NCPA - National Center for Policy Analysis


February 13, 2006

By any measure, Canada is a success story. Apart from being physically beautiful, politically stable and socially tolerant, it is rich. Canadians enjoy the sixth-highest gross domestic product (GDP) per capita in the Organization for Economic Co-operation and Development (OECD). Unfortunately, Canadians have one fatal flaw, says the Economist: They are poorer than their next-door neighbors, and the gap is widening.

According to a study by the University of Toronto's Institute for Competitiveness and Prosperity, in 1981, Americans were $1,800 (Canadian dollars) per person better off than Canadians. By 2003 their financial advantage had increased to $7,200.

If Canadians were more productive, they would be richer and the extra wealth could be used to increase social spending. However, Canadians are not making the most of their endowments, says the Economist:

  • Since 2000, business-sector output per man-hour in Canada has grown only 0.9 percent a year, compared with 3.5 percent in the United States.
  • In 2005, the fixed capital investment per worker by American firms averaged nearly $2,700 more than that of their Canadian counterparts.
  • Canada spends proportionately less on research and development, trains a smaller share of scientists and engineers to postgraduate level and has a disproportionately small number of big firms which have the best productivity performance.

Moreover, these features are structural and hard to change, but one solution might be to further reduce taxes, says the Economist.

Canada's marginal tax burden on capital is higher than America's, but the current government is reducing the high rate of corporate tax to encourage foreign direct investment and with the help of Canada's resource-boosted economy, the country will always be expected to do well, says the Economist.

Source: Editorial, "The perils of cool," Economist, December 3, 2005.

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