Enhancing Canada’s Productivity: Part 1 – Vital Measures for Progress

In my next series of blog posts, I am compelled to address the urgent and critical issue of Canada’s productivity struggles. This topic, which has recently been elevated to the status of an emergency by the Senior Deputy Governor of The Bank of Canada, Carolyn Rogers, has been a cause for concern among economists for some time now. Despite the initial optimism for a post-COVID productivity surge, the reality is stark – Canada’s productivity has remained stagnant for the past seven years. This puts us at a disadvantage compared to our neighbours to the south and raises serious concerns, given the significant population growth Canada has experienced during this period.

Over the course of the past seven years, Canada’s population has surged by nearly five million, a staggering 12% increase to over 40 million people. This population boom, however, has not been accompanied by a proportional rise in productivity. The consequences of Canada’s low productivity rate are dire, leading to stagnant wages and prolonged inflation. Interest rates may have to be raised further to counter inflationary pressures due to low productivity. These challenges are further exacerbated by Canada’s housing crisis, skyrocketing rents, healthcare demands, and ongoing inflation. The need for immediate and concerted action from governments and corporations to address this issue cannot be overstated.

Despite the challenges, Canada harbours immense potential for economic growth and innovation. If we can effectively harness this potential, it can pave the way for our nation’s brighter and more prosperous future. However, many barriers are preventing us from fully realising this potential.

A significant factor contributing to Canada’s productivity lag can be attributed to the dominance of oligopolies across various sectors of our economy. Canadian oligopolies have established a firm grip over their markets, enjoying substantial profit margins that leave little incentive for reinvestment or innovation to enhance efficiency. If the government continues to permit the existence of oligopolies, it must introduce measures to encourage them to invest in societal benefits. Canadian companies are notably trailing behind their global counterparts regarding business investments, infrastructure development, and intellectual property advancements.

Considering the drastic impact on productivity, the government needs to implement measures to dismantle oligopolies’ power. Past efforts like inviting foreign companies to foster competition have often proven futile as these foreign entities struggle to gain a fair market share against the formidable group of players, usually leading to bankruptcy and closure in Canada. The federal government must take more decisive actions to regulate and restrain these oligopolies. Measures should include prohibiting oligopolies from acquiring smaller companies that have gained a market foothold in Canada, mandating the divestment of certain sectors or subsidiaries to break up their monopolistic hold, and implementing stricter antitrust laws to prevent market concentration. These steps will help create a more competitive business environment, fostering innovation and productivity.

Another concerning trend is the declining development of small and mid-sized businesses and entrepreneurship in Canada, which play a crucial role in driving economic productivity and growth. The pandemic and the strict lockdowns dealt severe blows to countless small businesses, and the post-COVID era is seeing a decline in small businesses. Furthermore, many Canadian small business owners are nearing retirement, and many are expected to shutter their doors in the coming years. Many young Canadians and newcomers are hesitant to embark on small business ventures, posing a significant challenge to our society and economy and further depressing productivity rates. Therefore, it is imperative that we foster an environment that encourages entrepreneurship and supports the growth of small businesses.

The creation and growth of small businesses represent one of Canada’s best avenues for wealth generation and economic contribution, especially for young Canadians and newcomers. However, numerous barriers hinder Canadians from initiating and sustaining successful small to mid-sized businesses. The federal and provincial preferential small business income tax rates often lead to significant hikes in business income tax rates for growing businesses, and many rigid and often outdated business regulations in Canada create entry barriers for many small businesses and entrepreneurs.

To remedy this, governments should consider eliminating preferential business income tax rates for small businesses by lowering general business income tax rates at both federal and provincial levels. Additionally, they should consider a substantial increase in the small business income eligibility threshold, allowing firms to claim a larger portion of income at the small business rate. Additionally, the threshold for small business income eligibility should be substantially increased, dictating the amount of income firms can claim at the small business rate. Removing this significant tax obstacle will hopefully enable more Canadians and newcomers to start businesses and allow small to mid-sized Canadian businesses to flourish, expand, and unlock their full potential.

The challenging business environment for Canadians looking to start a business can also be attributed to the lack of investment by major Canadian corporations within Canada. Despite the substantial wealth controlled and gained by Canada’s major banks, many entrepreneurs and small business owners struggle to access capital. Canadian banks extend a below-average number of small-business loans, unlike many other countries. Only 12 percent of business loans are granted to small and medium-sized businesses (as per 2020 OECD data) compared to the OECD average of 44 per cent. The absence of open banking in Canada further complicates matters, particularly for tech or fintech startups that seek to integrate open banking systems. Given the level of wealth our ‘Big Five’ banks control and sit on, they must do more to innovate and contribute positively to our society by supporting more local entrepreneurs and small businesses with loans and investment options.

Canada’s productivity challenges require immediate and comprehensive actions from policymakers, businesses, and entrepreneurs alike. Addressing the dominance of oligopolies, reducing tax burdens for small businesses, and facilitating more accessible access to capital are crucial steps toward revitalising Canada’s productivity landscape. With the right strategies, Canada can unlock its full economic potential and pave the way for a prosperous future.

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