Action or reaction? Two visions of future immigration

Focus Area—Immigration

What would happen to the Canadian economy if the government decided to shut the door on immigration? While we don’t foresee this happening anytime soon, it’s an important question to ask given the present anti-immigration stance many governments have taken. President Trump won the election in 2016 in part because of this stance, which included claims that many new arrivals were criminals, stole jobs from Americans, and lowered wages—claims that are simply not true. Pro-Brexit Britons and those in several Eastern European countries—notably Hungary—are also in favour of sharply lowering immigration, and have won elections and referendums by taking a populist hard-line position against increased immigration.

The Canadian government’s position on this issue is somewhat of an outlier in the present environment. The Liberals decided to boost immigration when they took power in 2015 as a way of alleviating the negative effects of declining population growth. But we can’t become complacent. Anti-immigrant sentiment does exist in Canada. The Quebec government, for instance, wants to reduce immigration, and the position appears to be popular in the province.

To assess the impact of immigration on the economy, we used our econometric models to run two scenarios: a no-immigration scenario, which assumes that Canada doesn’t welcome any immigrants over the long term; and a one per cent scenario, which sees Canada gradually increasing its immigration levels over the coming decades to meet the rising wave of retirees and replenish the labour force.

The economic consequences of the first scenario would be dire. Canada’s real GDP growth would slow to an average gain of 1.24 per cent annually between 2017 and 2040. An absence of immigrants to boost Canada’s shrinking labour force would lead to declining investment. Firms would forego operations in this country due to a lack of labour to run their operations. Prices would likely increase significantly due to firms losing economies of scale to produce goods and services in the wake of a declining population. While it is true that the drastic drop in Canada’s population to 34 million people by 2040 would lower projected increases in health care expenditures over the long term, Canada’s standard of living would tumble when all economic developments linked to zero immigration are accounted for.

The results are dramatically different under the second scenario, which bumps the immigration rate to one per cent of Canada’s population by the early 2030s. Higher immigration mitigates some of the challenges of population aging and a low birth rate on Canada’s economic and fiscal standing. A faster-growing labour force would lead to higher investment and GDP growth. Real GDP would increase at an annual pace of close to 1.9 per cent through to 2040—more than 0.6 percentage points higher than the no-immigration scenario. Taxes would also be lower compared with the first scenario because higher immigration implies that there would be more taxpayers to fund the ongoing surge in Canada’s health care expenditures linked to an aging population. In the one per cent scenario, Canada’s population increases from 37 to 45 million by 2040 with most of the gains coming from new immigrants.

While extreme, our no-immigration scenario underscores the importance of newcomers to Canada’s future prosperity. In the absence of immigration, Canada would face constrained economic growth and greater challenges in funding rising costs in health care and other important social programs. Unfortunately, Atlantic Canada already provides a glaring example of the perils of weak population growth. The region has experienced a vicious cycle of slow economic growth and low public and private sector investment for many decades. To avoid this outcome, Canada must run against the tide of anti-immigrant sentiment in the world and continue to welcome people to this country. The health of our economy—and our citizens—depends on it.

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Matthew Stewart

Matthew Stewart

Director, Forecasting