Canada Needs a Pro-Growth Economic Strategy More Than Ever

Ahead of the Canadian federal election on April 28, there are two critically important economic facts about Canada to acknowledge. One, Canada has stopped growing over the past decade, with per capita growth rates at the bottom of all OECD countries and per capita GDP levels almost unchanged since the mid-2010s. Two, Canadians, even those near the median income, are overtaxed.

Conservative Party of Canada’s candidate for prime minister, Pierre Poilievre, has led the way as a policy entrepreneur in introducing several pro-growth policy ideas over the past several years: reducing interprovincial trade barriers, preventing the capital gains tax hike, ending the carbon tax, and growing the housing supply. All campaign policy ideas that Liberal Leader and Prime Minister Mark Carney has since surprisingly adopted in recent weeks in a flash attempt to appear as a moderate (one small difference is that Mark Carney has only eliminated the consumer carbon tax, while Poilievre has committed to also killing the carbon tax on businesses). Many of these policies would do much to help Canadians at or below the median income

But where Liberals can't seem to budge is on tax policy, a classic economic policy issue between conservatives and liberals in Canada. Canadians have become overtaxed during the Trudeau years. The top marginal federal rate begins at a much lower income level than in most countries around the advanced economy world. When combined with provincial tax rates, many Canadians pay over 50 percent of their income in taxes.

High capital gains tax rates continue to disincentivize entrepreneurs from staying in Canada. How can Canada credibly keep top tech talent at companies like Shopify before allowing them to go the way of Blackberry or shifting headcount to countries with more top talent? Lower taxes, even while losing federal government revenue, are essential to restoring economic growth to Canada by incentivizing productive talent.

Poilievre’s campaign has given us a start. He announced he will cut income tax by 15 percent, dropping the tax rate on the lowest income tax bracket from 15 percent to 12.75 percent. This means the average Canadian worker earning $57,000 will save $900, with two-income families saving $1,800 a year. He's also promised more comprehensive tax reform and a tax reform task force that would help oversee such a process.

Critics of these tax cuts fail to recognize the broader economic context in which these policies would be implemented. Canada's productivity crisis isn't just a statistical concern—it's reflected in stagnant wages, diminished purchasing power, and shrinking opportunities for upward mobility. When Canadian businesses struggle to compete globally due to high tax burdens, the consequences ripple through every sector of the economy.

It's no coincidence that ten years of Liberal rule, taxes, and regulation have coincided with a slowdown in economic growth. Accordingly, Liberal Leader and Prime Minister Mark Carney is more reluctant to cut taxes and has merely promised a small "middle-class tax cut" by cutting one percentage point off the lowest income tax bracket, saving two-income families up to $825 a year.

Canada needs much more than just tax reform for a single income bracket. While once boosting one of the lower corporate tax rates in the OECD, Canada has started to fall behind as other countries have cut their corporate tax rates. Lower corporate rates and full expensing for capital equipment would mean more fixed investment in Canada.

Some of this must also be combined with government spending cuts to account for Canada's weakened fiscal position, which has accrued throughout the Justin Trudeau years. Poilievre is the only candidate who has named some specific cuts during the campaign (like to foreign aid and the Canadian Infrastructure Bank) while others have promised cuts on "wasteful spending" but have failed to provide further specifics.

Carney's economic policy platform is worth evaluating because it hardly departs from Justin Trudeau's deficit-induced spending policies of the past decade.

Despite claims to balance the budget in three years, Carney says he will run a "small deficit" but intends to keep Canada on its current fiscal path, including freezing but not firing federal government employees, maintaining increased spending on military equipment, clean energy, infrastructure, and housing, and keeping Trudeau’s national $10-a-day daycare and dental care programs as well as every other entitlement program untouched.

He frames continued government spending as "investment in Canada" as if it can meaningfully revive Canada's waning economic growth, but this is plain-old Keynesianism. The fiscal multiplier is a fundamental concept in Keynesian macroeconomics. If the multiplier is one, it means that for every dollar the government spends, GDP rises by one dollar. If it is higher, say two or three, then the same dollar of spending generates two or three dollars in additional economic activity. In times of crisis, such as during the COVID-19 pandemic or the 2008 financial crash, policymakers often rely on high fiscal multipliers to justify massive government interventions.

