Stephen Poloz’s Plan to Fix Canada’s Economy

Economy | Feb 7, 2025

Image: Stephen Poloz (Canada Club Toronto)

How Canada Can Get Its Economy Back on Track – Insights from Stephen Poloz

On February 5, 2025, the former Governor of the Bank of Canada, Stephen Poloz, delivered a speech at the Canadian Club Toronto about the future of Canada’s economy. He covered a concerns about U.S trade tensions, productivity issues, Canada's weak business investment and the need for policy changes to ensure economic stability.  His key message?  Canada needs to take bold action NOW before it's too late.

Canada’s Economy is in a Fragile Spot Big Problem

Poloz painted a sobering picture of where Canada's economy stands today. While the economy weathered the COVID-19 crisis pretty well, the economy is in a much weaker position now. What’s wrong?

See:  Tariff Trade War Hits Canada – What’s Happening

• High interest rates are squeezing households and businesses
• Business investment has been sluggish for over a decade
• Young people face the toughest job market since the 1990s
• If Canada is hit with U.S. tariffs under a Trump presidency, it could lead to a permanent loss of up to 5% of GDP.  Retaliatory tariffs from Canada would only make things worst by further driving up costs.  The Canadian dollar could drop up to 20%, making imports more expensive.  A weak dollar might help exporters but it would really hurt Canadian consumers by making every day goods more expensive.

Poloz said that while these challenges are serious, Canada has an opportunity to strengthen economic resilience through investment, structural reforms, and proactive policy measures.  If Canada doesn’t make changes, it risks falling behind in global trade and innovation.

The Solution? Invest in Growth (Not Just Retaliation)

Poloz argued that instead of simply fighting tariffs with more tariffs, Canada should focus on boosting its economy from within, recommending:

1. Get Rid of Interprovincial Trade Barriers

One of Poloz’s strongest arguments was that Canada is leaving money on the table by not fixing its internal trade restrictions. He described it as free money that no one is picking up.

Right now, businesses face unnecessary hurdles when trading across provinces, adding extra costs and red tape.

See: Reversing Canada’s Digital Economy Productivity Decline

Removing these barriers could boost Canada's economy by 4-7%, which would (completely) offset the losses from U.S. tariffs, yet numerous governments have failed to take any action.

He also made a historical reference to Confederation highlighting that Canada was formed in response to trade challenges with the U.S., so it's lack of internal trade today is very ironic.

2. Increase Defence Spending to Strengthen U.S. Relations

Poloz linked trade policy to defence spending saying that the under-investment in defence is one of the biggest irritants for U.S. policymakers, and by increasing military spending, Canada could improve its trade relationship with the United States and potentially avoid severe tariffs.

He said boosting defence is politically sensitive.  It would require either tax hikes or budget cuts elsewhere but he argued that a small defence tax (1-2% of GDP) could be a smart trade-off to protect Canada's economic interests and avoid larger losses.

3. Prioritize Business Investment and Innovation

Poloz criticized Canada’s weak business investment over the past decade and urged policymakers to implement tax incentives to encourage companies to modernize and innovate.  Canada needs to embrace the Fourth Industrial Revolution by:

See:  Canada’s AI Competition Report Faces Big Tech Challenges

• Providing tax incentives for companies investing in AI and digital transformation
• Encouraging pension funds to invest more in Canadian innovation
• Reducing red tape for businesses to scale faster

He warned that if Canada doesn’t invest in its future now, it will fall even further behind.

Canada Must Act Now

With U.S. tariffs looming, a weak economy, slow business investment, and missed opportunities for growth, Canada can’t afford to wait!  Canada can strengthen its economy by (1) removing interprovincial trade barriers, (2) investing in AI and digital transformation, and (3) strengthening U.S. relations through defence spending.  The country must come together to adapt proactively to global economic challenges by taking bold action to increase productivity, resilience, and long-term growth.

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