NB economic growth: A couple of percentage points here or there, what’s the big deal?

I have been insisting in recent years that governments in Atlantic Canada should focus on getting their provincial economies back to pre-2008 rates of economic growth. Only PEI has come close to this objective. Between the long period 1983 and 2007, the New Brunswick economy, as measured by real GDP, increased by an annual average of 2.5% per year and this included a pretty significant recession in the early 1990s. By contrast after the 2008/2009 recession, between 2010 and 2018, real GDP in New Brunswick increased by only 0.6% per year.

Economists talk about the problem of large numbers. When people are confronted by very large numbers they have a hard time interpreting what it means.  When someone says the federal government will run a $343 billion deficit this year it’s such a large number that people can’t fathom what it actually means.  It works out to be about $23,000 per household across the country.

I think there is also a ‘small number’ problem. When people talk about 0.2% or 1.8% or some other tiny fractions, it is hard to put these into any perspective.  For example, is it clear that 1.8% is nine times larger than 0.2%?

This starts to matter a lot when looking at the performance of economies.  Some people see average annual real GDP growth of 0.6% in New Brunswick versus 2.5% and they think that is only a couple of percentage points  difference, so what’s the big deal?

In reality, the difference between 0.6% and 2.5% over a long period of time can be monumental. First of all, a 2.5% growth rate is over 4 times faster than a 0.6% growth rate.

To put this in greater perspective, between 2009 and 2018, the GDP across Canada increased by a cumulative 22% (compared to a cumulative 5.6% in New Brunswick). If the New Brunswick economy over this period had grown by the national growth rate of 22%, the economy in 2018 would be over $5 billion larger (real GDP, 2012 dollars).

What is $5 billion in real GDP?  Well, for one thing the New Brunswick government generates own-source revenue at an amount equivalent to 16% of GDP so that would add another $820 million per year in GNB taxes and other own-source revenues without raising tax rates at all.

I argue is is going to take somewhere in the range of 2% to 2.5% per year in New Brunswick over the next 20 years to be able to sustain public sector funding of health care (without gutting other spending or assuming massive new federal transfers).

So these tiny numbers do matter.

We need to push our elected officials to make getting back to a moderate level of economic growth a primary focus in the years ahead.

 

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