Don't overlook how government policies hinder economic growth
In a recent speech, Bank of Canada Senior Deputy Governor Carolyn Wilkins outlined a number of reasons for why we’re experiencing slow economic growth including the effect of demographic changes on labour supply, stagnant productivity, and a slowdown in business investment. However, the speech overlooked how recent policy choices by Canadian governments—including increases in spending, debt, taxes and regulation—also hinder growth.
Let’s start with federal policies. The Trudeau Liberals remain committed to a misguided fiscal policy approach that spends borrowed money in the hopes of increasing prosperity. The government itself projects deficits over the next five years totalling $113 billion, but that total could reach up to $200 billion under more realistic spending scenarios. With no end in sight to budget deficits, the government is set to pile on more government debt, increasing uncertainty, burdening future generations, and slowing growth in the process.
But the evidence shows that growing the economy through increased deficit-spending isn’t likely to work. For example, Harvard University professor Alberto Alesina analyzed several cases internationally from 1970 to 2007 where governments tried to increase spending to stimulate growth. The conclusion: “a one percentage point higher increase in the current [government] spending-to-GDP ratio is associated with a 0.75 percentage point lower growth.”
That does not bode well for Canada’s growth prospects, given that the Liberals plan to increase federal spending as a percentage of GDP by almost two percentage points by the end of next year (from 12.9 to 14.6 per cent of GDP).
And critically, virtually none of the debt-financed spending is being used to invest in growth-enhancing infrastructure.
On top of increased spending and debt, Ottawa has hiked taxes on our most skilled and educated workers, resulting in Canada’s top personal income tax rate being second highest in the G7, behind only France. Such high and uncompetitive tax rates discourage people from working, saving, investing and being entrepreneurial—all things that propel the economy forward.
The federal government is also planning to raise taxes on middle income Canadians—contrary to their campaign promise. Specifically, a looming payroll tax hike to expand the CPP will more than wipe out the reduction to the second lowest personal income tax rate, with negative implications for wages, jobs and overall economic growth.
Regulation is another area where federal policies hinder Canada’s growth prospects. For example, new regulations regarding the environmental impact of proposed pipelines are unnecessary and only add to the growing list of regulatory barriers and compliance costs that prospective pipelines already face. Limiting pipeline development means Canadians will continue to receive less for their resources than they could otherwise. This is not pro-growth.
While federal policies of higher taxes, increased spending and debt undermine growth, they are only part of the story. Several provinces are also implementing economically damaging policies.
Case in point is Ontario’s Green Energy Act, which ensures that Ontarians pay much more than their American counterparts for wind and solar electricity, resulting in higher prices for both consumers and businesses. In fact, a recent survey of business owners found that 38 per cent expect to see their bottom lines shrink due to rising electricity prices, resulting in delays or cancellation of investment in the province.
Moreover, the Ontario government in recent years has pursued many of the same growth-inhibiting policies as its federal counterparts, including higher taxes, persistent deficits and increasing debt.
Further examples can be found out west in Alberta. In a little over a year, and at a time when the energy sector has been hit hard by depressed commodity prices, Albertans have faced a litany of policy choices by their provincial government that stand to hinder investment and growth. That includes mushrooming deficits; major personal and corporate income tax rate hikes; minimum wage increases; a new carbon tax; a new costly emissions cap on oilsands production; and much more.
Bottom line: in any discussion of slow growth, the effect of poor policy choices shouldn’t be overlooked.
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