Canadian Competitiveness: A Decade of Achievement
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The Government’s economic strategy since 1994 has been a success. The Canadian economy in 2005 is much stronger than it was in 1994, with Canada having the fastest growth in living standards in the G7 over the last eight years. This has created a solid platform upon which a confident Canada can build.
During the 1980s and early 1990s, growth in Canadian living standards decelerated markedly as a result of slowing productivity and employment growth. In 1994, confronted with the country’s serious economic problems, the Government of Canada set out a bold economic plan to guide its long-term decision making. The first job was to balance the budget. This was the crucial first step of a broader agenda that established conditions under which the private sector could grow and create jobs. Over the past decade, the Government has also introduced a range of reforms to increase the flexibility and adaptability of our economy. Canadians have responded with energy and determination.
As a result, since the deficit was eliminated in 1997, Canada’s job creation and growth records are unmatched in the G7. Eliminating the deficit and reducing our debt burden have allowed the Government to make major reinvestments in Canada’s economic, social and international priorities. This success has occurred despite major structural changes and shocks to the economy. Our experience shows that when Canadians prepare for the future with confidence and a plan, we can build a dynamic economy that serves the greater needs of society.
1. 1994 Agenda: Jobs and Growth
The Government of Canada’s response to the country’s seemingly intractable economic problems was laid out in Agenda: Jobs and Growth—A New Framework for Economic Policy. The document provided a long-term plan with a clear and concentrated focus to bring discipline to the policy-making process and to ensure that the actions of the federal government were consistent and self-reinforcing.
1994 Agenda: Jobs and Growth Policy Objectives
"…the basic objective of public policy is to create the opportunity for every Canadian to achieve personal fulfillment through work and leisure in a free and just society.
"These aspirations can be attained only through a dynamic economy that generates both ample employment opportunities and the financial resources to undertake those public endeavours—including health care, education, cultural development and assistance for the needy, among others—that have made Canada one of the world’s most civil societies.
"There is no conflict between economic policy and the broader social objectives of Canadians."
The priority was to foster a more productive and adaptable economy, since that was the only way to ensure that Canadians would have more jobs and a rising standard of living. Consistent with this priority was the principle that Canadians needed to be prepared to capitalize on new opportunities. The Government of Canada signalled its intention to act in partnership with provinces, business, labour, communities and individual Canadians. There would be an active and smart government, but not a "big government." Understanding its limitations, the Government committed to focus its energies where they were most needed, and to live within its means. In the words of the agenda, "the framework will guide what we will do in the future and what we won’t do."
Applying these principles to the economic challenges of the day, the new framework for economic policy highlighted five policy areas for action, chosen for their ability to create a coherent and mutually reinforcing strategy for improved economic performance. The Government stated that its economic policy actions would further the following policy directions:
- Helping Canadians acquire skills to foster better job opportunities and incomes for individuals.
- Encouraging Canadians to adapt to new opportunities by ensuring that government policies encouraged both individuals and firms to change when the economic environment changed around them.
- Getting government right so that government itself would be a contributor to a more productive economy.
- Providing leadership in the economy in those areas where government was best placed to take the initiative, but always in partnership with the private sector.
- Creating a healthy fiscal and monetary climate by reducing and then eliminating the deficit, with a view to eventually reducing taxes to put in place broad economic conditions for sustained growth and job creation.
Over the past 11 years, this agenda has been implemented and it has worked.
Starting With Macroeconomic Reform
The lynchpin of the economic plan was to strengthen radically Canada’s macroeconomic framework by eliminating government deficits and achieving low, stable and predictable inflation. A key factor behind the spiralling government deficits of the 1980s and early 1990s was persistently unaffordable growth in program spending. By 1991, Canada had the second highest total government debt-to-GDP ratio among G7 countries. With such a high debt burden, international lenders worried that Canada might not be able to meet its payments. Interest rates increased to compensate for this perceived risk, which in turn stifled economic growth.
The elimination of the deficit, achieved mainly by reductions in federal program spending, was an essential component of restoring macroeconomic stability and encouraging faster economic growth. Expenditure reduction initiatives were put in place through the 1995 and 1996 budgets, and federal program spending as a share of the economy declined from almost 17 per cent in 1992–93 to about 12 per cent in 1997–98, the same year that the federal government achieved a fiscal surplus for the first time since 1969–70. This past fiscal year, the federal government posted its eighth consecutive budget surplus, a record unmatched since Confederation.
With deficits eliminated, the Government has made considerable progress in reducing its debt, while continued healthy growth of the economy has further lightened the debt burden. In fact, Canada’s total government debt-to-GDP ratio is now the lowest among G7 countries. As a result, debt interest payments have declined from almost 40 per cent of federal revenues in
1995–96 to about 17 per cent last year. Improved fiscal conditions and stronger economic growth allowed the Government to implement the largest tax cuts in Canadian history in 2000, while beginning to reinvest in the programs that matter most to Canadians.
