Canada's Performance 2004

II. Canada's Economy

Introduction

The economy is a complex system involving the production, distribution and consumption of commodities such as material goods and services. In a free-market economy such as Canada's, the laws of supply and demand determine what, how and where goods and services will be produced, and who will consume them and when.

Canada's economic well-being depends on factors such as:

• the surrounding environment and the wealth and sustainability of natural resources;
• the strength of our industries;
• the health of the financial and service sectors;
• the ability to span distances using communications and transportation technologies;
• dynamic trade relationships with other nations; and
• the ability to compete in a global marketplace.

The government's central goal is to achieve the highest possible standard of living and quality of life for all Canadians. Critical to that is building an economy that produces jobs and growth. Canadians have been increasingly successful in recent years in creating a more productive, competitive and sustainable economy.

Canada's economy is one of the strongest and healthiest among the seven leading industrial countries (G-7), which consist of the U.S., Germany, Japan, France, the U.K., Canada and Italy. In fact, unlike many countries in the world, Canada is working toward incrementally paying down its national debt.

However, in 2003 Canada experienced a slowdown in economic activity. A major contributor was the more than 20 per cent appreciation of the Canadian dollar against the U.S. According to Statistics Canada's Year-end Review 2004, this event led to the largest 12-month movement of the exchange rate (up or down) in the country's history, accounting for an increase of 21.7 per cent from 63.39 to 77.13 cents (US) during the year.

The Government of Canada's Role in the Economy

Enhancing the well-being of Canadians, through higher living standards and a better quality of life, lies at the heart of the government's economic and social policies. By undertaking the right investments and creating favourable conditions for growth, the government can encourage continued prosperity.

In the October 2004 Speech from the Throne, the Government of Canada committed to pursue a strategy to build an even more globally competitive and sustainable economy. This strategy includes investment in skilled knowledge workers, cutting-edge research, science and innovation and helps provide an open, transparent, rules-based global trading system that would allow for the movement of goods, services, people and technology. Also included in the federal government's strategy is a commitment to regional and sectoral development through efforts to upgrade skills, support research and development, community development, and modern infrastructure.

A strong economy, supported by a modern infrastructure, contributes to job creation and the level of income required to sustain families and their communities, while investments in key areas of social policy help to ensure that the benefits of economic growth are available to all.

This chapter measures progress against key Government of Canada outcomes related to Canada's Economy:

1. An Innovative and Knowledge-based Economy;
2.  Income Security and Employment for Canadians;
3. A Secure and Fair Marketplace; and
4. Strong Regional Economic Growth.

Government of Canada outcome: An innovative and knowledge-based economy

Why Is It Important?

Innovation is a driving force in economic growth and social development. This is particularly so in today's knowledge-based economy. Innovation through new knowledge has become the main source of competitive advantage in all sectors of economic activity and is closely associated with increased exports, productivity growth and the creation of new firms.

In February 2002, the federal government launched its 10-year innovation strategy (Canada's Innovation Strategy) to help make Canada one of the world's most innovative countries. In collaboration with provincial and territorial jurisdictions, key stakeholders, universities, communities and citizens, the government is working to make Canada a world leader in developing and applying ground-breaking technologies; creating and commercializing new knowledge; promoting continuous learning; training skilled workers; ensuring a strong and competitive business environment; and strengthening the economy.

Connectedness is a broad concept that reflects the ability to use information and communication technologies to interact and transact with one another. Canada has ranked second behind the U.S. in the Conference Board of Canada 2003 Connectedness Index for the fourth consecutive year.

Measures to Track Progress

The following indicators contribute to measuring Canada's progress in the area of An Innovative and Knowledge-based Economy:

• Innovation as measured on three levels: GERD/GDP, scientific patents and publications;
• Educational attainment as measured by the percentage of the population aged 25 to 64 with completed post-secondary education; and
• Literacy as measured by three levels of proficiency: prose, document and quantitative.

