Canada's economy in '90s: 'Truly ugly'

Standard & Poor's rates decade's performance the worst since the Depression

Marje Fletcher, the Ottawa Citizen / Canada tags behind U.S.

"Ugly," is how a think-tank describes Canada's economic performance this decade -- "truly ugly" when compared with the United States.

"In fact, it is the second-worst decade this century in terms of economic growth," Standard & Poor's subsidiary DRI says, suggesting only the Dirty Thirties were worse.

But that leaves a lot of room for improvement, which should come now that the global economy is on the mend, it says, adding that the federal government has wiped out its deficit and has money to invest in the economy -- in tax and debt relief, and in capital spending.

"In addition, we expect the underlying pace of Canadian inflation to remain weak for several more years," it says. "This means that the Bank of Canada can err on the side of providing more stimulus to the economy."

The economy could use it, according to the report, which outlines how Canada has fallen farther behind the U.S., in generating jobs and incomes, encouraging and attracting investment, in entrepreneurship, in the high-tech race, and in economic growth.

Canada can't even claim any more to be a "kinder" society, it claims, arguing that in the wake of government cuts here, the U.S. government now spends more caring for its elderly and unemployed .

"Historically, Canada has offered a more generous social safety net than the United States," it notes. "Canada's social safety net took a tumble during the 1990s, though, as various levels of government tried to rein in spending.

"Today, Canadian governments provide a fewer number of dollars (to its elderly and unemployed) than does the United States."

The surprisingly brutal assessment of Canada's economic -- and social --performance this decade comes only days after Canada was named by the United Nations, for the sixth consecutive year, as the No. 1 country in overall human development.

It also follows a report from a group of academics that argues there is no brain drain from Canada to the United States.

The DRI report finds that conclusion "quite surprising."

"Perhaps the real question is how much longer this income discrepancy can continue before the economic tug from the U.S. becomes too strong for Canada's best and brightest to resist," it says.

"In the United States, personal disposable income is soaring, while in Canada it continues to fall in real per capita terms."

While some analysts blame higher taxes for the lower levels of disposable incomes, the DRI report says "this is not just a tax issue."

"By far the most important reason for this divergence in disposable income was a tremendous slide in pre-tax personal income in Canada, concurrent with a dramatic surge in the United States."

Put another way, wages and salaries in the U.S. have been rising this decade while falling in Canada.

That, in large part, is because of the gap in the performance of the two economies, it says. The greater demand for labour in the U.S. has allowed workers there to demand higher wages.

Also, the government opened the door wider to immigration, increasing the supply of working-age Canadians, which helped keep a lid on wages.

"There is a huge well of untapped labour in Canada," it says, noting that unlike during recent decades, the proportion of working-age Canadians with jobs is now smaller than it was at the start of the 1990s.

But Americans are also earning more than Canadians in investment income and in earnings from their entrepreneurial business ventures, a greater proportion of them being in the fast growing high-tech sector.

While government restraint and corporate downsizing depressed the economy during the decade, DRI also notes that "the external environment was not kind to Canada."

In the wake of the Asian crisis, which pushed much of the world economy into recession, already weakening commodity prices "collapsed."

But the global economy is on the mend, and with it commodity prices.

And the federal government, not to mention most provinces, is sitting on a large and growing surplus, which DRI estimates will grow to $30 billion a year over the coming half-decade.

Also, there is significantly more room for the Canadian economy to expand than there is for the U.S.

"Consequently, Canada could grow more quickly than the U.S. economy for an extended period of time," it concludes.

It remains to be seen, however, whether, the economy will ever return to what the Bank of Canada has called the golden decade of the 1960s -- when economic growth was strong, inflation low, and incomes rising.

There are hurdles, it warns.

There is a 15-per-cent chance that a significant slowdown in the U.S. economy, the market for 85 per cent of Canadian exports, will drag Canada into recession as early as next year, and a 25-per-cent chance that will happen by 2002, it says.

But even if there is no recession, Canada may not reach its potential if the government doesn't use enough of its budget surpluses to cut the debt and taxes and spends too much on program spending, it warns.