How Canada became the sick man of North America: Ivison

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The Liberal government has helped to create an anti-growth climate that won’t be easy to change

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Published Sep 28, 2024 • Last updated 20 hours ago • 11 minute read

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Transportation, housing, energy: Traffic is snarled between apartments and a section of the still-unfinished Eglinton Crosstown LRT in Toronto, Sept. 27, 2023. Photo by Jack Boland /PostmediaArticle content

Saturday mornings are not generally a good time to start reading essays on public policy that run the length of the average Ken Follett or James Michener novel.

But last week I started reviewing a thought piece by three British writers from the Works in Progress online magazine — Ben Southwood, Samuel Hughes and Sam Bowman — on what they called the defining task of their generation: ending the stagnation that has seen Britain fall behind the developed world in economic dynamism.

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It was so gripping, so important and so relevant to what is happening in Canada that I missed three hours of the latest hot gossip on Sean “Diddy” Combs and a host of iPhone videos proving society is completely broken on X. But it was worth it. I’ll summarize the essay here and attempt to offer comparable Canadian data.

The Foundations essay pointed to moribund GDP per capita growth, among other data points, to make the argument that Britain is standing still economically. (Britain’s economy grew 0.7 per cent a year between 2002 and 2022, Canada’s increased 0.6 per cent a year in the same period, while U.S. output swelled 1.16 per cent a year.)

In relative terms, both countries are getting poorer: in 2002, Canada’s GDP per person was 81 per cent of the U.S.; in 2022, it was 72 per cent. The same figures for the U.K. against the U.S. are 78 per cent in 2002 and, 70 per cent in 2022.

The reason for Britain’s stagnation, the authors argue, is that it has effectively banned investment in transportation, energy and housing — “the foundations it needs to grow.”

Sound familiar?

“The most important economic fact about modern Britain is that it is difficult to build almost anything, anywhere. This prevents investment, increases energy costs and makes it harder for productive economic clusters to expand,” the authors write, saying the result is lower productivity, incomes and tax revenues.

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They argued that Britain needs a program of reform with the scale and ambition of the liberalization of the 1980s that focused on cutting taxes, curbing union power and privatizing state-run industries.

“This time we must focus on making it easier to invest in homes, labs, railways, roads, bridges, interconnectors and nuclear reactors,” they write.

That’s a difficult proposition for politicians who are able to resist anything except the temptation to use resources for immediate electoral gratification, rather than investing for a time after they have left office.

Both Canada and Britain are laggards when it comes to investment in infrastructure. While China spent more than five per cent of its GDP on roads, bridges and other infrastructure in 2021, Canada invested just 0.5 per cent (down from 1.3 per cent in 2010) and the U.K. 0.9 per cent.

But the lack of dynamism is not simply political expediency. Rather, it is motivated by an indifference, even a hostility, toward building critical infrastructure.

The Foundations report noted that Britain has not built a reservoir for 30 years, yet faces chronic water shortages in the east of England. Its environmental agency has blocked new development on the basis that it could only be supplied with water by draining environmentally valuable chalk streams. The result is that England’s innovation hub, Cambridge, is barred from expanding, which threatens to strangle the country’s life-sciences industry.

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Similar impulses are at work in Canada. Federal Environment Minister Steven Guilbeault said in February that Ottawa would stop investing in new road infrastructure — a position he later clarified to say meant the federal government would not fund large projects like a highway tunnel connecting Quebec City and Levis, Que.

That same sentiment is reflected in the federal Liberal government’s Impact Assessment Act, passed in 2019, which slowed the pace and increased the cost of major project approvals.

On the housing front, a generation of activists emerged who were intent on preventing urban sprawl yet were also opposed to building mid-rise buildings of the kind that eased housing pressures in continental Europe. Constraints on approval are a major contributor to the 3.5-million-unit housing gap because supply has not kept pace with demand.

The consequence of Canada’s regulatory sclerosis is what business veteran Paul Deegan and former clerk of the Privy Council Kevin Lynch in an FP Comment article earlier this year referred to as “an insidious stealth tax on Canadian jobs and growth.”

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Taking each of the “foundations” in turn, the depth of the problem becomes clearer — but so do the solutions.