The challenge is that the Canadian economy is not in recession (at least yet). Arguing for massive fiscal spending is way too soon and preemptive.

In addition, fiscal spending is not solution to Canada's growing debt problem (federal debt to GDP in Canada has risen by nearly 20 percent of GDP since the Liberal Party of Canada took office in 2015). If fiscal spending was such an elixir, then many advanced economies would not have the soaring debt burdens they currently do.  

The reality is that Keynesian multipliers are much lower than economists think they are. Research by economists like Valerie Ramey of the Hoover Institution regularly finds that the government spending multiplier is less than one. Research by other economists, such as the late Alberto Alesina of Harvard, found that fiscal multipliers related to government spending were also much lower than those related to taxation.

How can a government spending multiplier be less than one? Certain types of government spending may crowd out private investment or consumer spending that would have otherwise taken place.

This crowding-out effect occurs through several mechanisms. When governments borrow to finance spending, they compete with private entities for capital, potentially driving up interest rates and making private borrowing more expensive. Additionally, anticipation of future tax increases to service government debt may lead businesses and households to reduce current consumption and investment.

Moreover, government spending often suffers from inefficiency and misallocation. Unlike private enterprises subject to market discipline, government agencies face different incentives that can lead to wasteful expenditures and politically motivated rather than economically rational investment decisions. The classic example is infrastructure projects chosen for political visibility rather than economic return.

Carney's economic vision also fails to address Canada's lagging productivity growth. Over the past decade, Canada has experienced anemic productivity growth despite significant government "investment." The OECD reports that Canada's labor productivity growth has consistently underperformed relative to peer nations. Simply injecting more public spending without addressing fundamental structural microeconomic issues is unlikely to reverse this trend.

Another critical flaw in Carney's approach is its timing. Expanding fiscal policy when inflation remains above the Bank of Canada's two percent inflation target while the central bank still maintains relatively tight monetary conditions risks working against monetary policy. This policy contradiction could force the central bank to keep interest rates higher for longer, ultimately negating any stimulative effect from government spending while increasing the debt.

The demographic challenges facing Canada further complicate Carney's fiscal expansion plans. With an aging population, healthcare and pension costs will rise substantially in the coming decades. Adding more debt now only reduces fiscal space for addressing these inevitable pressures and recessions later. Prudent fiscal management would prioritize creating more fiscal space for future needs and crises rather than exhausting capacity on short-term stimulus.

International evidence also undermines Carney's case. Countries that have pursued aggressive fiscal consolidation, like Sweden, Switzerland, or Canada during the Liberal Chretien-Martin and Harper governments, have often outperformed their peers in economic growth. These examples suggest that fiscal discipline, rather than permanent stimulus, provides a more sustainable foundation for broad-based prosperity.

Canada's economic challenges require structural microeconomic reforms to enhance competitiveness, reduce regulatory burdens, and incentivize private investment. These include reforming occupational licensing regulations, reducing interprovincial trade barriers, reforming tax codes to reward innovation and risk-taking, and addressing housing affordability through supply-side measures.

Rather than doubling down on the fiscal policies that have produced disappointing results over the past decade, Carney should embrace a more balanced approach that acknowledges the limits of government spending as an economic catalyst. True "investment in Canada" means creating conditions for private sector innovation and growth, not simply expanding the government's economic footprint.

As Canadians consider their economic future, they should question whether more of the same deficit-financed "investment" from the Liberal Party is truly the path to prosperity, or merely a politically expedient approach that defers difficult but necessary choices to future generations.

Canada needs a pro-growth economic strategy now, more than ever. We're finally starting to hear some of the right things, including from candidates in both the Liberal and Conservative parties, but much more is needed.

Jonathan Hartley is a research fellow at the Civitas Institute, a senior fellow at the Foundation for Research on Equal Opportunity, a senior fellow at the Macdonald-Laurier Institute, and podcast host of Capitalism and Freedom in the 21st Century at the Hoover Institution.