Amid Chaotic Headlines, Canada’s Steady Economic Decline Continues

InsightSpencerFernando

Short-term attention is understandably focused on the plethora of controversies engulfing the federal government and the country. Yet, the biggest story in Canada is the ongoing decline in our standard of living.

The long-term health of a nation is – by definition – dependent upon long-term trends. However, given that the media makes money on short-term controversy, emotion, and scandal, most of the focus tends to go towards whatever generates the biggest headlines, leaving deeper trends to recede into the background.

Thus, the ‘biggest story’ often isn’t really the biggest story.

In the past few weeks, Canada’s attention has been focused on a disastrous invite to Parliament – which cost the job of the Speaker – and the ongoing deterioration in our relations with India amid accusations by the federal government that India may have participated in the killing of a Canadian on Canadian soil, and counteraccusations by India that Canada is a safe haven for terrorists.

While those stories deserve attention, the biggest story in the country – and the story with by far the largest impact on our day-to-day lives, is the steady decline in our standard of living.

A steady economy?

Usually, a ‘steady’ economy is seen as a good thing. Economic chaos upends people’s lives, makes it more difficult to plan for the future, and worsens many social ills.

However, a steady economy is not inherently positive.

Booming economies are often unstable, as technological innovation and economic competition brings down companies and industries even as others rise in their place. While that kind of chaos is disruptive, it is positive in the long-run, because strong economic growth tends to benefit the vast majority of people given enough time.

Steadiness and stability can also be negative. Things can steadily get worse. And that’s the situation Canada finds itself in. While our economy has not been subject to any kind of significant shift or collapse as of late, our standard of living is steadily eroding.

Lower revenues, higher spending, increased debt expenses

According to Desjardins Economic Studies, federal revenue is lower than the government projected, spending is higher than the government projected, and debt expenses are also higher than the government projected:

“This souring of the economic outlook doesn’t bode well for the Government of Canada. Surging revenues on higher growth and inflation coming out of the pandemic allowed it keep program spending high despite rising debt service costs.

But the momentum in the tax take is clearly fading. Looking at the federal government’s July 2023 Fiscal Monitor, two things stand out. First, revenues are coming in at less than half the pace that was projected in Budget 2023, mostly due to lower-than‑expected corporate income and sales taxes (graph 1). Second, and more importantly, program expenses are growing at more than double the pace projected in the budget, largely because of higher operating expenses and other transfer payments. By and large, these are spending measures that directly relate to the day-to-day workings of the federal government. At the same time, public debt charges are coming in higher than expected too. Taken together, federal finances are tracking a worse annual outcome than at this time last year.”

As economic conditions worsen, the trend of lower per capita GDP continues:

Canada is already in a per capita GDP recession

In the past 12 months, Canada’s population increase has been truly staggering:

“Canada’s population grew by the highest rate in a single year since 1957 as the number of temporary workers, foreign students and immigrants surged.

The country’s population rose 2.9 per cent in the 12-month period ending July 1, one of the world’s fastest growth rates, bringing the number of residents to 40.1 million. The jump was driven by the largest recorded increase in temporary residents in data going back to 1971.”

Unfortunately, Canada’s GDP growth is not even close to keeping pace:

“Looking ahead, Statistics Canada’s flash estimate for August is pointing to a 0.1% m/m advance. Assuming it is correct, and that September real GDP is flat, Q3 2023 would see a 0.2% annualized increase in real GDP by industry. We’re now tracking annualized growth in real GDP by expenditure of around 0% in the third quarter. This is below the Bank of Canada’s forecast of 1.5% for Q3 real GDP growth published in its July Monetary Policy Report.”

The essential thing for Canadians to understand is that so long as GDP growth isn’t keeping up with population growth, we are becoming poorer in real terms.

Month after month, Canadians have less purchasing power.

To get a sense of how serious this is, consider that even if Canada technically avoids a recession and ‘achieves’ flat growth for the year, that would be the equivalent of a nearly 3% drop in GDP with population growth taken out of the equation.

If Canada’s GDP were to decline 3% in a year, alarm bells would be going off all over the country, and the abject failure of the federal government’s economic policies would be clear for all to see. Only population growth obscures the truly dire state of our economy.

This is made even worse by the fact that – as noted above – government spending remains quite elevated and is even higher than the already-high projections. The government is spending more and more to achieve less and less.

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Bitter divides

People tend to be motivated more by avoiding loss than pursuing gain.

This is referred to as “loss aversion“:

“Loss aversion is a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing.1 Loss aversion refers to an individual’s tendency to prefer avoiding losses to acquiring equivalent gains. Simply put, it’s better not to lose $20, than to find $20.”

In part, this explains why inflation is a more ‘palatable’ way for people to become poorer, since the loss is not immediately evident. Most people would react far more negatively to having their pay cut 10% while prices stay constant than they would to having their pay remain constant while prices rise 10%.

In both cases, the change in purchasing power would be the same, yet the up front pay cut would feel much worse.

This is also why companies tend to fire workers or cut hours than reduce hourly pay, as employee loyalty would quickly collapse if across-the-board pay cuts were instituted.

It follows then that people react quite badly to feeling an acute sense of material loss.

This will bring a rise in ‘zero-sum-thinking,’ with people feeling that a gain for anyone else is a loss for them. In turn, this makes it far more difficult for a country to muster up support for sound long-term decisions, since everyone is focused on just making it through their short-term struggles.

And that is exactly what Canadians are feeling today. As long as our per capita GDP continues to decline, we can expect Canadian public discourse to become more and more divisive. People are less willing to overlook differences and tolerate different perspectives when they feel they are falling behind, and this is further exacerbated by a federal government that shows little interest in acknowledging their policy failures.

For example, the Liberals (with the exception of one Liberal MP), NDP, and Bloc all voted against a Conservative motion to repeal the carbon tax, indicating there will be no substantive change in federal policy:

While repealing the carbon tax would not magically fix all of Canada’s economic issues, it would at least be a step in the right direction.

In order to simultaneously generate economic growth and increase the purchasing power of Canadians, the federal government needs to rein in spending and incentivize investment.

Since Canada is increasingly uncompetitive when compared to many states in the U.S. that don’t have a carbon tax – in addition to the other benefits of the much wealthier, freer, and more competitive U.S. market, repealing the carbon tax would help to make Canada a more investment friendly place. It would also put more money back in the pockets of Canadians.

Getting control of spending – even just holding spending growth steady relative to our growing population would be a good start – would reduce inflationary pressures, easing the ongoing decline of our purchasing power.

Instead, the government continues to increase spending and continues to raise the carbon tax. And their attempt to ‘address’ inflation and the decline in the purchasing power of Canadians is to spend even more money, which only serves to further worsen the problem.

Canada’s biggest underlying problem – the slow and steady weakening of our economy – will not be solved until our country decisively shifts away from a centralized ‘government-knows-best’ attitude and puts more money and power back in the hands of Canadians. Given their intransigence, that’s something the current Liberal government seems absolutely unwilling to do, meaning a fundamental change in our economic prospects will undoubtedly require a new government.

Spencer Fernando

Photo – YouTube

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I am funded by voluntary contributions from Canadians. If you would like to support my writing, I encourage you to chip in what you can.

You can donate using PayPal at the button below. I encourage you to select “make this a monthly donation” if you would like to contribute on an ongoing basis.