Cut taxes, let markets fix productivity crisis

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Canada’s decision to provide billions of dollars’ worth of incentives to companies building battery plants could bolster the manufacturing sector, but may not be the ideal move to boost the country’s overall productivity levels that have been on the decline, says a new report by the Conference Board of Canada.

Instead of picking winners, a better approach would be to cut taxes and allow the market to fight it out and find the right solutions for Canada’s current economic troubles, Pedro Antunes, chief economist at the board, said.

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“To be very specifically making deals with three or four companies on battery production, I think is just risky,” he said. “What if it turns out that the solution to our road pollution is different? Who knows what technology comes around the corner?”

The battery plant investments will stimulate economic activity, but it could be a costly approach in the long run since other companies will want similar handouts to invest in Canada, Antunes said.

“It’s a dangerous road for governments to embark on to subsidize and compete to attract dollars,” he said. “It becomes more costly for taxpayers and there’s less room for governments to use those funds for other purposes.”

Canada recently announced deals with Stellantis NV, Volkswagen AG, Northvolt AB and Honda Motor Co. Ltd. to build battery plants. Many expect the agreements to boost the country’s labour productivity levels, which have fallen in 12 of the past 15 quarters, according to government data.

The dire situation compelled Bank of Canada senior deputy governor Carolyn Rogers to describe the situation the country finds itself in as an emergency during a speech in March. Central bank governor Tiff Macklem added his voice to the growing concerns by saying that a failure to boost productivity would make it difficult for the economy to move forward.

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Productivity is a measure of gross domestic product (GDP) per hour worked. GDP measures the value of goods and services produced by a country during a specific time frame.

Antunes, however, said describing Canada’s poor productivity levels as an emergency is misplaced since it hints that there may be a quick fix.

“Restoring productivity growth may require addressing short-term industry disruptions with a more important focus on long-standing structural issues,” he said.

The Conference Board of Canada report, published on Wednesday, analyzes both the historical reasons and the more recent developments that have affected the country’s productivity levels.

Productivity grew in the 1960s when the economy was mechanizing, but has slowed down in recent years in developed economies in general, Antunes said. The concern, though, is that Canada’s productivity growth is “very weak” compared to the United States.

Weakening business investment has reduced productivity growth by 0.5 percentage points per year over the past decade, the report said. If that slowdown had not occurred, nominal GDP would be roughly $130 billion (4.2 per cent) higher than it is today.

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Sectors where productivity declined due to labour intensity and challenges in automation include accommodation and food, administrative, recreational and other private services. Poor productivity in large sectors such as construction and transportation was also a concern.

The report said some of the recent productivity declines may be due to a mistiming of the rapid hiring that occurred in the last two years.

“Through 2022 and 2023, the number of temporary foreign workers arriving in Canada skyrocketed — and employers continued to fill vacancies or hold on to their workforce, even as the Bank of Canada was quickly raising interest rates to put the brakes on the economy,” the report said. “Employment grew by 480,000 (2.4 per cent) in 2023, while GDP growth flattened, resulting in the drastic decline in productivity facing Canada.”

Overall, Antunes said it was too early to analyze how recent events have affected the country’s productivity levels since the economy had some “major shakeups” in 2023 that need to settle a bit more.

• Email: nkarim@postmedia.com

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