The EconomistJuly 27th 2019 Special reportCanada 51E
ven beforeDonald Trump and before Brexit, Justin Trudeau
was aware that voter disenchantment and populism were on
the rise. He saw one of the important answers to this as economic,
and his remedy has been to give the middle class a pay rise. “West-
ern democracies around the world had a struggling middle class-
...that felt that it wasn’t part of the growth that was going on around
them,” he told The Economist. “And we said, ‘Well, how do we put
people back at [the heart of ] the success of our economy instead of
hoping that trickle-down will work for them?’ ”
Middle-class alienation north of the 49th parallel seems sur-
prising. The global recession that began in 2007, kindling populist
fires elsewhere, was shorter and less severe in Canada than in oth-
er rich countries. Taxpayers did not bail out fat-cat bankers, health
care is universal, the quality of public education is high and it does
not vary wildly by postcode. The intergenerational rate of social
mobility for people born in the 1960s in Canada is double that of
America, says Miles Corak, an economist at the City University of
New York. Income inequality, as measured by the Gini coefficient,
has been stable since 1995, and median household income has ris-
en sharply over the past 25 years.
On closer inspection, however, the numbers are more trou-
bling. The recent rise in income was preceded by a sharp decline
from the mid-1970s to about 1995. People responded by delaying
marriage, reducing the number of children they had and working
longer hours. This boosted incomes, which are now well above
what they were 40 years ago. But this is a sign of stress, caused by
technological change and the volatility of an economy largely
linked to commodity prices, argues Mr Corak. Incomes soared in
commodity-rich Alberta and Saskatchewan from 1992 to 2014 but
barely grew in people-rich Ontario. From 2007 to 2011 some 10,000
manufacturing firms stopped exporting. A third of workers have
insecure jobs in the “gig economy”, according to a report by the
Bank of Canada.
Although inequality has been steady recently, it has risen since
the 1970s. The 40% of the population with the lowest incomes now
have a much smaller share of the total, while that of the top 10%
has risen sharply (see chart). “The Astonishing Rise of Canada’s
1%” was the subtitle of a book by Lars Osberg published last year.
Mr Trudeau has also had to worry about whether there will be
growth to distribute. The recession in the oil industry began the
year before he took office. Mr Trump challenged the economy not
just by threatening naftabut by cutting taxes and regulation for
business, which yanked investment south. Even outside natural-
resource industries, the capital stock is “hardly growing at all”,
says Pedro Antunes, chief economist of the Conference Board, a
think-tank. Canada has avoided recession thanks to spending by
consumers, who have accumulated a lot of debt, and by govern-
ment. Mr Trump wants Congress to ratify usmca, nafta’s succes-
sor, but his trade war on China threatens global growth. “Anything
that puts the global trade system at risk is a significant risk to us,”
says Stephen Poloz, the central bank’s governor.
Mr Trudeau has dealt with these discontents with a dose of old-
fashioned redistributive liberalism. To stimulate growth he let a
near-balanced budget move into deficit (of about 0.9% of gdpthis
year). He also promised to spend C$180bn ($138bn)—about 8% ofthis year’s gdp—on infrastructure over 12 years. Most important,
he has put money into the pockets of people on middle and low in-
comes. A means-tested child-benefit programme gives families on
the lowest incomes C$5,600-6,600 a year per child.
More moolah came from cutting the tax rate on the bottom in-
come bracket and raising it for the richest 1%. The government ex-
panded a tax credit for workers on low incomes. Its critics claim
that middle-class families are worse off because it took away some
tax credits. In fact, says Mr Morneau, the finance minister, a family
of four at the median-income level is C$2,000 better off than it was
in 2015. From 2015 to 2017 the number of people living below the of-
ficial poverty line dropped by 825,000, the government says. Poll-
ing by ekos, a firm in Ottawa, shows that the number of Canadians
who say they are middle class has risen since 2017.Give ‘em that old razzle-dazzle
Over the long run, however, to sustain growth (and therefore high-
er social spending) Canada’s economy and business culture will
have to become more American. Its enterprises rarely dazzle the
world. A survey of 900 executives in 2011 found that Canadians are
more risk-averse than their cousins south of the border. At a time
of strain in Canada’s partnership with America, it no longer seems
acceptable that six of the ten biggest companies by revenue on For-
tune’s list of the world’s largest are American or Chinese, while the
top Canadian firm, Manulife, an insurer, is 241st. Canadians have
had it with the old gibe that they are content to “go for bronze”.
Until now, Canada has been keener to
develop local champions than global ones.
The country’s six biggest banks hold nearly
three-quarters of loans. Lending to small
businesses as a share of gdpis lower than
in other rich countries. Canada restricts
foreign ownership of airlines and telecoms
firms. In 2017 the average cost of flying per
kilometre in Canada was more than double
what it was in America. Dairy, poultry and
egg farmers are protected by a system of
quotas and price floors called “supply man-
agement”. Provinces erect their own barriers to trade within Cana-
da. For example, to satisfy their varying rules, businesses may
need to buy ten different kinds of first-aid kits.
Canada’s economic quirks are in part a reaction to American in-
fluence. Competition law, written to protect Canadian firms from
hulking American rivals, allows anti-competitive mergers if they
are expected to lead to gains in efficiency that outweigh the cost to
competition. American corporations set up operations in CanadaHandouts and high tech
Redistribution and innovation are at the heart of Canada’s
changing economyEconomyTo sustain growth
Canada’s
business culture
will have to
become more
AmericanHow the other 10% liveSources:StatisticsCanada;MilesCorak,CityUniversityofNewYorkCanada, share of income, %
By income decileTop 10% Middle 40-90% Bottom 40%2224262830321976 90 2000 10 175254565860621976 90 2000 10 17810121416181976 90 2000 10 17