Fraser Institute: Size of Canadian state is harming the economy

Report says that the growth of federal, provincial, and local governments will make recovery from recession harder

Fraser Institute: Size of Canadian state is harming the economy

Government officials talk of post-pandemic recovery and announce measures to spark growth in the economy, but a new report suggests they might be a barrier to the bounceback.

Specifically, the size of government in Canada could be a negative influence on the economy, according to the Fraser Institute Report.

The study measures federal, provincial, and local government spending in each province as a share of the economy (GDP). It also considers public sector employment relative to private sector employment from 2007 to 2018, the most recent year of comparable data.

During the 10-year period, the size of government increased in every province except Saskatchewan and Prince Edward Island. Relative to the size of the economy, the growth in government ranged from 29.3% in Alberta to 61.6% in Nova Scotia.

“The size of government is directly linked to an economy’s ability to grow, and so it is important to understand how governments across Canada have grown in recent years, and what impact that might have on our economic recovery moving forward,” said Steven Globerman, resident scholar at the Fraser Institute, professor emeritus at Western Washington University and study co-author.

Optimum growth
Previous research suggests that the optimal growth in government relative to the economy is 26-30% and when this is exceeded it weakens economic growth in several ways, such as crowding out private sector investment.

The latest study shows that government growth already exceeded the optimum level prior to the surge in government spending as a response to the pandemic.

“The size of government has been on the rise all across Canada for years, which will impact the recovery from the current recession,” said Alex Whalen, policy analyst at the Fraser Institute and coauthor of The Changing Size of Government in Canada.