Liberals’ big promises to middle class will take time

TORONTO—The big Liberal promise to Canadians is that a Trudeau government will deliver rising living standards for the middle class. In last year’s election, the Liberals portrayed themselves as the champions to save the middle class. And in all their government messaging since winning the election there’s scarcely a government speech or press release that fails to claim that whatever they are doing is for the middle class. This is a key branding exercise to seize the wide centre of the political spectrum. But by the time of the next federal election—by 2020—will they be able to show that the middle class is really much better off? As Finance Minister Bill Morneau acknowledged in his first budget, in March, “what the Canadian middle class need most is strong economic growth.” But we are not getting that—instead we have growth forecasts that are constantly being lowered. The big question is whether we are in a new normal where improvements in per capita incomes are much lower than they were in the past? If they are, then the Trudeau government may find that it cannot deliver its promise for the middle class without radical new policies. In an interesting paper published last month—Reassessing Long-Term U.S. Growth: How Low?— John Fernald of the Federal Reserve Bank of San Francisco argued that the U.S. faced a “new normal” of much lower per capita economic growth. While the U.S. and Canadian economies are not identical, many of the factors affecting future U.S. per capita growth are similar. What we need in Canada is the same kind of analysis—something the researchers at the Bank of Canada could easily do. While the U.S. rule of thumb, based on a long-term average, has been for two per cent annual growth in per capita GDP, Fernald concludes that for roughly the next decade, per capita GDP will average just 0.9 per cent growth annually, which translates into a 1.6 per cent average annual growth rate for the economy overall, compared to a long-run average of 2.75 per cent in the past. “This slow pace implies slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policy-makers it suggests a low ‘speed limit’ for the economy and relatively modest growth in taxes revenues,” he said. It also implies a very low neutral rate of interest, which means business will only invest when interest rates are very low. With per capita growth of two per cent, there is doubling in about 35 years; at 0.9 per cent, it takes more than 70 years to double. There is another consequence that Fernald could have mentioned: It becomes much harder for individuals to earn a satisfactory return on their savings for retirement. There are two big reasons for this slowdown in growth, he says, both relevant for Canada as well. The first is that we are unlikely to replicate the strong growth in educational achievement that occurred in the 20th century, so improvements in labour quality will add less to productivity—the amount of GDP generated by an hour of work—than occurred in the past. The great majority of young Canadians are now getting some form of post-secondary education. The second is that as the population ages and baby boomers retire, hours worked are also likely to grow more slowly than the overall population, so that growth per capita will be lower than growth generated by each hour of work. In the second half of the 20th century, the reverse was true as baby boomers entered the prime working age and women increasingly entered the workforce; growth in GDP per capita was greater than growth in GDP per hour worked. “Raising growth above this modest pace depends primarily on whether the private sector can find new and improved ways of doing business,” he says. The big imponderable is productivity. But here too Fernald finds reasons for caution, contending that after the productivity surges in the 20th century and the information technology-led surge in 1994-2005, we are now in a period of much slower productivity growth. In the second quarter of this year, Canadian labour productivity was just 0.2 per cent higher than a year earlier; for each of the previous quarters, compared to the same quarter a year earlier, the results were all negative. Unless the Trudeau government can find ways to significantly improve Canada’s productivity, it has little hope of really improving the lives of the middle class. There’s another uniquely Canadian problem. We still suffer from denial over the future of oil in our economy, hoping that prices will move up and that pipelines will be built, so that we can return to an economy where we export it at high prices and at growing volumes. But we should be planning for an economy where oil becomes less important and innovation more so. Former Finance minister Michael Wilson, in The Financial Post, put the challenge this way: “The price of oil is our biggest uncertainty, over which we have little influence. We are also a high-cost producer. Pipeline development also adds to this uncertainty. Pressures are building globally in support of a world of reduced reliance on carbon-based fuels. The result of all of these facts is that we are facing the prospect where the price of oil and natural gas will force a permanent change in our economy and balance of payments.” The Liberals are counting heavily on their promised innovation strategy, along with the recommendations from Morneau’s growth council. That is the right direction. Even so, it’s unlikely the middle class in 2020 will be much better off than they are today. New policies take time. In the meantime, slower growth means bigger budget deficits, which over time are an additional brake on growth. As the Liberals are finding, it’s easier being in opposition than in government. David Crane can be reached at crane@interlog.com. news@hilltimes.com The Hill Times

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Liberals’ big promises to middle class will take time

Unless the Trudeau government can find ways to significantly improve Canada’s productivity, it has little hope of really improving the lives of the middle class.

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