TRANSPORTATION

Shopify president Harley Finkelstein responded on X last weekend to someone who said it is “beyond insane” that half of Canada’s population lives close to a corridor that could have a high-speed train running down it — namely between Quebec City and Windsor, Ont.

“I think about this daily. Who is solving this and how can I help them? The conditions seem beyond ideal,” Finkelstein wrote.

Canada remains the only G7 country that does not have high-speed trains.

The feasibility of such a link has been studied since the 1980s and the federal government issued a request for proposals from three consortia for a dedicated passenger track line that would go from Toronto to Quebec City, via Peterborough, Ont., and be built by 2030.

Eyebrows were raised recently when Air Canada was revealed as a partner in one consortium; odd, because any high-speed link would be a competitor to its short-haul domestic flights. The airline said that it wants to help “the harmonious integration of a future intercity rail network with existing airport hubs … for the benefit of all travellers.”

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It may also just be hedging its bets: French lawmakers are trying to ban flights between Paris and cities connected by high-speed trains.

But the likelihood is, the airlines will not need to worry about a high-speed link for many, many years.

Canada is just not good at building rail infrastructure on budget and on time. Take Toronto’s Eglinton Crosstown light rail system that is still not open, even though construction started in 2011 and was expected to be finished in 2020. The costs were judged at $9 billion when the contract was awarded; they are now estimated at nearly $13 billion.

The Foundations report says that the cost of building underground rail is two to four times more expensive in the U.K. and Canada than it is in France or Spain.

A large part of the problem is regulatory. The report said a three-mile track between Bristol and Portishead in southwest England required 18,000 pages of environmental assessment that cost nearly $60 million.

Projects in both countries are redesigned multiple times in response to stakeholder interventions.

In their FP Comment article, Deegan and Lynch suggest assessments should have hard deadlines; only people directly affected by a project should get intervenor status; appeals should be finite; and courts should exercise greater regard for economic policy decisions made by cabinet.

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France, which is notoriously highly taxed and dominated by labour unions, nevertheless does a good job building things. It has four times as many tram networks as Britain does and twice as many underground metro systems. It has thousands of kilometres of high-speed rail links and in the past 25 years has built more highways than the entire British motorway network.

A major reason is that France has spent more of its GDP on capital investment: 26 per cent across the public and private sectors, compared to just 19 per cent in the U.K., with major buy-in from the private sector (three-quarters of the highways are tolled).

ENERGY

In its 2024 budget, the federal Liberal government paid lip service to the idea that getting major projects is a priority, and that Canada’s regulatory system must be quicker and more efficient.

Yet, in its amendments to the 2019 Impact Assessment Act, forced upon it by a Supreme Court decision that said the federal government was infringing on provincial jurisdiction, Ottawa did not move toward a “one project, one assessment” solution.

Yet even it agrees that regulation is too cumbersome and costly, with different layers of government overlapping and sometimes competing.

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The declaratory policy of the government of Canada is that projects should be approved or rejected in 24 to 30 months. In practice, large projects can take five years or more. A project survey of 50 large projects by law firm Stikeman Elliott found federal project reviews averaged 56 months.

Canada is known as a difficult place to build major projects, with the inevitable negative impact on capital investment and competitiveness. The Macdonald Laurier Institute noted that the number of energy and natural resource projects completed in Canada dropped by 37 per cent between 2015 (88 projects) and 2023 (56 projects). A 70-per-cent decline in the oil price in 2014–16 does not invalidate the notion that approvals are hard to come by and projects are often beset by unexpected cost overruns and delays.

The government says it is intent on changing that reality.

Finance Minister Chrystia Freeland has charged former Bank of Canada governor Stephen Poloz with helping Ottawa to find ways to persuade Canada’s pension funds to invest domestically.

The industry has traditionally bristled at attempts by politicians to direct where it invests. Pension funds want large-scale, reliable long-term investments that are not subject to the political game of chance.

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According to The Logic, Brookfield Asset Management is in talks with other pension funds about creating a new $50 billion pool to buy domestic assets.

But it will take a major show of faith, such as privatizing the nation’s airports, to convince hard-nosed pension funds that their investment objectives and the government’s are aligned.

In her 2024 budget, Freeland said it shouldn’t take over a decade to open a new mine and secure our critical mineral supply chains.

The Trudeau government’s impatience to kick-start critical mineral production as part of its net-zero, transition-to-electric-vehicles narrative adds a curious postmodern component to the debate. Progressives are becoming as pro-build as are business-oriented conservatives.