One of the direct payoffs of eliminating the deficit and reducing the debt has been lower interest rates. As Canada proved it was serious about getting its fiscal house in order and about maintaining low and stable inflation through inflation targets, our international fiscal credibility improved, leading to the restoration of the Government of Canada’s AAA credit rating (the highest in financial markets). International investors no longer demand a risk premium to hold Government of Canada bonds, thereby helping to lower interest rates. Since these rates act as a benchmark for other interest rates in the economy, buying a home or investing in a business has become more affordable for Canadians. Similarly, provinces and municipalities have seen their cost of borrowing decline.
Major Structural Reforms
To complement the stronger macroeconomic framework, important steps were also taken to make the economy more adaptable. The Government reformed the employment insurance system and social assistance programs. Trade barriers were further reduced, particularly in 1994, when the Canada-U.S. Free Trade Agreement was expanded to include the phased elimination of tariffs between Canada, the United States and Mexico, although some important trade irritants remain. More recently all products from the least developed countries became eligible for duty- and quota-free entry into Canada.
Government regulations were also reformed to promote efficiency and competitiveness. More sectors of the economy, such as telecommunications, were opened to competition. High administrative burdens for new businesses, which had been shown to hamper employment growth, were lowered to make it easier for Canadians to create new companies.
Reforms Contributed to the Sharp Rebound in Jobs and Living Standards
The improved macroeconomic framework, complemented by structural reform, created the right conditions for economic growth, job creation and sustained improvements in living standards. Between 1997 and 2004, the Canadian economy created 2.6 million jobs, putting Canada first among G7 countries in terms of employment growth during this period.
Canada’s employment rate—the share of the Canadian population over the age of 15 with a job—has increased dramatically. The decline in the employment rate in the early 1990s contributed to Canada’s poor living standards performance. In 1993 it stood at 57.9 per cent. Since then, however, healthy job growth has led to a strong increase in the employment rate, which reached a record high of 62.7 per cent in 2004.
Strong employment growth helped to reduce Canada’s unemployment rate despite a rate of participation in the labour market that reached record highs by late 2003. In 1993 Canada’s unemployment rate, adjusted to increase comparability with the U.S. rate, was nearly 4 percentage points higher than that of the U.S., but by 2004 the gap was only 1 percentage point.
The rebound in employment growth and the participation rate since the
mid-1990s is especially evident among youth and older workers—the two groups hardest hit by the economic weakness of the early 1990s.
A healthier labour market meant that those who became unemployed did not remain so for as long. With more plentiful jobs, the average amount of time an unemployed worker spent looking for work fell by nearly 10 weeks between 1997 and 2004. Furthermore, about 85 per cent of the 2.6 million new jobs created between 1997 and 2004 were full-time positions.
While this pickup in employment growth was widespread, growth was fastest among high-wage and high-knowledge occupations. Employment in management and professional occupations grew much more quickly than employment in trades and manufacturing, where jobs are generally less lucrative. As well, employment among people with university degrees has grown more than twice as fast as that of people with less education. This suggests that the economy is not only creating more jobs, but also creating better jobs than in the past.
Strongest Growth in Living Standards in the G7
Canadians’ success in creating more and better paid jobs led to a strong rebound in the growth of real GDP per capita. Indeed, over the 1997–2004 period real GDP per capita growth was more than twice that of the period between 1980 and 1996. To put this improvement into context, the living standards of Canadians have increased more in the past 8 years than in the previous 18. Canada has moved from a laggard to a leader in living standards growth among our G7 peers.
Furthermore, all parts of the country have contributed to and benefited from this improvement in living standards. The largest increase in living standards occurred among the Atlantic provinces, further reducing economic disparities between regions of Canada, a trend which has now been observed for over two decades.
Canadians have also witnessed an improvement in their take-home pay. Real disposable income per Canadian—the amount of income available after taxes to and transfers from government—grew three and a half times as fast per year between 1997 and 2004 than it had between 1980 and 1996. Real disposable income per person was $2,700 higher in 2004 than in 1996, an increase of about 15 per cent. This rate of growth, sustained over a lifetime, would be sufficient to quadruple real disposable income.
2. The Flexibility of Our Economy Has Been Central to Job Creation and Prosperity
The long-term economic performance of a country is closely linked to its degree of flexibility and its capacity to adjust to changing economic circumstances. New firms created in expanding sectors drive faster employment and productivity growth as they replace firms with declining demand for their products or services. Through this evolution, a society constantly moves resources to where they can be used most effectively. The Canadian economy has shown considerable dynamism in recent years. For example, during the six-year period between 1994 and 2000, an average of 142,000 new businesses were created each year and about 131,000 closed, resulting in net new business creation of about 11,000 per year.
Workers from contracting firms and sectors of the economy are generally reabsorbed quickly into expanding ones. In fact, more than half of the Canadian jobs available in 2003 did not exist in 1997. In 2004 about 4 million workers, or more than one-quarter of the labour force, changed jobs, a testament to the degree of change constantly occurring in the economy and the adaptability of Canadian workers.