Innovation

Innovation is the process of extracting new economic and social benefits from knowledge. It means conceiving new ideas about how to do things better or faster, or creating a product or service that has not previously been developed or thought of. Innovations can be world firsts, new to Canada, or simply new to the organization that applies them.

While gross expenditure on research and development (GERD) provides an indication of input into the innovation process, it does not indicate whether research and development led to innovation or whether benefits were obtained from the innovations. For example, while Canadian manufacturing firms measured higher than many European countries in innovation in 1999, they captured smaller economic benefits from their innovation.

Current Level and Trends

Canada's GERD as a percentage of GDP was 1.87 per cent in 2003. While this represents a decrease from 1.91 per cent in 2002, the GERD has increased since 1997, when it was 1.68 per cent. It has become increasingly important for Canada to remain competitive with other countries that are aggressively increasing their GERD. According to the key considerations identified in Canada's Innovation Strategy, Canada would greatly benefit from achieving a GERD of 3 per cent in the upcoming years (other countries are, or soon will be, achieving a GERD of this level).

Shares in triadic patent families are used to measure a country's inventive performance, diffusion of knowledge and innovative activities. Canada's world share in triadic patent families among the OECD countries has been fluctuating since 1993 when it was 0.99 per cent to 1.18 per cent in 1999. The U.S. had the most shares in 1999 at 35.03 per cent.

Compared to other OECD countries, Canada's share of science and engineering articles outputs has steadily decreased over the past 15 years. In 2001 output totalled $22,626, down from $23,417 in 1999.

International Comparison

In 2002, Canada advanced from sixth to fifth place among G-7 nations with respect to GERD as a percentage of GDP. However, OECD studies suggest that an innovation gap separates Canada from the leading OECD countries. The corresponding chart shows that in a number of indicators of innovation performance, Canada is considerably behind the U.S. and other G-7 countries.

Educational Attainment

Educational attainment is the highest level of education achieved by an individual in a learning institution. It affects the likelihood of an individual finding employment, the type of work, job security and earnings. Studies show that, in general, more education means more earnings.

Current Level and Trends

In 2002, full-year, full-time workers with a university degree earned on average $62,900 compared to $39,200 for those with only a high school diploma, a difference of $23,700. (Source: Statistics Canada, 2004) Within the next few years, it is projected that 7 in 10 new jobs will require some form of post-secondary education or training. (Source: Human Resources Development Canada, Knowledge Matters: Skills and Learning for Canadians, 2000)

According to the 2001 Census, 61 per cent of all Canadians aged 25 to 34 had educational credentials beyond high school; 28 per cent had a university education; and 21 per cent held a college diploma. This is a marked increase over a decade earlier when only 49 per cent of people in that age category had credentials past high school, with 18 per cent having a university education and 17 per cent holding a college diploma.

International Comparison

According to the OECD, Canada is the world leader in education when considering the combined proportion of university and college graduates. In 2001, 41 per cent of Canada's population aged 25 to 64 had a college or university education, compared with 37 per cent in the U.S. and 34 per cent in Japan. This is due to the high post-secondary enrolments in Canada and the fact that over 40 per cent of immigrants who arrived in Canada during the 1990s are university graduates.

Literacy

Literacy is more than simply being able to read and write. It is the ability to read and understand written materials, including reports, documents, and mathematical charts and displays; use that information to solve problems, evaluate circumstances and make decisions; and communicate that information orally and in writing.

Current Level and Trends

Literacy is important to the economic success of both individuals and countries, especially in today's highly competitive global economy. Countries are moving quickly to raise the literacy levels of their people. At the individual level, a basic level of literacy is now required to get and keep most jobs and to adjust to changing economic opportunities. At the national level, it enables a country's workforce to compete in a changing world, opening the way for economic growth and enhanced quality of life.