Access to renewable natural resources means Canada has some of the lowest residential power prices in the world: the Canadian average was 19.2 cents per kilowatt hour last year, compared to 33 cents in Britain. (Within Canada, that ranged from 25.8 cents in Alberta to 7.8 cents in Quebec.)

Canada generates three times more electricity per person than the U.K. does, but its needs are also much greater, and are growing.

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A shift to electric vehicles means we would need to invest $350 billion in new electricity generation over the next 20 years to accommodate growing power demands.

One possible solution is small, modular nuclear reactors to increase the percentage of Canada’s generation produced by clean nuclear power from 15 per cent (compared to 60 per cent nuclear in France).

But that is going to require a streamlined approval process and it is far from clear it will be forthcoming.

The Liberal government has helped to create an anti-growth climate that is likely to be as hard to change as reducing carbon emissions. Critical mineral production is down and the average time from discovery to production on a new mine is 18 years.

HOUSING

The disparity between political will and economic will-not is even more stark in the housing sector.

The federal government is intent on increasing the housing stock, but reality has not yet aligned with those wishes. Housing starts are falling across much of the country and, while the government has set a target of 483,750 new units a year, TD Bank Group’s forecast of 250,000 is likely closer to the mark. Things do not happen just because prime ministers wish them to.

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The restrictions of the development control system mean cities have not been allowed to expand upwards or outwards.

The consequence is that the cost of land, as a proportion of the final purchase price, is much higher in Canada than in peer countries like France, which have allowed cities to spread.

Local residents continue to resist the disruption, congestion and competition for health care and education that come with new building.

Municipalities require developers to set aside “affordable” housing and constrain where building can take place. These restrictions act as a tax on new homes and those costs are passed on to the end purchaser. (Taxes now account for up to 30 per cent of a new home’s price.)

In addition, municipalities have imposed development charges, ostensibly for road, water and wastewater connections, that have far outpaced inflation. Economist Mike Moffatt, a senior director at the Smart Prosperity Institute, calls this a “massive transfer of wealth to older, wealthier residents from younger, lower-income new residents.” His research suggests that development charges on new homes in the Greater Toronto Area have increased by an average of 274 per cent (and inside the City of Toronto by 993 per cent) since 2011, when consumer prices over the same period have increased by just 41 per cent.

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The Foundations report noted that in Britain, national governments have tried to force local governments to permit the homes the country needs through targets and punishments but that this has backfired repeatedly, since targets calculated with almost no reference to actual demand have produced low-quality homes, far from the places where people want to live.

A study from the Building Industry and Land Developers Association that came out this week said the number of new homes being built in the GTA is lagging significantly behind population growth, which suggests the housing crisis is only going to get worse.

It revealed the municipal approvals for new housing takes an average of 20 months, with each month adding thousands of dollars to the cost buyers pay. Based on the average approval timelines, this adds on between $43,000 and $90,000 to the cost of a new home. Municipal developers’ fees add a further $164,920 to the cost of a single-family home in the GTA, the study said.

Both the Liberals and Conservatives are now advocating a carrot-and stick approach to municipalities that withdraws federal funding from cities that lag on building homes. Moffatt said he worries that setting targets based on sheer numbers treats all units as equivalent. “If the intention is to rack up the unit count, it is helpful to a point but doesn’t address the biggest shortfall, which is for three-bedroom-or-more family homes,” he said. “In five to 10 years from now, we might find that, yes, we incentivized the number of units but of lower-quality homes.”

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Despite the potential for unintended consequences, there are reasons for optimism that Canada and the U.K. can rediscover their vigour.

There has been a shift in the mindset on the left from saying no to everything, to being open to removing barriers that stop the private sector from supplying a pent-up demand for more efficient transportation, new energy supplies and better housing.

If the Conservatives win the next federal election, they should take advantage of this emerging consensus to build, baby, build. That will create jobs and attract capital in the construction phase, and increase productivity and prosperity in the longer term.

Politics is often the art of the possible — and quite often not much is possible. But opening up the economy to investment is almost entirely in the domain of the federal government.

Affluence is not guaranteed or eternal, but stagnation need not be either.

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Twitter.com/IvisonJ

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Publish date : 2024-09-27 23:11:00

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