The Canada-U.S. Free Trade Agreement of 1988 and the North American Free Trade Agreement that followed. The deep recession of 1991-'92. The subsequent decline in value of the Canadian dollar to near-record lows. The federal fiscal crisis of the mid-1990s, which was brought on by nearly three decades of annual budgetary deficits.
To this list, you would also add the economic expansion of the past 14 years. Canada's gross domestic product (GDP) has grown annually. Unemployment has fallen to 30-year lows. The Canadian dollar has risen from the low 60s to the high 80-cent range against the U.S. Inflation has fallen and so have interest rates. Federal deficits have been turned into surpluses and Ottawa has been paying down the national debt.
A casual observer might conclude that Canada is humming along nicely from an economic standpoint and that we have nothing to worry about.
But that would be a mistake, according to Jason Clemens, director of fiscal studies at the Vancouver-based Fraser Institute and co-author of the recently released study Productivity, Prosperity and Business Taxes. Clemens contends, and many economists agree with him, that Canada's productivity growth has been so sluggish over the past 20 years that our standard of living is at risk, and so are many of the government services we now take for granted.
"If you talk to economists and business people who follow these things, productivity growth is the No. 1 issue facing the Canadian economy," he says, "but getting that issue onto the kitchen table is a difficult proposition."
For one thing, it is not a simple, easy-to-grasp measurement such as rates of inflation or unemployment. Furthermore, Canadian productivity has been increasing over the past two decades, but not nearly as fast as it has in the United States or in many other leading industrialized nations.
The productivity of the workforce is determined by dividing GDP by the total number of hours that employed and self-employed individuals work in a year.
By this measure, Canadian workers produced $36.23 in goods and services per hour in 1985, which increased to $46.01 in 2004.
In the past 10 years, our productivity has increased, on average, by 1.5 per cent a year, compared with 2.2 per cent in the United States and 4.7 per cent in Ireland, which ranked first out of 24 industrialized countries. Canada, by the way, ranked 18th, behind Portugal but ahead of Belgium.
The net effect is that personal incomes in Canada have fallen sharply against the incomes of Americans, although in most cases that is not apparent to the average person. "It only shows up if you're living in a closely integrated border town," says Clemens. "If you live in Windsor, Ont., you can readily observe someone with similar education and employment who enjoys a higher standard of living and more opportunity. If you live in Winnipeg, the differences don't show up."
This country will only keep pace with the U.S. and other leading industrialized nations if the federal and provincial governments can be persuaded to ease the tax burden, primarily on businesses.
"Canada should make its business taxes more competitive," Clemens writes in his report. "We propose an ambitious plan to reduce corporate income tax rates significantly and to eliminate Canada's most damaging tax - the corporate capital tax - in all jurisdictions."
Clemens proposes combined federal-provincial tax reductions of nearly $60 billion over five years, an idea that New Democrats and their fellow travellers would surely lambaste if it were ever taken up in the capitals of the nation. But Clemens argues that tax cuts of this magnitude could easily be attained if governments would limit increases in spending to population growth plus the rate of inflation.
That seems like a reasonable proposition, and maybe even a necessary brake on the runaway federal budgets of recent years when Paul Martin allowed expenditures to rise nine per cent in 2004 and 15 per cent in 2005.
Clemens concludes that a more competitive tax system would create a virtuous circle of higher productivity, which would make Canadian companies more profitable and competitive. Canada would become more attractive to investors. Businesses would put money into new equipment, machinery and technology, which would lead to yet more gains in productivity and, ultimately, higher government revenue.
The alternative is the status quo. Governments continue to consume too much of the wealth of the nation. Businesses are reluctant to invest in new plants and equipment. Workers become less productive. Incomes stagnate and public services deteriorate.
(D'Arcy Jenish can be reached at jenish@businessedge.ca)
