Posthaste: Fixing Canada's productivity problem could cost a 'staggering' $7.6 trillion

Canada’s dismal productivity that has significantly lagged other OECD countries over the past few decades is a common complaint. However, fixing it won’t come cheap, says a leading economist.

Charles St-Arnaud, a former strategist at the Bank of Canada, says the main culprit for this underperformance has been a lack of investment in the economy. Remedying that will take an outlay he describes as “staggering.”

Decades of underinvestment have resulted in Canada’s stock of capital per worker (buildings, machinery and intellectual property used in production) falling severely behind its advanced nation peers, said St-Arnaud, who is now chief economist at Servus Credit Union.

How bad is it? Here are a few sobering statistics:

To catch up to the productivity level of these nations, Canada’s stock of capital needs to grow by up to 5.4 per cent per year over the next decade which would require an investment of $7.6 trillion.

Closing half that gap would require Canada’s capital stock per worker to grow by up to 3.5 per cent annually, an investment of up to $4.5 trillion.

Just to prevent the gap between Canada and its peers from widening would take an investment of up to $2.2 trillion.

“Putting these numbers in context, the economy requires about $1 trillion in investment per year, the equivalent of about 30 per cent of GDP, over the next 10 years just to ensure we do not see further decline in competitiveness relative to the leaders in the OECD,” said St-Arnaud.

Doing nothing doesn’t seem an option, because if Canada’s pace of capital investment doesn’t pick up, the gap between it and its OECD peers will widen to over 60 per cent in 10 years.

The elephant in the room is how to pay for it.

St-Arnaud’s report also considers the costs of fixing Canada’s housing affordability crisis which over the next 10 years could take an extra $1.7 trillion above and beyond what would normally be spent on home construction. Add the two “generational challenges” together and the total nears $9 trillion.

Most of the heavy lifting would fall to foreign investors.

However, St-Arnaud warns that relying on money from abroad runs the risk of Canada becoming even more of an “extractive” economy where profits flow out of the country and are not invested domestically. Attracting capital may also require higher interest rates, which brings its own set of problems.