The International Adult Literacy Survey (IALS) has helped shape the way we think of literacy today. It has five levels of proficiency ranging from the lowest (Level 1) to the highest (Level 5) and tests for three types of literacy:

• prose - the ability to understand and use information from texts (e.g. instruction manuals);
• document - the ability to locate and use information contained in various formats (e.g. maps and charts); and
• quantitative - the ability to apply arithmetic operations (e.g. calculating a tip).

While the most recent survey results will not be available until 2005, the 1994 results of the IALS reported that the fundamental story of literacy in Canada remained the same from 1989 to 1994. During this period, there were significant numbers of adult Canadians with low-level literacy skills that constrained their participation in society and in the economy.

In all three types of literacy, over 40 per cent of Canadians aged 16 and over functioned below Level 3, the minimum desirable threshold, which corresponds roughly to successful high school completion and college entry. In the 16 to 25 age group, over 30 per cent functioned below Level 3. One in four high school graduates in the 16 to 20 age group did not have the skills requirements of Level 3 on the prose and literacy scale. (Source: HRDC, Reading the Future: A Portrait of Literacy in Canada, 1995)

International Comparison

Sweden leads the world in all three types of adult literacy in OECD countries. Relative to other countries, Canada scored in the mid-range, ranking fifth on the prose literacy scale, eighth on the document literacy scale, and ninth on the quantitative literacy scale.

Canada consistently outperformed the United States on all scales, but ranked below many European countries. (Source: Highlights from the Final Report of the International Adult Literacy Survey: Literacy in the Information Age, 2000)

An OECD study conducted in 2000 presents a more recent picture of Canada's performance in the area of reading, mathematics and science. The 2000 Program for International Student Assessment (PISA) centres primarily on reading, with a secondary focus on mathematics and science skills for 15-year-old students in 32 countries. Canada ranked among the top six nations, second only to Finland in average test scores. (Source: OECD, 2002)

The Government of Canada's Performance

Several departments and agencies contribute to the pursuit of An Innovative and Knowledge-based Economy through their respective departmental strategic outcomes. In the electronic version of the report, clicking on the links in the table below will lead the reader to planning, performance and resource information, which is contained in the organizations' Departmental Performance Reports and Reports on Plans and Priorities. The Database, which can be found at http://www.tbs-sct.gc.ca/rma/krc/so-rs_e.asp, also leads to relevant audits and evaluations.

Government of Canada outcome: Income security and employment for Canadians

Why Is It Important?

An important aspect of quality of life is the ability to adequately support oneself financially. For some groups in society, this is not always possible even when the economy is performing well.

In the 2004 Budget, the Government of Canada addressed these issues by committing to invest in learning, research and development, and a "New Deal" for all communities. The government is also working toward creating a fair work environment, ensuring effective industrial relations in the workplace, providing effective income security programs for seniors, and helping persons with disabilities.

The well-being of children is a determinant of the present quality of life in Canada and our future productivity. The Government of Canada is committed to assisting low-income families through a number of initiatives such as the National Child Benefit (NCB), the Early Childhood Development (ECD) Agreement, and Early Learning and Child Care (ELCC).

In 2003, 4.1 million Canadians were 65 years of age or older. Their numbers are expected to reach 6.4 million in 2020 - nearly one in five Canadians - making them the fastest growing age group in Canada. Seniors today are generally healthier, better educated and economically better off than seniors of previous generations. Canada's diversified retirement income system has significantly contributed to the income security of the country's seniors, a long-standing priority for the Government of Canada.

According to 2001 Census data, the average age of the labour force was 39 in 2001, up from 37.1 in 1991. With the baby boomers aging and fewer young people entering the working-age population due to lower fertility rates over the past 30 years, the potential exists for shortages in certain occupations. As a result, a wide range of occupations, from doctors and nurses to teachers, plumbers, and electricians, may face shortfalls by 2011.

To help offset these potential shortages, Canada has increasingly turned to immigration as a source of labour force and skill growth. The 2001 Census data show that immigrants who landed in Canada during the 1990s and who were in the labour force in 2001 represented almost 70 per cent of the total growth of the labour force over the decade. If current immigration rates continue, it is possible that immigration could account for virtually all labour force growth by 2011.

