The following op-ed was co-written by ICBA Chief Economist Jock Finlayson and Business Council of BC VP-Policy David Williams, and ran in the Dec. 9, 2024 edition of the Globe and Mail.
On Monday the federal government said it will release its fall fiscal update on Dec. 16. This comes at a fraught time.
For one, the fall economic statement is late, and it comes as trouble looms over Canada’s vital trade relationship with the United States. Meanwhile, the Parliamentary Budget Officer has said Ottawa will likely miss its deficits targets.
What should the federal government prioritize? To answer that question, Ottawa must go back to the basics. In preparing its fall economic statement, the federal government should ask itself this question: What is Canada’s top economic priority? Is it growing or sharing the economic pie?
Last April’s federal budget committed to “raising the incomes of Canadians” and “growing the middle class,” while promising “fairness for every generation” and “building an economy that works for everyone.” However, the data indicate Canada’s economy is not achieving a balance between generating and sharing prosperity.
Canada’s economy is shrinking on a population-adjusted basis. Over the past five years, we were the second-worst performing economy among the 38 advanced countries that make up the Organization for Economic Co-operation and Development. Canada’s real gross domestic product per person – essentially the total yearly income that households and businesses generate divided by the population – shrank by 1 per cent between 2018 and 2023. Only Mexico did worse. By comparison, GDP per person rose by 9 per cent in the United States, 6 per cent in Italy, 4 per cent in Australia, 3 per cent in France, and 2 per cent in Japan over the same period.
Adjusted for population, Canada’s economy is the same size today as in 2014. Meanwhile, per-person government spending has grown by 9 per cent since then, three times the rate of per-person household spending. Again, using per-person figures, exports have shrunk by 3 per cent, and capital investment in businesses and residential structures have collapsed by 24 and 16 per cent, respectively.
There is some good news. Canada has benefited from a rising terms-of-trade. This means that international prices for products we export – mostly natural resources and some categories of manufactured goods – have risen faster than prices for items we import, such as clothing, cars and electronics. Canada’s terms-of-trade is currently 14 per cent above its average since 1961, and 5 per cent above its average since 2001. Thus, even though the country has not become any more productive, the relative value of what we produce has risen. This is a windfall for people’s incomes, while it lasts.
Canada has a better story to tell on income redistribution. The most widely used measure of overall income inequality is the Gini co-efficient. The closer it is to 0, the more equal are household incomes; the closer it is to 1, the more concentrated are incomes. For after-tax family incomes, Canada’s Gini co-efficient peaked at 0.32 during the early 2000s, and has since retreated to 0.29 – about the same as it was in the late-1970s.
Contrary to the U.S. experience, rising household income inequality in Canada was a feature of the 1980s and 1990s and mostly affected pretax incomes. Canada’s tax and income support systems did and do a good job of redistributing pretax income, as there has been little change in after-tax income inequality over the decades. Moreover, Canadian after-tax income inequality remains fairly low compared with that of other OECD countries.
What about poverty? The proportion of households living below the poverty line – that is, households unable to afford a modest, basic standard of living – fell to around 10 per cent in 2019 from almost 15 per cent in 2015. The federal government’s Canada Child Benefit contributed to this welcome outcome. The poverty rate dipped to a low of around 6 per cent in 2020, owing to temporary pandemic supports such as the Canada Emergency Response Benefit. Since their withdrawal, the poverty rate has returned to its 2019 level. This is something to watch.
A country cannot redistribute income it does not generate. Sound policy making balances the need for an economy to both produce and share prosperity, and the data indicate Canada is not achieving this balance. While the country has a mostly positive track record on sharing prosperity, over the past decade it has forgotten how to generate income growth in the first place. In preparing the fall economic statement, this is where federal government policy-makers should direct their attention.
