Canada’s relatively weak productivity is a significant economic issue that has yet to be effectively addressed. The problem is often linked to factors such as inadequate investment, insufficient competition, and internal trade barriers. Canadian productivity is the second lowest in the G7, with levels approximately 75 percent below the United States.
One major cause that is often overlooked is Canada’s extensive regional subsidy system. According to the Fraser Institute in 2021, taxpayers in Alberta and Ontario provide substantial subsidies to Atlantic Canada, Manitoba, and Quebec, ranging from $3,700 to $6,900 per person annually.
The economic ramifications of these subsidies are more severe than commonly acknowledged. For instance, the federal deficit in Atlantic Canada in 2019 totaled $16.6 billion, compared to the overall national deficit of $14 billion for that year. These funding flows from regions with stronger productivity to those with weaker performance have significant implications for Canada’s fiscal and productivity prospects.
The impact of federal subsidies on economic development in Atlantic Canada and Manitoba is clear. Despite relying on federal spending as the primary driver of economic development and productivity improvements, the Atlantic Provinces and Manitoba have shown little change in productivity relative to other provinces. The lack of dynamism in their economies can be traced to weak productivity as well.
Moreover, Ontario has experienced a steady decline in productivity, slipping behind all leading U.S. states, while Alberta has also suffered negative effects stemming from these policies. To address these issues, changes to the regional subsidy system and its impact on productivity and national unity are crucial.
Addressing regional subsidies’ impact on productivity and economic performance will require changes in policies and conditioning continued provision of subsidies on greater cooperation among recipient jurisdictions and the elimination of internal trade barriers. In conclusion, the current regional subsidy system has clear negative effects on productivity and national unity and should be reformed to benefit all Canadians.