Measures to Track Progress

The following indicators contribute to measuring Canada's progress in the area of Income Security and Employment for Canadians:

• Employment rate as measured by the percentage of the working-age population that has jobs.
• Income security as measured by real disposable income (RDI) per capita and low income cut-off (LICO).

Employment Rate

Current Level and Trends

Canada experienced employment growth during 2003, albeit at a slower pace than in 2002. Strong growth followed in the last four months of 2003 bringing job gains to 291,000. Employment strengthened after March 2004 following a weak first quarter. This growth helped to push the number of employed relative to the working-age population (persons 15 and over) to 62.4 per cent in 2003, the highest employment rate on record.

Provincial Differences

The Atlantic provinces and Quebec continue to have higher unemployment rates than the national average. The unemployment rate in British Columbia has surpassed the national average in each of the last six years.

International Comparison

With the Canadian labour market outperforming the U.S. labour market in 2002 and 2003, the gap between the unemployment rates in the two countries narrowed from almost 4 percentage points in late 1996 to 1.1 percentage points in March 2004.

In 2003, Canada's employment rate surpassed that of the United States for the first time in over two decades.

Income Security: Real Disposable Income (RDI) per Capita

Real disposable income (RDI) per capita is the amount of income available to an individual for the purchase of goods and services and for personal savings after taking into consideration taxes, transfers and inflation. Changes in RDI over time indicate the evolution in a country's standard of living.

Current Level and Trends

In 2003, RDI per capita stood at $20,324 compared to $20,226 in 2002. After declining in the first half of the 1990s, RDI per capita has increased at an average rate of 1.7 per cent per year since 1997, reflecting strong employment growth and cuts in personal taxes.

In addition, the 2001 Census indicated increases in overall earnings, defined here as total wages and salaries plus net income from self-employment. In 2000, for the first time in Canadian history, the average annual earnings of Canadians aged 15 or older exceeded $30,000, to reach $31,757. This represents an increase of 7.3 per cent from 1990-2000, compared with the 1.3 per cent rise between 1980 and 1990. The 1990s increase mirrored a robust demand for more highly skilled workers, an aging workforce of baby boomers who made substantial gains during the 1990s, and an increasing share of workers holding university degrees.

Income Security: Low Income Cut-offs (LICOs)

Low income cut-off (LICO) is the income level (after tax and income transfers from governments) at which an individual or a family has to use substantially more of its income than the average Canadian individual or family for food, shelter and clothing. LICOs vary according to family size and community size.

Current Level and Trends

Despite the strong growth in average incomes, certain segments of society continue to experience economic hardships. Many Canadians live on incomes that are insufficient for their daily needs or for their adequate participation in society.

• In 2002, the LICOs varied from $10,429 for an unattached individual living in a rural area to $41,372 for a family of seven or more persons living in a large Canadian city.
• The percentage of Canadians living below the LICOs measure has moved from 10 per cent in 1989 to a high of 14 per cent in 1996, then down to 9.5 per cent in 2002.
• An estimated 1 million people living alone were below the LICOs in 2002. This represents about 25 per cent of the total, down from 34 per cent in 1996.
• Canada's low-income rate for seniors has declined significantly, from 20.8 per cent in 1980 to 6.9 per cent in 2002.
• Of the estimated 500,000 lone-parent families headed by a woman, 34.8 per cent earned low income in 2002, up from 30.1 per cent in 2001. This was the first increase in the low-income rate for these families in five years. Their low-income rate peaked at 49 per cent in 1996.
• An estimated 10.2 per cent of children, or 702,000 Canadians under the age of 18, were living in low-income families in 2002. This represents a decline for the sixth consecutive year from a peak of 16.7 per cent in 1996. (Source: Statistics Canada, The Daily, 2004)

The Government of Canada's Performance

Several departments and agencies contribute to the pursuit of Income Security and Employment for Canadians through their respective departmental strategic outcomes. In the electronic version of the report, clicking on the links in the table below will lead the reader to planning, performance and resource information, which is contained in the organizations' Departmental Performance Reports and Reports on Plans and Priorities. The Database, which can be found at http://www.tbs-sct.gc.ca/rma/krc/so-rs_e.asp, also leads to relevant audits and evaluations.

