01-05-2025
Why economist-turned-politician Mark Carney is Canada's big hope
Canada's Liberal Party has won a fourth consecutive national election in a race that largely came down to which party would better stand up to US President Donald Trump. 'We are over the shock of American betrayal," Mark Carney, a former central banker and the leader of the Liberal Party, said in a victory speech early Tuesday morning. 'But we should never forget the lessons."
Indeed, there were many lessons, not the least of which is that Trump's provocations on tariffs and musings about making Canada the 51st US state probably would have been easier to laugh off if the country's leaders had taken steps to shore up its woeful productivity.
Productivity is Canada's Achilles heel. It is so bad that the 1.8% drop in labour productivity in 2023 was the worst among 38 members of the Organisation for Economic Co-Operation and Development (OECD). The poor performance, which carried into 2024, erased all productivity growth since 2017.
The Deutsche Bank Trade Weighted Canada Dollar Index, a measure of the nation's economic performance compared with trade partners, has plunged 9.44% over the past four years. A similar measure for the US dollar surged 11%.
No wonder the OECD predicts that growth in
Canada's
gross domestic product (GDP) per capita will rank last among its member countries over the next 40 years. 'A positive change in productivity could be the most significant factor in lifting economic growth, and the prosperity that goes with it," RBC Capital Markets noted in a recent report.
Luckily for Canada, Carney is more economist than politician.
Bloomberg News
describes him as 'a consummate crisis manager," having steered the Bank of Canada through the global financial crisis of 2008 and the Bank of England through the UK's highly disruptive decoupling from the EU in 2016. Disclosure: Carney was the chairperson of Bloomberg Inc until January, when he resigned that post to enter politics in Canada.
Comments by Carney on the campaign trail suggest he understands the challenge, promising a capital spending budget that would allocate tens of billions of dollars to investments in productivity-boosting
infrastructure
.
More spending is a start, but more is needed. Canada needs to reduce its notorious bureaucracy and the stiff internal trade barriers between provinces that impede the flow of goods, services and people. It also needs a system to match education and skills with jobs to accommodate its immigrant-fuelled population boom.
Here, a little could go a long way. RBC notes that businesses in Canada invest about half as much per worker as those in the US, a trend that has only become worse since the 2008-09 global financial crisis. Lower taxes, especially for businesses that embrace worker training, should be an immediate priority.
Carney could also help the cause by adopting a policy championed by Pierre Poilievre, head of the defeated Conservatives, to boost housing in a nation that does not have enough supply by tying municipal grants to a requirement that cities increase home construction by 15% a year.
Carney may have no choice, given that his party had about 43% of the national vote, falling short of the 172 seats needed for a majority in Canada's House of Commons. This means the government will be forced to work with other parties to pass budgets and other legislation, according to
Bloomberg News
. Carney is already talking about 'working constructively with all parties across parliament."
Although Canada's tax burden isn't bad relative to other advanced economies— with tax revenue amounting to 34.8% of GDP in 2023 as measured by the OECD—it's meaningfully higher than the US's 25.2% of GDP. Bringing the tax burden down would go a long way to spurring growth and productivity.
It's not like Canada doesn't have the fiscal space to accommodate lower taxes, with a budget deficit of around 2% of GDP versus 7% in the US. In its 2025 outlook, the OECD recommended that Canada could make its tax system more growth friendly by switching the burden from direct taxation to indirect and environmental taxes. Canada could also incentivize research and development, which the OECD notes is 'a key driver of a country's innovation capacity." Carney has already promised to run deeper budget deficits to cut income taxes and step up spending on infrastructure.
Fixing what ails Canada's economy will not be either easy or quick. But Carney's credentials as an economist and comments about never forgetting 'lessons" suggest he understands the root of the problem that Canada faces. ©Bloomberg
The author is the executive editor of Bloomberg Opinion.
