The next few years could be tough for Canadians because many of us may be feeling poorer. Why is that? There are two big reasons.
First, we face the prospect of only modest rises in income. Strong international competition combined with sluggish U.S. growth and a high Canadian dollar will put strong pressure on many Canadian businesses to control their costs, including payroll — as well as to minimize new hiring.
At the same, federal and provincial governments will be working to reduce and eliminate their budget deficits, meaning they will not be a strong force for economic growth. Instead, they will be curbing spending and even imposing pay freezes in the public service.
Second, if you add to the prospect of flat or slow growth in incomes the fact that a number of essentials in life will be rising in price, then there will be less money for other expenditures, from vacations to that new dining room table. We will have less money left over after paying essential bills.
For example, energy prices — electricity and gasoline — are likely to rise. The same is true for food, as a growing global population, combined with more people in the developing world whose incomes are reaching a level where they want more dairy and meat products in their diet, drive up food prices.
Likewise, the growth of more affluent population in the developing world — China, India and Brazil, for example — will drive up the price of many raw materials, such as copper and iron ore, and products such as aluminum, leading to higher prices for many manufactured products.
Two other factors also matter.
One is that young Canadians are finding it harder to get permanent jobs. Instead, there is a greater role for temporary work, including short-term contracts, which often provide for lower pay and zero benefits. In some industries, new workers are being hired at much lower entry salaries, creating two-tier wage systems.
The other factor is that one of the forces for growth, growth in the size of the labour force, will diminish as our society ages.
If labour force growth slows down but productivity doesn’t improve, then economic growth slows down. Labour force growth is currently growing at about 0.8 per cent a year but will be slowing to 0.25 per cent a year a decade from now.
So if Canada’s productivity growth continues at its insipid rate of 1.5 per cent a year, then we will have a slow-growth economy, which means less prosperity and fewer tax dollars to pay for public programmes, let alone start new ones.
The good news is that there is a way out. The answer is to boost Canada’s productivity by aggressively promoting and facilitating innovation throughout the economy.
Successful innovation would allow Canadian companies to gain what is described as “a first-mover advantage” in introducing new products or services that the world would like to buy. The BlackBerry is a good Canadian example.
This, in turn, can have spillover effects in the economy as other industries utilize these new products or services to make their own operations more competitive, adding to jobs. Success in tradable goods and services, with new jobs and wealth, in turn generates new demand for housing, retail trade and public services.
Successful innovation is also the driving force for improved productivity growth. And it is through sustained growth in productivity that we will be able to raise incomes, create jobs and finance public programmes such as healthcare and education.
Fortunately, one effect of a strong dollar is that it makes imports of advanced machinery and equipment cheaper, and investing in new technology is one of the best ways to innovate and raise productivity.
But the bigger challenge, at a time of budgetary constraint, is to ensure that governments continue to support initiatives that stimulate innovation — these include investments in education, research and development, financial programmes to share the cost of developing and demonstrating new technologies, smart procurement to make government a first customer for new technologies, investment in infrastructure and support for trade expansion.
These should all be seen as investments rather than expenses.
We should not accept a future of diminished expectations when there are ways to build a better future. It’s a challenge but that’s what we should be focussing on.
David Crane is a syndicated national afairs columnist for The Toronto Star.