Government of Canada outcome: A secure and fair marketplace

Why Is It Important?

The marketplace is an essential foundation for investment, innovation, trade, sustainable development, job creation, consumer confidence and economic growth. A secure, fair marketplace maintains and enhances consumer confidence, and gives businesses the best environment possible for competitiveness.

The Government of Canada is committed to providing a secure and fair marketplace by ensuring that:

• the Canadian financial system is safe and sound;
• Canadians comply with tax, trade and border legislation;
• producers' rights are protected; and
• high standards for a safe and secure trading system are in place.

The globalization of markets and technological change demands that Canada's marketplace legislation be up to date to remain competitive with G-7 countries in order to increase consumer confidence and economic opportunities.

The Government of Canada is committed to addressing fraudulent, unfair and deceptive behaviour in the marketplace by seeking tougher penalties; increasing awareness among target groups on how to detect and self-protect against these crimes; and modernizing the tools used for detection, prevention and deterrence. (Source: Industry Canada, Making a Difference - Contributing to the Quality of Life of Canadians, 2003)

An aspect to consider for economic opportunities is the importance of direct investments, both Canadian and foreign. According to Statistics Canada, direct investments are investments through which investors in an economy acquire a significant influence over the management of a business operating in another economy. The Government of Canada considers foreign direct investment (FDI) an important contribution to the Canadian economy in terms of capital, innovation and technology. In 2003, the most important direct investor countries in Canada were the United States, France, the United Kingdom, the Netherlands and Japan. The amount of foreign direct investment into Canada has been decreasing since 1990, while the amount flowing out of the country has been increasing. (Source: Conference Board of Canada 2004 Report, Open for Business)

Measures to Track Progress

The following indicator contributes to measuring Canada's progress in the area of A Secure and Fair Marketplace:

• Barriers to entrepreneurship as measured by barriers to competition, regulatory and administrative transparency and administrative burden on start-ups (among G-7 countries).

Current Level and Trends

According to the OECD, Canada has developed a strong regulatory capacity that has greatly contributed to Canada's economic growth. The 2002 OECD report entitled Regulatory Reform in Canada, Maintaining Leadership Through Innovation, examines the following three areas for measuring the regulatory climate:

• Regulatory policies for both foreign and domestic firms;
• Economic regulation and how it supports competition; and

Administrative regulation.

In 2002, Canada had the second lowest level of regulatory barriers to entrepreneurship among G-7 countries. It was surpassed only by the United Kingdom. These low barriers contribute to an innovative economy as well as provide an advantage for Canadian entrepreneurs in the global marketplace. However, Canada has one of the least friendly regulatory environments for foreign firms. For more information on these restrictions, please see the Conference Board of Canada's 4th Annual Innovation Report 2002.

The Government of Canada's Performance

Several departments and agencies contribute to the pursuit of A Secure and Fair Marketplace through their respective departmental strategic outcomes. In the electronic version of the report, clicking on the links in the table below will lead the reader to planning, performance and resource information, which is contained in the organizations' Departmental Performance Reports and Reports on Plans and Priorities. The Database, which can be found at http://www.tbs-sct.gc.ca/rma/krc/so-rs_e.asp, also leads to relevant audits and evaluations.

Government of Canada outcome: Strong regional economic growth

Why Is It Important?

Strong regional, urban and rural infrastructures are vital to a nation's sustained prosperity and economic growth. According to the 2001 Census, almost 80 per cent of Canadians live in an urban centre of 10,000 people or more, and predictions show that this rate could exceed 90 per cent in the coming decades. A rapid increase in population affects the rate at which renewable and non-renewable resources are depleted within urban areas, thus increasing pressure on infrastructure modernization.

