Prime Minister Justin Trudeau’s government must refocus spending on boosting investment instead of consumption to address Canada’s sluggish productivity growth, argues a new report co-written by former Bank of Canada Governor David Dodge.

Canada’s gross domestic product per capita has fallen at a 0.5 per cent annualized pace since the start of 2020, compared with a 1.6 per cent annualized increase in the U.S. The country’s productivity has “suffered chronically” since the mid-1990s, according to a report released Monday by law firm Bennett Jones.

“We have to shift from relying excessively on the expansion of the labour force and hours worked to grow the economy,” say the authors, who also include former Liberal cabinet minister John Manley and ex-British Columbia Premier Christy Clark.

The report adds to mounting criticisms Canada’s economy has become too reliant on population growth and government spending, and is persistently short on business investment in productive capital and skill development.

Labour productivity fell 0.8 per cent in the third quarter, according to data released last week by Statistics Canada, the sixth consecutive quarterly decline. 

The report also calls Trudeau’s latest budget outlook — which added $20.8 billion in spending over six years — “unsustainable.” The authors say federal spending is still geared toward transfers and services, which “reinforce” consumption at a time when fiscal policy should be directed to boosting expenditures in infrastructure, housing, skills development, research and development and national security.

In the last year, transfers from government represented 19 per cent of Canadian household income, the highest level since 1994 outside the COVID-19 crisis, according to Statistics Canada data. In October, Bank of Canada Governor Tiff Macklem urged elected officials to prioritize policies that expand supply, not just demand, when considering new outlays.

“We have to shift the burden of taxation towards consumption and away from investment,” say the authors of the Bennett Jones report. Additional revenue could be raised through user fees for public infrastructure or dedicated taxes to fund new and expanded services, such as health care, they say.

The tax system must also incentivize private funding in research and development and intellectual property, they argue.

The distributional burden of fiscal policy should also be examined more closely from a demographic perspective, the authors add. “It may be appropriate to rebalance the tax and transfer system to provide fewer advantages for retired Canadians and more for workers, especially young workers with families.”

The report’s economic forecasts show annual inflation returning to near the Bank of Canada’s two per cent target by the end of 2025. Interest rates in Canada and the U.S. are expected to settle to between three and 3.5 per cent, which the authors say is around the “new” neutral rate — the theoretical level of borrowing costs that neither stimulate nor restrict economic growth.