It’s a start, but will it be enough? Canada’s 2025 Budget correctly flags productivity as a crucial economic issue and includes measures meant to boost it.
With the economy under pressure, the government’s new “Productivity Super-Deduction” could be a successful way to get businesses to invest money at a time when their inclination may be to pull back.
That said, the Budget measures are hardly going to be a definitive solution to a problem that will require radical attention for years to come.
In fact, the Super Deduction is a collection of various incentives grouped together, with only a few of them being new.
Speeding up deductions for manufacturing is one beneficiary, as are liquefied natural gas facilities.
The hope is that together, they will reduce costs to businesses and encourage them to invest in areas that will make Canada more competitive.
The government calculates that the suite of measures will lower Canada’s marginal effective tax rate to 13.2 per cent from 15.6 per cent, leaving it lower than that in the U.S.
Let’s start with a quick review of what productivity is, and why Canada is not exactly a productivity superstar.
The simplest definition is that labour productivity is what we produce per hour of work put in.
Workers cannot be efficient, though, if they’re not adequately equipped with what they need.
A lot depends on raising productivity. If you can produce more with your inputs, everyone, including workers and businesses, sees their income rise.
If you cannot increase productivity, incomes can stagnate or fall.
As has been well articulated in recent years, Canada’s productivity performance is dismal.
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According to calculations by the Organization for Economic Cooperation and Development (OECD), as of 2023, Canada’s workforce generated the equivalent of U.S.$74.7 in goods and services per hour put in by a Canadian worker, far below the $97 generated in the U.S..
It is a situation that has been worsening for decades, with Canada’s productivity growth declining between 2000 and 2023, averaging just 0.8 per cent.
The budget puts it another way, noting that if Canada’s productivity had matched the U.S. from 2017 to 2023, the median income of a Canadian family with one child would have been $11,000 higher.
In a speech that made waves last year, Bank of Canada Deputy Governor Carolyn Rogers discussed the issue, stating that Canada’s productivity needs to improve, stressing the fact that the country’s investment levels in machinery, equipment, and intellectual property are significantly below where they should be.
And, it would seem that with this budget, the Carney government is addressing the challenge in a meaningful way with measures that will cost $110 billion over five years, but which will presumably pay off far more than that over the longer term.
The Productivity Super Deduction will effectively make it cheaper for businesses to invest in equipment that will make workers more productive.
It is a well-timed measure. Historically, whenever the economy slows down (which is arguably the case right now), businesses tend to pull back on investment.
Unfortunately, that leads to a vicious cycle of low investment triggering low productivity and more low growth.
By encouraging investment now, perhaps there is some hope of avoiding that.
Getting the right sectors to invest in will be crucial to boosting productivity.
Although it’s lagging in many sectors, including manufacturing, the situation is even worse in construction, where there has been little growth over the past 25 years.
Given that housing has become a bigger share of the economy over that period, the overall picture has also deteriorated.
With this budget, the government is pledging to ‘supercharge’ home building, suggesting that the importance of the sector will only rise, and that boosting productivity within it will be crucial.
The budget also notes the growing relationship between AI and productivity, saying that, “Canada has a significant potential, comparable if not better than other advanced economies, in emerging technologies such as AI or Quantum computing.”
The 2025 Budget proposes to provide $925.6 million over five years to support a large-scale public AI infrastructure, aiming to give Canada the capacity to be globally competitive.
A completely new AI strategy is promised to be implemented before the end of 2025. It could make a difference, with the OECD estimating that the adoption of AI could raise productivity growth by 1.1 percentage points annually over the next decade.
One of the themes of Budget 2025 is “generational shifts,” and that is a timely way to look at it. Canada’s economy has already taken a hit as a result of our radically different relationship with the United States regarding trade, but much more is ahead.
Climate challenges are growing, technology is reshaping the global economy, and our population is rapidly aging.
To get ahead of those things, we need a strong, productive economy.
The Budget measures will help, but they aren’t more than a start to a problem that needs to be addressed with a host of other measures, including improving post-secondary education, reducing regulation, and cutting interprovincial trade barriers.
Some of these things are in process, too, but there is a lot that needs to be overhauled, and it will not happen overnight.
Time will tell if this budget goes far enough in kick-starting Canadian productivity growth. Canada has a lot of ground to make up, and we can only hope that the proposed measures to help it are not too little, too late.
Linda Nazareth is an economist and host of the podcast Work and the Future.
