Economic growth tops the priority list for Canadian policymakers — and here's why

Canada is present Anemic economic growth is experienced, which means there is a slowdown in the aggregate output of personal goods and services. The Real GDP growth forecast for 2024 is 0.7 percent.

Despite this, American economist Tyler Cowen wrote recently Canadians have nothing to worry about when it comes to the economy. Although the Canadian economy is not growing as fast as America's, he argued, few are. „Yes, Canadian performance could be better, but there's no reason to hit the panic button,” he wrote.

'Fiscal Choices: Canada After the Pandemic' covers several key fiscal policy topics in Canada.
(University of Toronto Press)

This is not a view shared by Canadian policy makers. In our latest book, Fiscal choices: Canada after the pandemicWe explain why Canada's anemic growth rate is worrying and why politicians and their advisers almost unanimously believe that economic growth is a policy imperative.

Their rationale boils down to this: in an underdeveloped economy—per capita income stagnates in real terms—any budget adjustment to meet evolving priorities is zero sum.

For example, this cannot be achieved without requiring Canada to increase its commitment to NATO Raises taxes Or Eliminates $18 billion from elsewhere in the budget.

Read more: Canada's Arctic conservation policy update: All flash, no bang

When we reallocate what we have already spent, most federal spending is collected under the heading of „transfers to individuals,” and much of this spending is statutory, meaning it cannot be reduced by adjusting the annual budget.

Expenses for employment insurance and pensions are required. Similarly, transfers to other Govts – The Canada Health Exchange and Equity Payments, for example – legal requirements.

While legislative changes are possible, they come with political risks and uncertain economic benefits. The eligibility age for the Canada Pension Plan may be increased and Old Age Security may be withdrawn at lower incomes.

Reducing transfers or increasing taxes may improve the government's balance sheet, but whether these changes have a positive effect on the economy is another matter. Cost cutting or Tax increases are austerity measures And austerity has so far had limited, if any, payoff in terms of economic growth.

Interest rates are higher than growth rates

One possible solution is for Canada to simply borrow more. Debt is not inherently bad. Short-term debt is better for dealing with cyclical downturns than raising taxes to balance budgets. Keynesian logic For that.

When growth is strong and interest rates are low, debt is manageable. As long as the social rate of return from government spending is greater than the real rate of interest, fiscal deficits help maintain output at capacity.

But now, Interest rates are higher than growth rates. As of 2017, the yield on 10-year government bonds was 1.8 percent, while the economy was growing at an annual rate of 3.1 percent. At that time, interest payments on debt consumed 7.04 percent of the central budget.

In 2023, on the contrary, Interest rate on bonds National growth slowed to 1.1 percent, rising to 3.3 percent. Meanwhile, just 10 percent of the central budget was allocated to debt servicing costs. Public loan charges will be charged $54.1 billion in 2024-25, or 10.9 per cent of the Union Budget.

Worse, there is no budgetary relief on the horizon. The Parliamentary Budget Office estimates The debt service ratio will peak at 12 per cent in 2023-24 and fall to 11 per cent in 2028-29 – up from its pre-pandemic low of 8.3 per cent in 2018-19. Such a decline assumes a level playing field that does not involve large increases in the debt we already have.

Even when borrowing conditions are favorable, the social rate of return on government spending must be positive. Many academics support periodic reviews of government programming to ensure that spending is effective. In theory, this involves removing programs that don't work and replacing them while saving money in the process.

Government review processes

In 2022 Budget, the federal government announced a review of plans to save $6 billion over five years. The 2023 Budget And the 2023 Fall Economic Report doubled down on this initiative, requiring sequential savings $15.8 billion.

Politicians and public servants we spoke to while preparing our book were in favor of periodic reviews, but they acknowledged that reviews rarely work to save money.

Besides A review process was undertaken by the federal government under Jean Chrétien in 1994Program reviews have provided very little on long-term savings.

One reason is ideological. Practitioners argued that program evaluation should be an ongoing program, usually aimed at improving outcomes such as shorter wait times or better math scores, not saving money. Sometimes both can be done, but these two objectives do not naturally line up.

Chrystia Freeland speaks in the House of Commons.
Finance Minister Chrystia Freeland presents the federal budget at the House of Commons in Ottawa on April 16, 2024.
The Canadian Press/Adrian Wilde

Financing choices are always difficult, but they are especially problematic for an underdeveloped economy. A A small but determined group of economists Wonder if economic growth is really an imperative and whether the level of aggregate economic activity (GDP, in other words) should be the holy grail of fiscal policy.

There are other economic goals with intuitive appeal, including price stability, low levels of inequality, and happiness. Some (usually non-economists) have gone so far as to argue that We should welcome the fall – Our collective economic footprint shrinks to better serve other species and the ecosystem as a whole.

Economic progress

There's nothing wrong with reviewing our assumptions about what economic progress looks like and who benefits from the big economy. We must accommodate measures of individual and collective well-being in addition to GDP.

But we also need economic growth – not just so we can consume more or generate more revenue for governments, but also so we can take better care of each other. Consider the possibilities: Development may include better housing, better food and better health care, or a better defense position. And it does not require much use of natural resources.

Technological innovation has an important role to play in the transition to an economy structured by providing better services rather than producing more goods. This shift to a knowledge-based service economy is already well under way and is to be welcomed. But we cannot benefit from this change without being more productive. That means, as the saying goes, doing things better and doing things better.

Short term fights over carbon tax, for example, turning away from long-term questions of economic sustainability. We need to produce what the world needs and do it efficiently. Improved productivity in the public and private sectors is another way of ascribing more sustainable economic growth. Without it, we stand still as our needs grow, and our neighbors — not just America — leave us.

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