Recovery plans must be built on a foundation of economic growth

Thinking about how to increase economic growth and productivity is missing from much of the policy debate about Canada’s post-pandemic recovery, at least so far. (File photo: Manny Fortin/Unsplash)

The recent spike in COVID-19 cases across the country is a sober reminder that a return to normalcy is still far away. But that doesn’t mean that policy-makers shouldn’t be planning ahead. There’s already a nascent debate about what priorities ought to guide our post-pandemic recovery. Some, for instance, have argued for an ambitious “green” agenda. Others have called for a feminist recovery strategy. And new and different ideas continue to come forward.

But our ability to make progress in so many important areas presupposes a growing and dynamic economy. Thinking about how to increase economic growth and productivity is missing from much of the policy debate about Canada’s post-pandemic recovery, at least so far.

Economic growth is not an end in itself. It’s a crucial precondition for addressing many of the challenges facing our society, including with respect to public finances (such as funding for education, health care, and social services), employment, wages, and, ultimately, living standards. Economists from Paul Krugman to Dani Rodrik to Tyler Cowen have made the case that societies must prioritize economic growth and productivity in order to advance the goals of economic efficiency and social equity.

Boosting growth has become an even bigger imperative in light of the economic costs imposed by the COVID-19 pandemic. Canada’s economy contracted by 11.5 percent in Q2 2020 and it may take years to recover the lost output. The timeframe will ultimately depend on the rate of economic growth that can be achieved in the coming years.

Canada’s economic growth has been slowing for the past several decades. Average real GDP growth was 4.08 percent between 1960 and 1980, 2.73 percent between 1980 and 2000, and 1.99 percent from 2001 to 2018 (see figure below).

Canada is hardly alone in this regard. Most advanced economies have experienced sluggish growth over the past two decades or so. Slowed innovation and productivity, the unique characteristics and features of the digital economy, and aging demographics are cited as potential causes. Even before the pandemic, there were already growing concerns that long-term stagnation (what former US Treasury Secretary Larry Summers has coined “secular stagnation”) represented a “new normal.”

But these headwinds shouldn’t cause policy-makers to succumb to fatalism. Secular stagnation isn’t destiny, as the current Bank of Canada governor wrote with a co-author in 2016. There’s room for public policy to support higher levels of economic growth and productivity.

The thinking about the types of public policies supportive of a pro-growth agenda is evolving. The conventional view tended to focus on macro policy levers such as monetary policy, taxation, and regulation. Newer thinking, though, is now focused on a wider range of policy levers, including child care, public transit, and housing affordability. It’s not that traditional policy levers are obsolete but rather that a different mix of policies will be needed to realize the broader goal of inclusive growth.

The upshot is this: a combination of traditional and newer growth-oriented policies will be needed to break out of secular stagnation and accelerate economic growth and productivity gains. It will require a combination of tax reform, regulatory reform, human capital investments (including university, college, and apprenticeship education), support for R&D and innovation (including a role for government procurement), and high-quality infrastructure (including traditional and digital) as well as well-designed social policies including child care, income support programming, and skills-training.

One way to bring coherence and intentionality to these disparate policy areas is to develop a long-term economic strategy. As we outline in a recent paper for the Ontario 360 project, housed at the Munk School of Global Affairs and Public Policy, numerous Canadian and US states have produced five- and 10-year economic policy frameworks to better situate policy decision-making, provide greater certainty for businesses and investors, and create an accountability tool for voters.

Of the nearly 30 long-term strategies that we analyzed, the Saskatchewan government’s 10-year plan was among the best for its use of evidence and the clear link between outputs and outcomes. Extending to 2030, the provincial strategy sets out 30 goals (including a combination of economy-wide and sectoral-specific targets) and a series of accompanying policy reforms to achieve them.

As an example: the plan sets the goal of increasing annual uranium sales to $2 billion and potash sales to $9 billion by 2030. It then outlines policy steps, such as reinstating sales tax exemptions for exploratory and drilling activity, in order to achieve the sales goals.

The Saskatchewan strategy isn’t without areas for improvement, but, overall, it’s a comprehensive plan that draws on a good mix of traditional and growth-oriented policies and situates the goal of economic growth in a broader, inclusive vision including better quality social services and improved outcomes for vulnerable citizens.

This is an approach that the federal and other provincial governments ought to consider as part of their own post-pandemic recovery planning. A five- or 10-year policy framework is not only useful for internal policy development and fiscal prioritization, but it can help to bring more concrete expression to the broad benefits of economic growth.

This will be important if policy-makers are going to build the political support needed to advance a pro-growth agenda in the aftermath of the COVID-19 crisis.

Canadian post-secondary expert Alex Usher recently tweeted that there “doesn’t seem to be a (political) constituency for growth anymore.” He’s not wrong. A complacency about economic growth has set in. There are various explanations for it, including a false confidence about so-called “endless economic growth.” But a big part of it is that Canadians don’t necessarily grasp the tangible benefits linked to higher rates of economic growth. A long-term growth strategy that’s rooted in clear, measurable outcomes can help people to see how economic growth translates into employment, wages, and other measures of economic and social well-being.

The notion of “build back better” has come to define the policy debate about post-pandemic planning in Canada and elsewhere. It reflects the idea that governments should use their recovery plans to hasten major economic, social, and technological changes. But this will only be possible if we can achieve higher rates of economic growth and productivity to sustain government revenues, employment, wages, and, ultimately, living standards. “Build back better,” in short, must be built on a foundation of economic growth.

This article first appeared on Policy Options and is republished here under a Creative Commons license.