In order to succeed in the 21st century, Canadian output and employment will have to move increasingly to knowledge-intensive and highly skilled sectors. As noted earlier, not only did Canadian employment increase more quickly since 1997 than it did between 1980 and 1996, but also growth was fastest among high-wage and high-knowledge occupations. All major sectors of the economy are increasingly relying on highly skilled workers. Between 1990 and 2004, the share of those employed with post-secondary education increased in every major sector of the economy, including the primary sector where it has increased by close to 15 per cent. Indeed, nearly 50 per cent of those employed in the primary sector now have post-secondary education.
These trends indicate that the Canadian economy is adapting well to economic change. Service industries that have experienced superior employment growth, such as professional and business services, pay higher-than-average wages. As well, the Canadian manufacturing sector is increasingly specializing in the production of high value-added goods. As a result, while the relative share of manufacturing employment has declined, manufacturing’s share of output has remained constant over the past decade and a half, as productivity improved. Faster productivity growth, in turn, drives higher average incomes and greater demand for goods and services. It is this process that has helped fuel the strong growth in Canadian output and employment observed over the past decade, as it should continue to do in decades to come.
Canada ranks well in economic flexibility, not only against European economies where labour and product markets tend to be more rigid, but also against the U.S. For example, Canadian workers who lose their jobs find new ones more rapidly than in other major countries, including the U.S.
Canada’s Economy Has Become More Resilient
The resilience of the Canadian economy has been enhanced by a much-improved macroeconomic environment, higher levels of education and greater business investment. This greater resiliency has enabled our economy to weather shocks while maintaining healthy economic growth for more than 14 years, the second longest economic expansion on record. Despite external shocks such as the Asian financial crisis in 1997–98 and the slowdown in the U.S. economy in 2001, as well as domestic shocks including bovine spongiform encephalopathy (BSE), severe acute respiratory syndrome (SARS) and the Ontario power outage in 2003, output and employment in Canada have continued to expand at a healthy pace. The Organisation for Economic Co-operation and Development (OECD) recently acknowledged Canada’s achievements, stating that "the Canadian economy has delivered solid performance for nearly a decade with increased resilience to economic shocks, demonstrating the benefits of a well designed macroeconomic framework…"1
More recently the appreciation of the Canadian dollar against the U.S. dollar has created challenges for firms with a high degree of exposure to international trade. However, businesses are demonstrating their continued ability to compete in the international marketplace. Looking ahead, recent increases in energy prices as well as the possibility of a further appreciation of the Canadian dollar driven by large and persistent U.S. current account imbalances could pose additional challenges for the Canadian economy. However, a healthy fiscal position and a much-improved macroeconomic framework have established a strong platform from which Canadians can meet these challenges.
A trade-dependant economy such as Canada’s also faces potential disruption because of crime, terrorism or natural disasters. The Government will continue to make the legislative changes and investments required to strengthen the resilience of the economy by enhancing Canada’s capacity with respect to security, emergency preparedness and readiness to cope with pandemic infuenza.
Environmental Industry as a Growing Sector
The Canadian environmental industry, including services, manufacturing and construction, is an example of a sector that is growing rapidly in response to changing conditions. It has benefited from an increased demand for pollution control technologies and processes as firms increasingly strive for higher standards of environmental performance in light of concerns over climate change and air, water and soil pollution, as well as the ongoing need for energy efficiency.
Sales derived from environment-related activities grew from over $11 billion in 1997 to almost $16 billion in 2002. Over this same period the number of business establishments engaged, in whole or in part, in environment-related activities grew from 6,000 to 8,000. In 2002 Canadian environmental businesses earned $364 million in revenues from the sales of advanced technologies to reduce greenhouse gas emissions, such as fuel cells, alternative fuel technologies, and solar and wind energy systems.
The environment and climate change are key priorities for Canadians, industry and the Government. Accordingly, the environmental industry can be expected to continue its impressive growth by making other industries more efficient and productive, while also helping them meet environmental standards and regulations.
3. As a Result of This Progress, Our Common Future Is More Secure
Only through integrated and complementary economic and social progress will we achieve our goal of strong and sustainable living standards growth along with a better quality of life. The improvement in Canada’s economic performance, especially since 1997, has allowed the Government to make progress on tax competitiveness and fairness and to reinvest in a range of areas that contribute to our quality of life—health care, the environment, families and children, communities and security. By maintaining clear priorities through discipline and focus, much has been accomplished. The following highlights a number of the Government’s initiatives in key policy areas.
|Improved Economic Performance Has Allowed the Government to Make Key Reinvestments in Important Priorities|
The federal government, in partnership with provincial and territorial governments, is committed to strengthening Canada’s publicly funded system of health care through:
Communities and Culture
The Government has made a number of important strategic investments to strengthen safe communities and local economies and to encourage cultural diversity, including:
The Government has made significant investments in support of Canadian families and their children including:
The Government is making major investments to preserve our natural environment and to address climate change, including:
Canada and the World
The Government has introduced initiatives to ensure that Canada continues to meet its global responsibilities and to enhance personal and economic security through: