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Annex 4
Improving Canadian Living Standards

Highlights

• The central objective of economic and social policy is to enhance the well-being of people through higher living standards and a higher quality of life.


• Growth in Canada’s living standards has increased substantially over the past five years, more than in any other Group of Seven (G-7) country.
• Our superior performance since 1997 has narrowed the gap in living standards between Canada and the United States, but a sizeable gap remains.
• Both stronger productivity growth and labour market progress have been responsible for narrowing the Canada-US living standards gap since 1997. Looking ahead, population aging will limit the scope for further large contributions from employment and we will need to look predominantly to stronger productivity growth to raise living standards and help close the gap with the United States.
• Economic factors such as fiscal and monetary stability, competitive taxes, investment in learning, new technologies and research and innovation are all key to helping Canada improve its productivity performance. Equally important is building a stronger society to give Canadians a higher quality of life and the skills and confidence to participate in the new economy.
• Only through integrated and complementary economic and social progress will Canada achieve its goal of strong and sustainable living standards growth along with a better quality of life for all Canadians in the future.

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Canadian living standards growth slowed in the 1980s and early 1990s, but has rebounded since 1997

• The most commonly used measure of living standards is real (inflation-adjusted) GDP per capita. GDP is a measure of all goods and services produced in the country in a year. Equivalently, GDP measures the amount of income generated in Canada during a year, including wages and salaries, business profits and earnings from self-employment.
• In the 1960s and 1970s real GDP per capita grew rapidly in Canada, averaging over 3 per cent per year. However, this was followed by slow growth in the 1980s and almost no growth in the first half of the 1990s.
• Since 1997, with governments balancing their budgets, Canada’s living standards performance has turned around substantially. Real GDP per capita has grown by an average rate of 3 per cent per year, similar to that achieved over the 1960s and 1970s.

Canada’s performance relative to other G-7 countries has improved significantly

• Over the 1980-1996 period, a period when Canada was experiencing sustained and large fiscal deficits, it ranked second last among the G-7 countries and 22nd among all Organisation for Economic Co-operation and Development (OECD) countries in terms of real GDP per capita growth.
• The 1997-2001 period marked a major turnaround, with real GDP per capita growing faster in Canada than in any other G-7 country. Our ranking among OECD countries improved from 22nd to 9th place over this period.

The living standards gap with the United States has narrowed over the last five years but remains sizeable

• The living standards gap between Canada and the United States, which stood at 8.4 per cent in 1980, widened through the 1980s and the first half of the 1990s, peaking at almost 19 per cent in 1997.
• With Canada’s strong economic performance over the past five years, the gap has started to narrow to roughly 15 per cent; however, it remains sizeable.
• Clearly, one of Canada’s key challenges in the future is to further narrow and eventually close our standard of living gap with the United States.

Strong employment growth and faster labour productivity growth have both contributed to the recent living standards growth rebound

• Living standards can be raised by increasing the share of the population that is working (the employment rate) or by growth in productivity (the average value of goods and services produced by each person working).
• In the 1960s and 1970s living standards growth was generated by both strong labour productivity growth and a rising employment rate, as the baby boom generation entered the labour market and the participation rate of women increased.
• By the 1980s the growth in both productivity and the employment rate had slowed significantly, and in the early 1990s the employment rate fell. As a result, the growth in our standard of living virtually stalled between 1990 and 1996, with increases averaging only 0.3 per cent annually.
• Real GDP per capita growth has rebounded significantly since 1997, generated by both a sizeable increase in the employment rate and a strong improvement in labour productivity growth.

Labour market progress has been responsible for narrowing the Canada-US living standards gap over the past five years…

• The rebound in the employment rate since 1997 reflects a rise in the proportion of the population in the labour force (the participation rate) and a decline in Canada’s unemployment rate.

• The participation rate increased by 1.3 percentage points from 1996 to 2001, after declining through the early 1990s. It has continued to rise in 2002 and is now above the US rate for the first time since 1991.
• Canada’s average annual unemployment rate declined by 2.4 percentage points from 1996 to 2001, from 9.6 per cent to 7.2 per cent. In contrast, the US unemployment rate declined by only 0.6 percentage points over the same period.
• In 2001, 1.6 million more Canadians were working than five years earlier. Canada’s job creation record over this period was the best among the G-7 countries, including the United States.

… but population aging will limit the scope for further large increases in the employment rate

• Looking ahead, there will be less potential for Canada to make further gains in living standards growth through increases in the employment rate.

• The participation rate is near its historical peak.
• The unemployment rate has declined and while it could certainly fall further, declines of the magnitude seen over the past decade are unlikely. Canada has narrowed its unemployment rate gap with the US from almost 5 percentage points in late 1996 to 2.1 percentage points in September 2002.
• Growth in the working-age population (aged 15-64), which was a key factor behind the growth in overall employment during the 1960s and 1970s, has since slowed considerably. Demographic projections show that working-age population growth will slow even further as the baby boom generation reaches retirement age.

