Massive government spending is crowding out private-sector investment

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I have to say that watching the recent fiasco in the House of Commons with respect to the subtle (maybe not too subtle) shift in Mideast policy makes it embarrassing enough to be a Canadian, but the government’s mishandling of the economy and fiscal policy is beyond the pale — declining real per-capita incomes in Canada year in and year out.

If not for the tight trading ties with the United States and the good fortune of a rich endowment of resources, the Canadian economy would be in perennial recession.

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There has been no capital deepening or productivity growth in Canada in eons because the massive spending at the government level has continued to crowd out private-sector investment. All the spending that was used to combat the pandemic has become a permanent feature of the budgetary landscape. The level of program spending in Ottawa today is 35 per cent higher than it was pre-COVID-19. Meanwhile, volume spending on aggregate business investment is lower today than it was in 2012. How can the citizenry be OK with that?

On a per-capita basis, government program spending is 27 per cent higher than it was in 2019 and almost double the average of the past 40 years. Inflation has only accounted for 40 per cent of that gap in per-person spending now compared to four years ago. The fiscal spending is out of control, and a clear sign is that when it comes to the government sector, what is always billed as a temporary spending measure to fight a crisis inevitably finds a way to remain on the books.

Either Canadians don’t know about what is going on with this fiscal profligacy or, as is typical in this country, totally apathetic to what is going on. The government incursion into the economy in this country is so acute that the public sector now comprises 27 per cent of GDP. Business capital spending? Try a mere eight per cent share and flirting with two-decade lows. The capital spending share of the U.S. economy is practically double that, which is why productivity growth stateside is running at a 2.6 per cent year-over-rate pace versus minus 0.6 per cent (yes, negative) north of the border.

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When you blend labour and capital together, total factor productivity in Canada, under this current government in Ottawa, is now back to where it was a quarter-century ago. And productivity is the mother’s milk of future standard-of-living enhancement and no amount of pro-immigration policies to provide the illusion of economic prosperity can act as a true antidote.

This is not an attempt at xenophobia, just a comment on how Ottawa has completely taken its eye off the ball when it comes to promoting capital formation and a future of productivity growth. It’s content instead to run an economy that has less than one per cent growth in real output and incomes at a time when population gains top three per cent at an annual rate.

The problem with the magnitude of the unrelenting fiscal expansion, which will surely not be resolved in the upcoming federal budget, is that it is crowding out private-sector investment. And that is a huge problem. It is why the country’s productive capital stock has stopped growing over the past two decades, and, indeed, has actually decayed 1.5 per cent over the past year.

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I understand that to non-economists, this discussion of the ongoing deficiency of business capital spending and the link to productivity is arcane, incomprehensible and downright boring. But it affects us all, nonetheless.

Because of this dismal productivity performance, unit labour costs of five per cent at an annual rate are running double the U.S. trend. That means we are increasingly uncompetitive and that is showing through in a Canadian dollar that instead of reaping the benefits of this year’s commodity price run-up, has headed south and, by most measures, is undervalued by at least five per cent.

It is why, under this current government’s watch, Mexico has replaced Canada as the top exporter to the U.S. — this happened two years ago. Historically, Canada exported around 20 per cent more to the U.S. than Mexico did; today, Mexico sells 10 per cent more to the U.S. than we do. That says everything we need to know about how current and past policies have failed us. Too much emphasis on government intervention and less on promoting pro-productivity business investment and export competitiveness.

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Brian Mulroney greets Margaret Thatcher in Toronto in 1988.
Brian Mulroney greets Margaret Thatcher in Toronto in 1988. Photo by John Mahoney/Montreal Gazette

All so sad. Brian Mulroney (R.I.P.) certainly did leave a legacy — too bad this current government has had nearly a decade to tear it apart. The world not only lost one of the greatest statesmen of the 20th century, but Canada lost its most effective prime minister of the 20th century. What he accomplished in his near-decade in office from 1984 to 1993 was most impressive: taking Canada out of the dark ages of economic sclerosis after years of inept government rule under the Liberals (talk about being back to the future given what is happening today in Ottawa) using Ronald Reagan-style deregulation, tax reform, breaking the back of inflation and embarking on the Canada-U.S. Free Trade Agreement.

And it wasn’t just in domestic politics, but much like Lester Pearson in the 1960s, Mulroney had Canada punching well above its weight when it came to tackling global issues of all kinds. For those who know their history, Mulroney would regularly be mentioned in the same breath as the likes of Reagan and Margaret Thatcher.

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The controversial, but powerfully positive policies Mulroney embarked on that cost his Conservative Party the 1993 federal election ended up being nurtured by the ensuing Liberal government, even though it had pledged to abandon all those pro-growth, supply-side policies. A true visionary. A true leader. A true statesman. All these attributes are so woefully absent today, and not just here at home.

Forgive me for being so nostalgic, but how good would it be to return to a dynamic duo such as Mulroney and Michael Wilson who understood how the economy works? I don’t know about you, but Oct. 20, 2025, can’t come soon enough.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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