The Government of Canada is committed to working with Canadians, organizations and other levels of government to ensure the long-term sustainability of rural and urban communities. The federal government has invested $7.05 billion for strategic and municipal-rural infrastructure investments through the Canada Strategic Infrastructure Fund (CSIF), the Infrastructure Canada Program (ICP) and the Municipal Rural Infrastructure Fund (MRIF).

The government's objective to provide affordable housing, good roads, public transit, and abundant green space in communities includes:

• funding municipalities through the sharing of a portion of the federal gas tax transfer;
• acceleration of the $1 billion Municipal Rural Infrastructure Fund, with spending over the next 5 years instead of 10;
• a stronger voice for municipalities in federal decisions that affect them; and
• increased support for community-based economic development and the social economy.

Measures to Track Progress

The following indicator contributes to measuring Canada's progress in the area of Strong Regional Economic Growth:

• Real gross domestic product (GDP) per capita

Current Level and Trends

GDP per capita is the inflation-adjusted value of all products and services produced in Canada per person in a given year. When real GDP is growing near its long-term potential growth rate, the economy is growing as strongly as possible without sparking inflationary pressures. A growth rate below potential, means that the economy's stock of plants and equipment is not being used to the fullest, and unemployment tends to rise.

Real GDP per capita is the most widely used indicator of national standards of living. It is important to remember, however, that it does not take into consideration activities that occur outside the market, such as the value of natural capital, work done within the home or by volunteers, or the harmful effects on human health from pollution.

After leading the way in economic growth among G-7 countries in 2002, Canada has experienced a slowdown in economic activity reflecting a series of economic shocks. The most important factor was an unprecedented appreciation of the Canadian dollar. As a result of this slowdown, real gross domestic product (GDP) expanded by only 2 per cent in 2003, well below the 3.2 per cent expected by private sector economists at the time of the 2003 Budget. Despite this slowdown, Canada fell only to the mid-range of G-7 growth.

The Organisation for Economic Co-operation and Development (OECD) predicts Canada will be the only G-7 nation to post a budget surplus in 2004. Canada is expected to record its seventh consecutive balanced budget in 2003-04. The federal debt-to-GDP ratio is expected to fall to 42 per cent in 2003-04, down from its peak of 68.4 per cent in 1995-96. The federal government has set an objective of reducing the federal debt-to-GDP ratio to 25 per cent within 10 years.

Real Gross Domestic Product: Provincial and Territorial Comparison

Current Level and Trends

Several events in 2003 can account for the change in pace of GDP growth nationally to 1.7 per cent from 3.3 per cent in 2002.⁽¹⁾

Many unforeseen events such as the outbreak of severe acute respiratory syndrome (SARS) and mad cow disease (BSE), the power blackout in Ontario, and environmental disasters such as Hurricane Juan on the East Coast and forest fires in British Columbia negatively affected economic growth in 2003. In addition, the appreciation of the Canadian dollar during the year reduced demand for Canadian goods due to the increase in the relative cost of Canadian goods and services.

In 2003, a slowdown in GDP was experienced in the Atlantic provinces, Quebec, Ontario, Manitoba and British Columbia.

The 10.6 per cent increase in the Northwest Territories GDP was the direct result of an increase in the mining and exporting of diamonds. Nunavut's commensurate loss was due to shortfalls associated with the closing of gold mines.

The Government of Canada's Performance

Several departments and agencies contribute to the pursuit of Strong Regional Economic Growth through their respective departmental strategic outcomes. In the electronic version of the report, clicking on the links in the table below will lead the reader to planning, performance and resource information, which is contained in the organizations' Departmental Performance Reports and Reports on Plans and Priorities. The Database, which can be found at http://www.tbs-sct.gc.ca/rma/krc/so-rs_e.asp, also leads to relevant audits and evaluations.