• As a result, we cannot count on a rising employment rate as a key source of living standards growth in the future; improvements in living standards will have to come predominantly from productivity improvements.

Closing the Canada-US living standards gap will require faster productivity growth

• In the 1960s and 1970s Canadian business sector labour productivity growth outpaced that of the United States. However, in the 1980s it lagged US growth, with the gap widening further in the first half of the 1990s.
• Since then Canadian productivity growth rates have increased significantly, almost catching up with those in the United States even as US productivity growth surged ahead. Average hourly business sector labour productivity growth in Canada rose from 1.2 per cent between 1990 and 1996 to 2.0 per cent over the 1997-2001 period, whereas in the US it rose from 1.7 per cent to 2.3 per cent. However, a sizeable gap in the levels of productivity performance between the two countries remains.
• Looking forward, given the more limited scope for the employment rate to increase, labour productivity growth in Canada will need to exceed that of the United States if we are to close the living standards gap with the US.

Economic factors that influence productivity

Key Economic Factors Fiscal and monetary stability Research and innovation Investment in machinery and equipment Adequate access to financing for firms Openness to trade and foreign investment Favourable business climate

• Canadian businesses must be the catalysts for raising productivity growth. However, there are a number of areas in which government policy can play a role – to help create the right economic conditions to support private sector productivity growth.
• A stable macroeconomic environment with balanced budgets and low inflation brings lower interest rates and boosts confidence, thereby encouraging investment, which is an important source of productivity growth.
• Government support for research and innovation helps provide the funding needed for firms and researchers to create new products, processes and services that enhance their productivity. Access to capital is also critical to fostering innovative companies – for new businesses as well as those at various stages of development.
• Openness to trade and foreign investment allows goods and services to move freely across countries and allows Canadians to benefit from technological developments abroad.
• A favourable business climate includes factors such as supportive, more efficient regulation and competitive taxes. Lower personal taxes improve incentives to work, save and invest; lower corporate and capital gains taxes encourage entrepreneurship and innovation and stimulate investment.
• Governments have been making a significant number of contributions in Canada on these fronts over the past few years.

Canada’s recent $100-billion tax cut created tax advantages for firms and entrepreneurs to grow

• For example, in the 2000 budget and October 2000 Economic Statement and Budget Update, the Government introduced a five-year, $100-billion plan of tax reductions – the largest tax cuts in Canadian history. The tax reduction plan announced significant personal income tax reductions and created tax advantages for firms and entrepreneurs to grow:

• By 2004-05, federal personal income taxes will be 21 per cent less on average and 27 per cent less for families with children.
• Combined with tax reductions by the provinces, the average general corporate tax rate in Canada will fall below that of the US in 2003, from almost 7 percentage points above the US rate in 2000. By 2005 firms in Canada will have a 4.3-per-cent corporate income tax rate advantage over their US counterparts (including capital taxes).
• Canada’s top marginal capital gains tax rate is now lower than the typical top US rate.
• As well, the employment insurance premium rate has been reduced by 28 per cent, falling from $3.07 in 1994 to $2.20 in 2002.

• These tax reductions will enhance incentives to work, save and invest, help create jobs and improve our productivity performance.

Social factors can support a productive economy

Key Social Factors Helping children and families Medicare/health Social policies geared to learning Early childhood development, kindergarten to grade 12, post-secondary education, on-the-job training Healthy communities

• Progress on the economic front is key to raising productivity and living standards, but equally important is improving our social capital by investing in people and the infrastructure that supports them. Canada’s education and health care systems, for example, provide Canadians with the skills and the sense of security that allow them to participate in the economy with confidence. Equally, they provide Canadian businesses with a competitive advantage in the global marketplace.
• As an example of combining good social policy with good economic policy, the National Child Benefit supplement, the federal contribution to the National Child Benefit initiative (a joint federal-provincial-territorial initiative) and a component of the Canada Child Tax Benefit (CCTB), has allowed provinces to reinvest social assistance savings to improve incentives to work for low-income families with children. Total federal government support to help low- and middle-income Canadian families through the CCTB will have increased from $5.4 billion in 1997-98 to $8.7 billion by 2004-05, an increase of $3.3 billion or 61 per cent.
• Policies geared toward learning help bring more people into the workforce and better equip them to work in higher-wage, higher-skill jobs. Implementing those policies requires investments at all stages of life: from early childhood development through to post-secondary education, to graduate schools that can attract the very best from around the world, and on-the-job training and mentoring programs to help Canadians become lifelong learners.
• As well, healthy communities are key to attracting and retaining talent and investment. As stated in the 2002 Speech from the Throne, competitive cities "require not only strong industries, but also safe neighbourhoods; not only a dynamic labour force, but access to a rich and diverse cultural life."
• The goals of attaining a stronger, more productive economy and building a stronger society are mutually reinforcing. Only through progress on both fronts will Canada be able to achieve its ultimate goal of rising living standards and a better quality of life for all Canadians in the years to come.

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