Federal budget must face up to a lost decade for Canadian prosperity

The upcoming federal budget should acknowledge that a key metric of Canadian prosperity has retreated to its level of almost a decade ago. Last week Statistics Canada released the December quarter 2023 (2023Q4) figures for gross domestic product (GDP). GDP is the total annual income generated by households and businesses in Canada. GDP per head of population (“GDP per capita”) is a key metric of a country’s living standards: it’s the economic pie we share. Of course, income doesn’t measure everything in life, but it sure matters when paying trying to feed our families and pay the bills. And right now, the economic pie is shrinking.

Canada’s GDP per capita has retreated to its 2014 level

Canadian GDP per capita was $58,111 in 2023Q4 (Figure 1). That’s a whopping $2,066 (3.4%) per person lower than in 2022Q2. GDP per capita has fallen in five of the past six quarters. In fact, this important metric has retreated to where it stood in 2014Q4 when it was $58,162. This means prosperity has been stagnant for almost a decade.

Canada’s performance is also poor compared to other advanced countries (see Williams, 2023). In the five years prior to the pandemic (2014-19), Canada’s GDP per capita grew by only 0.5% per annum, the 4th lowest among the 38 OECD member countries. Since the pandemic, Canada’s recovery has been the 5th weakest among OECD countries in per capita GDP terms.

Figure 1

Expanding government is not a sustainable path to prosperity

Figure 2 shows selected expenditure components of GDP per capita. Total GDP per capita is no higher than in 2014Q4. Notably, in the right hand panel, the only part of the economy that is expanding is the public sector (i.e., all levels of government). General government consumption per capita is 9% higher than in 2014; general government capital investment per capita is 6% higher. It is not sustainable to rely on an expanding public sector to increase prosperity, as noted in Williams (2024) following the big-spending B.C. 2024 Budget.

In contrast, in the left hand panel of Figure 2, Canada’s private sector is stagnant or in retreat. Household consumption per capita has been falling since mid-2022 and is now only 3% above its 2014 level. Despite historically advantageous international trade prices, exports volumes per capita are no higher than in 2014. Worse, business non-residential investment per capita is a staggering 25% below its 2014 level.

Residential structures investment has been volatile in response to the precipitous swings in monetary policy during and after the pandemic. In 2021, residential structures investment soared to 24% above its 2014 level due to near-zero policy interest rates and quantitative easing which led to negative real mortgage interest rates. Subsequently, the economy was gripped by surging inflation and the Bank of Canada had to belatedly and steeply hike policy interest rates. Residential structures investment per capita has consequently dropped to 13% below its 2014 level.

Figure 2

Conclusion

Young people entering the workforce today are facing the prospect of 40 years of near-stagnant growth in average real per capita incomes. The OECD projects Canada will be the worst performing economy out of 38 advanced countries over 2020-30 and 2030-60, with the lowest growth in real GDP per capita (Williams, 2021; Williams and Finlayson, 2022).

The OECD forecasts Canada will achieve growth in real GDP per capita of just 0.7% per annum over 2020-30. The latest data to 2023 - detailed in Figures 1 and 2 above and showing GDP per capita in outright decline - indicate Canada is not even on track to deliver that dismal outcome.

Thus far, the federal government’s strategy has been to sweep Canada’s dreadful income per capita performance under the carpet. The Trudeau government was so alarmed by Chart 28 of the 2022 Federal Budget (pages 25-26) – showing Canada dead last in the OECD for growth in real GDP per capita over 2020-60 – that it took bold and decisive action: it scrubbed any mention of the issue from its 2023 Federal Budget. This omission was not lost on columnist Andrew Coyne in the Globe and Mail. The 2023 Federal Budget contained 149 mentions of GDP – but not a single mention of GDP per capita.

With the 2024 budget due on April 16, we encourage the federal government to face up to the fundamental reality that for the average Canadian their slice of economic pie is shrinking. Real GDP per capita – a key metric of any country’s prosperity – is no higher than in 2014, almost a decade ago. The private sector is in retreat and the economy is firing on only one cylinder, government spending, which is not a sustainable path to prosperity. Only once these problems are acknowledged can they start to be addressed through tax, regulatory and structural reforms to revive and invigorate Canada’s private sector economy.