Canada Needs a New Economic Game Plan

April 4, 2025 – Canada is facing threats to its economic security and territorial integrity from the US. Responding to these threats is job one, but Canada’s next government must not lose sight of the need to strengthen its economy, according to a new report from the C.D. Howe Institute. In “An Economic Strategy for Canada’s Next Government,” John Lester, in collaboration with Institute staff, sets out a detailed agenda for economic renewal.

“Canada must respond carefully to US tariffs,” says Lester. “We need to stand up for Canadian industries and workers – but in a way that doesn’t hurt our long-term competitiveness. Support for those hit hardest by tariffs must be targeted and temporary. We can reduce our dependence on the United States by renewing efforts to secure trade deals with the UK and the Association of Southeast Asian Nations (ASEAN), getting critical energy and mineral projects off the ground, and strengthening supply chains.”

The centrepiece of the economic strategy is improving Canada’s dismal productivity performance to stop the decline in our standard of living relative to peer countries. “Canada’s productivity problem didn’t just happen overnight,” says Lester. “For many years, we have invested less in machinery and R&D. And Canada has a poor track record on innovation, which is the key to productivity growth.”

Boosting productivity requires action on many fronts. Reducing the tax burden on investments will increase capital per worker, making them more productive. Reforming immigration to sharply reduce reliance on low-skill workers will also encourage employers to adopt more capital-intensive, more efficient production methods. Improving the effectiveness of R&D tax incentives, increasing patenting and commercialization activity by higher education institutions so it is in line with the high quality of research they undertake, and encouraging small firms to commercialize more of their inventions in Canada will promote a more innovative economy.

Small firms account for a high share of Canada’s output, which is a drag on productivity and prosperity because they are less efficient and pay lower wages than large firms. Canada’s next government should therefore review all policy measures supporting small-scale production to ensure the net effect on productivity is positive.

The report also urges the next government to put its debt on a sustainable path by returning to budget balance by 2028/29. Adopting a fresh approach to fiscal management will improve the odds of achieving its targets for deficits and debt. The proposed governance framework includes legislated guiding principles for fiscal policy, a multi-year cap on non-cyclical spending, and mandatory value-for-money assessments of program spending and tax breaks.

On climate policy, Lester argues that the elimination of the fuel charge has made it imperative to reassess the country’s greenhouse gas emissions reduction strategy. Before the results of this review are in, Canada’s next government should adopt a more focused approach built around large-emitter trading systems that avoids piling on new layers of regulation by dropping proposed measures like the oil and gas emissions cap and Clean Electricity Regulations. He also urges rethinking the 2035 zero-emission vehicle (ZEV) mandate, calling for room for hybrids and renewable-fuel vehicles alongside ZEVs.

“The shift from being America’s trusted ally and valued trading partner to an annexation target caught us all by surprise,” says Lester. “Canada’s next government needs to protect workers from the fallout from the US economic assault while building an economy that’s more innovative, more productive, and less dependent on one trading partner.”

Read the Full Report

For more information, contact: John Lester, Fellow-in-Residence, C.D. Howe Institute; Percy Sherwood, Associate Editor and Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.