Government policies should encourage—not stifle—economic growth

With Canada’s economy slowing, the U.S. economy in technical recession, high inflation and poor long-term prospects for economic growth, Ottawa and the provinces should have a clearer and more purposeful focus on policies that encourage economic growth. Unfortunately, in case after case, government policies remain stuck in redistributing existing income rather than promoting income growth and virtue-signaling rather than economic pragmatism.

Recessions are, by definition, periods when the production of goods and services, and the income associated with production, declines. It’s increasingly clear that the risks of a recession in Canada, like in most western countries, is increasing. Government policies that discourage economic growth increase the risk of prolonging recession.

Alarm bells about Canada’s long-term economic growth prospects were ringing well before thoughts of recession. For instance, as noted in the 2022 federal budget (chart 28), the OECD forecasts Canada having the weakest prospects for increases in per-person GDP (inflation-adjusted) between 2020 and 2060 among 17 countries. Meanwhile, Canada’s central bank is increasing interest rates and reducing liquidity to gain control of inflation and return the economy to relative price stability.

In light of these challenges, Ottawa and the provinces should focus on improving economic growth—that is, increasing the economy’s capacity to produce goods and services. This will ease inflationary pressures as inflation is always about too many dollars chasing too few goods and services.

Creating a more predictable business climate is critical to encouraging investment, which in turn underlies future economic growth. To this end, Ottawa and the provinces should move more aggressively and purposefully to balance budgets based on spending reductions and fiscal restraint.

Governments can also encourage growth by reducing business taxes and regulations. Business tax reductions will improve Canada’s attractiveness for business investment, a badly needed improvement prior to COVID and the current economic malaise.

Reducing red tape is also important as it reduces the cost of doing business and allows more time for entrepreneurs, small businessowners and managers to focus on innovation, product development, customer service and the like. Ottawa and the provinces should also reduce marginal personal income tax rates to encourage entrepreneurship, innovation, risk-taking and labour market participation, which would all improve prospects for economic growth.

And while it’s not in vogue in Ottawa or many other capitals (including Washington), a renaissance in Canada’s oil and gas industry would improve economic growth—and reduce global greenhouse gas emissions. Substituting expanded oil and gas production in Canada (and perhaps the United States) for coal-fired power in countries such as China and India would produce a net decrease in global emissions.

These are all win-win, pragmatic, proven solutions to the economic challenges we face today. Better policies focused on economic growth and informed by pragmatic solutions that worked in the past are urgently needed now.