Productivity Gap

I was at the Socio-economic Conference 2007, hosted by Statistics Canada, last week.

The keynote speakers were great (except the speaker spoke about social exclusion and poverty in Quebec). What her ministry is implementing will be a nightmare. I am deeply troubled by that plan - and I wish all Quebecors good luck!! To make it short, the Quebec government is planning to spend $4.5 billion (over 4 years) on welfare to "lift people out of poverty". In the mean time, they will increase minimum wage, provide more low-cost housing, and provide guarantee income to low income households. However, there is no plan on helping those in poverty/unemployed to become productive members of the society (i.e. re-train or learning new skills). Anyway, I will make my rant another day.

The session I really want to talk about, from the conference, is the one by Daniel Trefler on Canadian prosperity. Just a warning here - some of my Conservative friends will not enjoy the rest of this post (if they are not policy-oriented), and my Liberal and NDP friends will like it (just because they will get some ammos to attack the Conservatives).

Professor Trefler pointed out that the difference in GDP per capita between Canada and the US is over $9,000. That means the productivity gap per person per year between Canadians and Americans is over $9,000. He argues if we are at par with our neighbour on productivity, with those extra tax revenue (over $60 billion per fiscal year), we would be able to commit to the Kyoto Protocol, pay for all of Romanow's recommendations (from the Royal Commission), implement the national child care program (proposed by the Liberals and later scrapped by the Conservatives), pay for all new infrastructures proposed by cities, and would still have about $45 billion per fiscal year for tax cut or any other things governments want to do!!

He urges all governments to encourage capital investment by lowering taxes on capital and increase spending on education and research (as we all know that productivity is based on capital and labour).

Professor Trefler also pointed out for every dollar the government increases in consumption tax (i.e. GST), the government would actually collects 90 cents. But for every dollar the government increases in capital tax (i.e. capital gain tax), the government would lose 30 cents in revenue!!

The theme of his presentation was we need to invest more on physical and human capital to increase our productivity.

Of course, part of the productivity gap is due to some other reasons, for example, shorter work week for Canadians than Americans. Regardless, we still have a chance to close our productivity gap, by about $6,000, by 2020 if our governments decide to act.

For that, I urge the Conservative government not to cut the GST to 5%, even if they win again in the next election. Also, I hope all governments will lower capital and corporate taxes - by providing tax breaks to corporations invest in research and development.