Canada is in the midst of a rapid slowing in labour force growth – from nearly 1.5 per cent a year a decade ago, to below 1 per cent today – which will continue to fall in the decades to come.

These powerful demographic forces can be offset somewhat through specific policy choices. Higher levels of immigration, policies to better engage indigenous peoples and disabled Canadians, and encouraging older workers to remain in the labour force longer would bolster the available labour pool. Continuously improving knowledge and skills in the work force can close more of the gap.

But the full labour-force policy framework is still being defined and some recent steps – such as returning the age to receive Old Age Security benefits to 65 – may be taking us in the wrong direction.

Another key piece of the foundation is private investment. Without more robust private investment, stronger overall economic growth won't happen. But Canada's performance is dismal – the private-capital base is shrinking for the second year in a row and is now smaller than it was in 2012. This trend is occurring despite a softer loonie that makes Canadian businesses more competitive in North America, and considerable effort to create a more competitive tax environment for business.

The overall policy environment shapes the playing field for businesses. Research and policy experience over the past decade point to a number of areas where Canadian governments could act to promote growth. These include:

  • Reducing and ideally eliminating internal barriers to trade, investment and movement of people.
  • Pursuing more open trade and investment, starting with implementation of the free-trade deal with the EU.
  • Shaping a more competitive tax system, including streamlining tax administration.
  • Increasing competition in many sectors of the economy.
  • Developing more efficient and effective regulation.
  • Fostering a climate of greater innovation in business and government.

One of the opportunities for increasing growth lies in the transformation to a low-carbon economy. This transformation will require: investing more and more in renewable energy sources that do not rely on hydrocarbons; shifting energy consumption toward those new sources; increasing energy efficiency in our communities, buildings, homes and vehicles, all of which will require added spending; and selling our expertise in low-carbon goods and services to the world.

The risk of stranded assets in carbon-based energy production and consumption, with a high related economic cost, is considerable if the low-carbon transition is not managed wisely. Yet if we get the policy framework right for low-carbon transformation, we can make a virtue out of necessity and get a boost to growth. Putting a price on carbon is a cornerstone for low-carbon growth, because it improves incentives for energy users to change their behaviour.

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Ultimately, stronger economic growth will require faster productivity growth, which most likely depends on action on all of these fronts. But as we have written before, Canada's track record on productivity growth is dismal – and there is no silver bullet to fix it. Unless we are prepared to consider and implement wide-ranging changes to policy and behaviour, the chances of closing the productivity gap with the United States are slim – let alone matching top productivity performers such as India and China.

We look forward to the report from the growth commission, and to the federal government's policy response. A dramatic change in the policy environment – and renewed vigour in the Canadian economy – are firmly under our control, if we choose to take decisions to make change happen.

Glen Hodgson is a senior fellow at the Conference Board of Canada.

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