Will the Upcoming Federal Budget Unlock Productivity Gains?

Well, it’s official. The federal government will publish its 2024 budget on April 16. And given how much notice we have, the budget’s contents will no doubt be leaked in dribs and drabs over the coming weeks. As such, we thought it a good opportunity to take stock of the state of the Canadian economy and where it may go from here.

Just over a week ago, Statistics Canada released real GDP for the fourth quarter of 2023. As we pointed out External link., while the headline came in hotter than expected, the details left us feeling cold. Even more concerning was the weakness in real GDP per capita, which fell for the third consecutive quarter to 2.5% below its recent Q3 2022 peak (graph 1). A persistent drop in this economic indicator typically only takes place during recessions. Much of this weakness can be chalked up to surging population growth, which shows no sign of slowing down.

The outlook for more modest wage gains is also a reflection of Canada’s lacklustre productivity growth. Data released this week showed a minuscule advance in output per hour worked in the final quarter of 2023, but the trend is not the country’s friend (graph 2). While productivity may have stopped its five-quarter slide in Q4, it remains below its pre-COVID peak. And the end-of-year uptick may only be a brief reprieve. Contrast this with the US, which has maintained much of its COVID-era productivity gains and has seen growth pick up External link. over the past year.

The big question for policymakers going into the 2024 federal budget should be: how do we emulate American productivity gains to raise living standards in the Great White North? Some have attributed our productivity penury entirely to immigration, but our problems long precede the recent spike in newcomers to Canada. Our research External link. shows that productivity growth has been in the dumps since 2014, when oil prices took a dive and capital investment External link. in the energy sector slowed to a crawl. No sectors have stepped up to take the baton, leaving productivity to stagnate and living standards to languish.

So why aren’t businesses investing? Much like consumers, they are currently facing high interest rates and input costs. And many companies that survived the pandemic emerged highly indebted. The spike in business insolvencies in January 2024—the same month as the Canada Emergency Business Account loan repayment deadline External link.—is a clear illustration of these struggles (graph 3). Insufficient domestic demand is also increasingly cited as limiting sales and production growth. And the outlook remains uncertain, with most consumers telling the Bank of Canada they expect a recession in the next 12 months.

Many of these same survey respondents are also of the view that inflation is being primarily driven by high government spending. This leaves the federal government in a tough spot in the run-up to Budget 2024. It doesn’t want to make the Bank of Canada’s job harder by opening the taps to even more deficit-financed spending, particularly with inflation slowing External link. and rate cuts External link. on the horizon. At the same time, the federal government is being called upon to address the affordability crisis, increase military spending, expand its nascent pharmacare program … the list goes on. While many of these initiatives may be well-intended, they are likely to do little in the near term to spur renewed business investment and innovation. As such, the federal government would be wise to look south of the border External link. or further afield External link. for inspiration. Otherwise, Budget 2024 risks missing a crucial opportunity to boost Canadian productivity, economic growth and living standards.