Canada’s Domestic Policy: What We Must Do Now to Win

There’s no point candy-coating it: Canada is falling behind.

The numbers don’t lie. Just ten years ago, Canada’s GDP per capita was on par with that of the United States. Fast forward to today, and the American GDP per capita is an astonishing 39% higher than Canada’s. Business investment remains anemic and shows no signs of picking up. 

There’s no quick fix. Canada’s predicament today is a consequence of years of misguided policies implemented by successive governments, often layered on top of each other and working at cross purposes. To start to unwind them will be a massive undertaking.

Redefining the Government’s Role to Improve Canada’s Domestic Policy

Start with the size of Canada’s Leviathan state. With notable exceptions, such as low military spending, Canada’s public sector is bloated and needs to be pared back, not least because it is starving the private sector of much-needed labour.

1. Government should be a referee, not a player

Recommitting the government’s role to be a referee – and not a player – in the economic game is an essential first step. This need not necessarily mean an extreme laissez-faire approach, but merely accepting the principle that government itself does not create wealth. Accordingly, chopping the array of federal subsidy programs would help end harmful distortions that prop up failing enterprises and inhibit the emergence of new ones.

2. Canada needs a simplified tax code

Simplifying the tax code would also help reduce economic distortions. On this front, a long-term effort is needed, given that short-term piecemeal efforts, including a disastrous suite of small business tax proposals, left the government badly bruised. Instead, a comprehensive review spanning several years might be more appropriate, along the lines of the 1966 Carter report. 

3. Combat rising trade protectionism

The government must also guard against the rising tide of trade protectionism, ensuring that Canada remains committed to trading with partners who respect the rule of law. Knocking down barriers to entry in a range of sectors – including airlines and telecommunications – would also bring the benefits of greater competition in the form of better service and lower prices.

“Addressing Canada’s housing crisis may now be the country’s single most pressing public policy challenge.”

In addition to foreign barriers, internal trade barriers also remain significant, and there are clear benefits to lowering them.

Addressing Canada’s housing crisis may now be the country’s single most pressing public policy challenge, and while the federal government is not solely responsible, it needs to examine ways in which the federal spending power can be deployed to boost the housing supply. This is particularly urgent given Canada’s high level of immigration – if this crisis is not addressed in the short term, it could lead to a major backlash on an issue that has, until recently, enjoyed widespread political consensus. 

Embracing Canada’s Resource Advantage

But perhaps the biggest challenge of all is finding a way to address our productivity problem – which is now longer merely slow but actually declining.

The most obvious solution? Unleash our resource and energy potential. With just 40 million people in the world’s second-largest country by area, we have almost inconceivable levels of natural capital, with world-class resources of oil, natural gas, uranium, hydroelectricity, and many critical minerals – in addition to vast amounts of arable land and forests.

Unfortunately, much of the political class in Canada has determined that our best economic path forward is to transition away from natural resource development. The income gap with the United States is invoked above, but when it comes to countries with similar resource endowments, Australia is perhaps the most relevant comparison. It has become the world’s fourth largest miner (compared to 8^th for Canada) and 2^nd largest exporter of LNG (where Canada still does not rank). Despite the greater distance to developed country markets and a lack of the world’s top commodity – oil – Australia has successfully leveraged their resource endowment for economic gain. While Canada had a slightly higher GDP per capita than Australia in 2008, today, Australians are far richer than we are: USD $68,701 per capita versus Canada’s $57,008 per capita – an over 20% gain in fifteen years.  

“The most productive sectors in Canada’s economy are in resource development – and it isn’t even close.”

Notably, the most productive sectors in Canada’s economy are in resource development – and it isn’t even close. While Canada’s hourly labour productivity in 2022 averaged $61.10, for mining and quarrying it was $205. Conventional oil and gas extraction had a labour productivity per hour of $583, while unconventional (i.e. oil sands) rang in at a whopping $998 per hour. Pipeline transportation and oil refining are both over $600, and utilities and natural gas distribution are both over $200. Crop production makes a solid showing at $102 per hour. 

