Canada Has What It Takes to Lead the G7 in Per Capita Growth
If Canada is Going to Talk Fiesty, It Needs to Act Boldly
By Douglas Laxton
April, 2025
FIESTY – Fiscal, Immigration, Energy, Strong Institutions, Trade,
Canada stands at a unique moment in history. With global uncertainty intensifying and the United States heading toward what many experts believe is an inevitable fiscal crisis, Canada has a rare opportunity to take the lead in the G7—not through flashy spending or short-term stimulus, but by implementing a bold and credible long-term strategy focused on raising per capita GDP growth. If Canada’s government is serious about ending its old relationship with the US and become a more self-reliant and determined country while also becoming a global economic power, then it has a lot of work to do but we will outline some of the steps which Canada can take.
Why Canada Can Lead in Per Capita GDP Growth
First, we must admit that the gap between the US and Canada in terms of GDP per capita has steadily widened since the 1980’s and Canadians earn about 25% less than their American counterparts. The goal starting today, regardless of which government is formed in the upcoming elections should be to formulate a foolproof strategy that ensures this gap is closed over time.
Canada has several advantages that many of its G7 peers do not. It has the lowest government debt-to-GDP ratio among the G7, strong institutions, abundant natural resources, and a globally respected democratic framework. But despite these strengths, our productivity growth has underperformed. To change that, we need a credible plan—one that integrates structural reform, energy strategy, digital infrastructure, and human capital development.
This would be Canada’s chance to outgrow the US which it needs to do by about 2.5 percentage points on average over the next 15 years if it is serious about closing the GDP per capita gap and become a global economic leader. Here are several steps that would be part of an ambitious fiscal expansionary policy plan that is oriented towards raising productivity growth in the short, medium and long term.
This experience has made both fiscal and monetary policy institutions strong in Canada and we should be confident that if any country in the world could design and execute an ambitious expansionary fiscal plan that supports growth while maintaining sustainability, it is Canada.
Meanwhile, the US never learned these lessons and are fast approaching a fiscal crisis if they do not get serious about controlling their deficits which remain a sizeable 6% of GDP and are expected to continue under the “Current Policy” scenario. However, at some point it would become apparent under such a scenario that fiscal was on an unsustainable path and would require a “Consolidation” scenario where the government no longer supports growth but subtracts from it.
This would be Canada’s chance to outgrow the US which it needs to do by about 2.5 percentage points on average over the next 15 years if it is serious about closing the GDP per capita gap and become a global economic leader. Here are several steps that would be part of an ambitious fiscal expansionary policy plan that is oriented towards raising productivity growth in the short, medium and long term.
What Can Canada Do to Become a Global Leader
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What Can Canada Do to Become a Global Leader
One of Canada’s most overlooked barriers to productivity is the existence of interprovincial trade restrictions. In fact, Canadian provinces trade more with the US than with each other. If Canada does not want to be referred to as the 51st US state, then it should stop acting like one. These outdated barriers distort markets, reduce competitiveness, and make it harder for Canadians to benefit from the scale of our own economy. During the Trump-era tariff battles, for example, some provinces retaliated by removing U.S. alcohol from shelves—but due to provincial monopolies, Canadians couldn’t easily switch to domestic alternatives. This isn’t just an inconvenience—it’s a symptom of a system that fails to treat the national economy as a unified whole.
That said, in the aftermath of the Trump tariff war, as Chrystia Freeland says, “interprovincial trade is sexy” now and this is exactly what Canada needs since opening provincial economies among each other should help raise output by 4% (IMF 2019) and internal efficiency to absorb the shock coming from the states.
2. Leverage AI to Raise Productivity
AI is the future and will dominate how fast economies grow with some estimates suggesting AI can raise overall productivity by 2 percentage points annually. If Canada intends to raise its GDP per capita and close the gap and move past the US then investing in an AI economy should be the number one new fiscal priority. This begins with sensible laws governing responsible AI that help define the AI landscape and provide clarity for the industry moving forward. The legislation should strike the balance between the wild west approach of the US where there is little regulation and the more stringent regulatory steps taken by the EU. The potential impact of AI can be large but will depend on how flexible the economy is to change.
3. Investing in Education & Social Safety Nets
AI is the future and will dominate how fast economies grow with some estimates suggesting AI can raise overall productivity by 2 percentage points annually. If Canada intends to raise its GDP per capita and close the gap and move past the US then investing in an AI economy should be the number one new fiscal priority. This begins with sensible laws governing responsible AI that help define the AI landscape and provide clarity for the industry moving forward. The legislation should strike the balance between the wild west approach of the US where there is little regulation and the more stringent regulatory steps taken by the EU. The potential impact of AI can be large but will depend on how flexible the economy is to change.
4. Modernizing the Immigration Process
Immigration can also play a key role in Canada’s future. Canada’s policies should be designed to attract talented individuals who share our democratic values and can help us build a high-productivity economy. We don’t need to compete on financial capital inflows—we need to compete on purpose and therefore human capital should be the focus.
AI can be utilized to identify the employment gaps within Canada that limit its potential to grow. As the US decides to close itself off from migration inflows, Canada could implement a state-of-the-art AI-augmented immigration process that regularly updates the skills and qualities the economy is experiencing shortages in and offer an expedited process for these sectors.
Creating an AI-driven economy also intends to attract skilled individuals who align with long-term values/goals. The development and exploitation is not just about wealth but about making sure everyone in Canadian society is contributing and encourages national cohesion.
5. Expanding Energy Infrastructure
On energy, Canada is sitting on an enormous opportunity. With Europe and Asia seeking more stable energy partners, Canada can become a long-term LNG supplier. At the same time, we should invest in expanding our nuclear capacity to meet future demand from data centers and clean digital industries.
6. Strong Institutions
Finally, we must align fiscal and monetary policy with this strategy. Unlike the U.S., which faces unsustainable debt dynamics and rising interest burdens, Canada has space to invest. But that space must be used wisely, with credibility in mind. That means continuing to implement prudent risk management across government—not just in central banking, but in fiscal policy, labor markets, and regulatory reform.
We have already talked a little about what fiscal can do, the Bank of Canada can move towards a prudent risk management approach to monetary policy that apply the principles of the Forecasting and Policy Analysis System (FPAS) Mark 2. This system seeks to achieve macroeconomic stability despite an uncertain future where the central bank plays a key role in mitigating the really bad outcomes from forming such as inflation expectations becoming unanchored or a financial crisis. The Bank of Canada used to be a leader in the monetary policy world that have produced many great economists that have gone on to other roles in other international institutions and have proselytized the FPAS within those institutions. It is about time that the Bank of Canada regain its international status of excellence by adopting the next generation of analytical frameworks.
All-in-all, Canada is in a position to carry out an ambitious plan that aligns monetary, fiscal, and structural policies that changes the current economic outlook of stagnation to one of growth and leadership. Canada doesn’t need to wait for a crisis to act. The tools are there. The policy space is there. What we need now is leadership to bring all the pieces together—and the courage to aim higher.
References
Alvarez, Krznar, and Tombe (2019). Internal Trade in Canada: Case for Liberalization. IMF
Briggs and Kodnani (2023). The Potentially Large Effects of Artificial Intelligence on Economic Growth. Goldman Sachs