Eyes on the prize: How Canada can and should double GDP by 2050

October 19, 2021

Targets to guide government actions are nothing new. For decades, the federal government has set annual targets for the number of immigrants it wants. Inflation targeting is the foundation of the Bank of Canada’s monetary policy. Hard budget deficit targets helped governments deal with the fiscal crises of the 1990s and may yet prove indispensable in dealing with today’s record deficits.

Given the demonstrated usefulness of hard targets, government needs to set a long-term goal for Canada’s GDP. GDP is the key to creating the incomes that drive employment growth. While governments love to set goals for national achievements for the health and well-being of citizens, and for Canada’s leadership and influence in the world, they ignore the fact that these things all flow from the greater prosperity that economic growth will bring.

Let’s start with the most important target of all – an ambitious goal to double Canada’s 2020 level of real GDP by the year 2050, which would grow the economy and create the wealth that will allow Canada to meet climate goals, reduce poverty, be more innovative and become a leader on the world stage. Doubling GDP over the next three decades would entail sustaining annual real GDP growth of 2.5 percent on average. It would mean setting a goal of reaching $4.0 trillion in 2050.

People regularly underestimate how small changes in growth rates that compound over long periods can produce significantly different outcomes. Increasing annual growth by a factor of five (from 1 to 5 percent) results in over seven times more GDP growth after just two decades. Conversely, the reduction in average annual growth from 3.0 percent in the decade from 1991 to 2000 to 2.2 percent in the 2010s helps explain the difference between an era of burgeoning budget surpluses, booming investment, and soaring optimism versus today’s chronic budget deficits, faltering investment, and rampant pessimism about the future. Establishing an ambitious yet readily attainable goal for growth serves several purposes. It is a constant reminder to governments that the past decade’s pace of economic growth is simply not acceptable to Canadians and must be improved. It would force governments to be cognizant of the consequences for growth of its major policy initiatives, notably those that target the distribution over the creation of income or that try to curb greenhouse gas emissions at the expense of incomes. It would put an end to the analysis of government programs in isolation from the impacts on the macro economy; claiming that a national child care program “pays for itself” takes no account of the impact higher government deficits and taxes have on long-term growth. Finally, a hard target would make government accountable for not reaching it.

A central tenet of the proposal to double GDP by 2050 is that accepting slow growth as our economy’s “New Normal” understates the importance poor policies have had on dampening growth in recent years (including high deficits, rising taxes, and onerous regulations that hamper investment, notably in natural resources).

Constant macroeconomic stimulus is a prime example of a policy that has depressed the economy’s long-term potential growth. One of the worst unintended consequences of easy monetary policy on long-term growth is that the resulting increase in inequality helps undermine support for capitalism itself. Without economic growth that benefits the average person, support for capitalism wanes, creating a vicious circle in which more taxes and regulation are introduced that only further dampen economic growth.

Many other policies aimed at redistributing income through taxes and transfers involve trade-offs that also suppress growth. For instance, trade-offs exist between many environmental initiatives and the economy. The long-term increase in our living standards originated from increasing the amount of lower-cost energy available to the average person. Hence, expensive plans to lower emissions necessarily involve a trade-off that lowers economic growth. Such plans are doomed to failure. Setting targets for both the economy and the environment will force government to avoid trading off one against the other.

A major benefit of a binding target for GDP is to prevent sacrificing long-term income growth for the expediency of short-term climate targets. We cannot allow the trade-off of one against the other. A solution must be found where both can be achieved at the same time. The scattershot approach involving myriad policy objectives clearly has failed, partly because of the lack of an over-riding objective. It is time to prioritize effective policies that boost longterm investment and productivity growth in Canada with the goal of doubling GDP.