By comparison, the Ottawa favourite of auto manufacturing is worth $60.90 per hour to the Canadian economy, with electronics manufacturing producing $66.30 per hour.

How do we start to embrace our resource opportunity, and the potential it provides to the Canadian economy and our collective living standards? The first thing is to change our mindset about resources. As Canadians have urbanized, and as our economy has shifted to be more service and knowledge sector-intensive, it has become entrenched in mainstream thought that developing our natural resources is a 20th-century economic strategy. The latest commodities downcycle, which hit in 2014, further exacerbated the idea that the resource sector was yesterday’s economy. 

“Commodities move in cycles, and as we move into the next upswing phase, we will be harshly reminded that we need ever more raw materials to meet the demands of billions of people around the world.”

But commodities move in cycles, and as we move into the next upswing phase, we will be harshly reminded that we need ever more raw materials to meet the demands of billions of people around the world striving for a higher standard of living, not to mention the terribly high proportion of the human population just looking to move out of extreme poverty.  

The opportunities for Canada in the resource sector are not just economic. Becoming more globally significant in the export of agricultural products, critical minerals, LNG, oil, uranium and nuclear technology will also enhance our global influence and bolster our foreign policy. If you believe Canada’s values of tolerance, freedom, and fairness are worth promoting, then ensuring our allies and unaligned nations can access products affordably and reliably from a democracy like ours, instead of depending on authoritarian nations, is a great way to advance them.   

Providing sufficient supplies of commodities to global markets instead of artificially reducing supply in the name of environmental conservation will also go a long way to promoting the first three UN Sustainable Development Goals of ending poverty, eliminating hunger, and ensuring health and well-being for all. As the war in Ukraine has shown vividly, cutting off supply in the delicate global commodities balance inevitably results in price spikes and shortages for the poorest among us. The best Canada can do to alleviate poverty and hunger is to provide affordable food and goods, and that means producing them as efficiently as possible.

Changing Canada’s Domestic Policy and Increasing Ambition

Unleashing Canada’s full potential as an energy and resource provider will require policy as well as mindset changes. The most urgent is regulatory reform. We have spent a decade enforcing progressively more burdensome requirements on proponents of major projects. The Canadian state has taken up the philosophy of seeing resource development and infrastructure projects as capitalist endeavours that Canadians need protection from, rather than as public goods that our society depends upon. The 2019 Impact Assessment Act (previously C-69, the no more pipelines bill) is the ultimate manifestation of this attitude. 

These policies, and the public opinion that has enabled them, have resulted in such absurdities as the cost overrun of the Trans Mountain Expansion pipeline, or TMX. It ballooned from what was estimated to be $5.3 billion in 2013, to the eye-popping $30.9 billion price tag it has today. As TMX is now owned by the Crown, this is an explicit cost to the taxpayer. But it’s also a huge suck of labour productivity and a red flag to foreign investors who might otherwise have considered building big in Canada. 

“We will not have an energy transition, nor a battery supply chain, without dramatically speeding up the process to build mines in Canada.”

TMX is the most high-profile example, but it is far from the only one, and it’s not just oil and gas that has a problem. According to S&P Global, the average time to build a mine in Canada has extended to 17.9 years, longer than the global average of 15.7 years, and far longer than our peers with similar political systems and Indigenous populations: USA (13 years) and Australia (14.5 years). We will not have an energy transition, nor a battery supply chain, without dramatically speeding up the process to build mines in Canada.   

The good news is that our problems are self-made, and therefore within our own power to fix. We have the ability to dramatically increase our productivity by allowing the private sector to build: housing, infrastructure, resource projects, and more. We don’t need subsidies to make Canada attractive to investment, just business-friendly policies. 

Many countries wish they had Canada’s problems. We are blessed with every advantage in this country and only lack ambition. But that is a renewable resource – Canada can get it back.