Government consumption – exhaustive spending on employees and other inputs – competes most directly with the private sector for resources. When the economy is weak, as in the early 1990s, after the 2008 financial crisis, after the 2014 oil price collapse and during the COVID pandemic, it is natural for government consumption to rise as a share of GDP, while business investment – which is strongly affected by economic cycles – falls. When the economy strengthens, government consumption should fall as a share of GDP – if it does not, government can crowd out private spending, including business investment. Canada’s post-pandemic experience is concerning as government consumption has trended up while business investment has struggled. Canada badly needs the productivity gains that come from higher business investment. Lower consumption by governments would help.
Read this C.D. Howe Institute research to learn how the federal government can reduce spending more effectively and free up resources for private sector growth.
