Can This Be Canada's "San Francisco" Moment?
To say that the past few months have been rough when it comes to productivity sentiment in Canada would be an understatement.
If you haven’t spent any time north of the 49th recently (or read/listened to any Canadian news media), then you’d be forgiven for assuming that everything in Canada was as happy as a polar bear chugging maple syrup while waiting for the puck to drop on the 2024 NHL playoffs.
Did I miss the opening face-off?
But for the last six months, the focus of much of Canada’s business community has been on an expanding productivity crisis in the country. Things came to a head last week, when the governing Liberal party released their 2024 budget. It included a significant increase in the federal capital gains tax that was immediately met with an uncharacteristic tsunami of opposition from business and tech leaders across the country.
Could this moment serve as an inflection point for the relationship between tech and politics in Canada?
How Did We Get Here?
Coming out of Covid, most countries saw productivity increase as companies found their footing and identified ways to leverage new technologies and modes of operating. Canada, however, experienced the inverse. This chart from a November report by BMO’s Chief Economist highlights the contrast in productivity between Canada and the U.S. post-pandemic:
The implications have been significant:
As a result, Canada has steadily drifted down the relative productivity rankings in the OECD. Not only have the Nordic economies moved well north of Canada, along with the U.S., but so have most of Western Europe and Australia.
Our closest comparables are Italy and Spain; feel free to draw your own conclusions.
Beneath the hood, a dramatic drop in real GDP per capita is wreaking havoc with Canada’s productivity. After 25 years of tracking the U.S. on this measure, a gap began to open in 2015 that has ballooned post-Covid:
The continued increase in real GDP per capita in the United States is very much the result of positive developments south of the border — so we should give credit where credit is due. The issue for Canada is not that it’s southern neighbors are pulling ahead — it’s that Canadian productivity has been effectively flat since 2017.
Lighting a Match on a Tinderbox
The volume of discourse around Canada’s drop in productivity has grown significantly louder over the past six months.
In March, the Senior Deputy Governor of the Bank of Canada, Carolyn Rogers, proclaimed that the need to improve productivity had reached an emergency level,
“You know those signs that say ‘In an emergency, break the glass?’ Well, it’s time to break the glass.”
Then last week, a report was released showing a stark increase in Canada’s public sector employment post-pandemic, and contrasted it with a slowing rate-of-growth in the private sector and an effectively flat level of entrepreneurship:
Suffice to say, people in tech took notice:
Two days later, the Liberal party released their annual budget, with a significant increase in the federal capital gains tax front and center.
The Backlash
Personally, I wasn’t at all surprised that the Liberal Party chose to introduce a capital gains tax in this budget. For left-leaning parties, increasing capital gains taxes (or, at least, announcing a desire to do so) is a common tactic used to curry favor with their base — especially in the lead-up to a difficult election. President Joe Biden announced his own intent to increase capital gains taxes in the U.S. only a month ago:
The difference between these two announcements is that President Biden wasn’t attempting to increase capital gains taxes in the shadow of a national productivity crisis and an ongoing debate about how to better support the innovation economy. To say that Canada’s Minister of Finance failed to read the room on this would be an understatement.
Capital gains tax. Saving democracy since 1972.
Thus far, Minister Freeland has failed at her attempts to convince the tech community to get on board. In an interview with The Globe and Mail, she claimed that the decision to increase the capital gains tax was based on extensive research showing that there would be no adverse impact on startups and the innovation economy. But the academic literature she cited actually supported the opposite conclusion, including:
“evidence about the long-run economic impact of higher capital-gains taxes are mixed and not easily quantified.”
“economic analysis confirms the adverse effects of higher capital gains taxes on the creation and success of young enterprises.”
“a 2005 European Central Bank analysis of 14 countries found a lower corporate capital-gains tax rate increased the share of venture capital investment in early-stage high-tech enterprises.”
“a 2019 study of 32 countries found that higher capital-gains taxes leads to a reduction of startups receiving venture capital in a statistically and economically significant way.”
What Does This Have to Do With San Francisco?
Frequent readers of The Quiet Part Out Loud are forgiven for rolling their eyes and wondering why I’m referencing San Francisco yet again (and what SF could possibly have to do with a Canadian federal budget).
In the days after the budget was announced, the reactions and discussions I saw across WhatsApp channels, email threads and Zoom calls reminded me of the discourse flowing through the Bay Area a few years ago:
People talking about leaving Canada / how to leave Canada / where to go for tax reasons
Founders talking about moving their startups to the U.S.
People from across the political spectrum expressing frustration with a government that had been in power for a long time and had become more idealogical in its actions
Sound familiar?
It was only a few years ago that San Francisco was being similarly left for dead. Prominent VCs and other tech leaders were loudly proclaiming that the government was failing and making sure that everyone knew it on their way out the door.
The media narrative was increasingly one of a dystopian city spinning out-of-control in a doom loop that could only lead to failure.
But…
Amidst all the negative sentiment, an innovative and resilient tech community — one that was historically ambivalent to politics — hit its breaking point. Born-and-bred San Franciscans like Garry Tan of Y Combinator and SF transplants from around the world, like Zach Coelius, decided they had had enough.
And they started to mobilize.
In less than 2 years, San Francisco has gone from being left for dead to ground zero for the AI revolution. (Oh…and most of those folks who loudly slammed the door on their way out have quietly come back). It’s by no means back to its former glory, but the vast majority of people I know went from all-but-writing San Francisco off to being long San Francisco (at least, publicly 😉).
Could This Happen in Canada?
This brings us to the question posed by the title: can this be Canada’s “San Francisco” moment?
Outside of lobbying efforts, the majority of Canada’s tech leaders have historically stayed out of politics. But in recent years, we’ve seen a handful of former entrepreneurs cross over, such as Vancouver’s new Mayor, Ken Sim, and British Columbia’s Minister of Jobs, Economic Development and Innovation, Brenda Bailey.
Archive photo of BC’s “JEDI” Minister (seriously…is that not the coolest job title ever?)
But we haven’t yet seen this at a federal level in Canada.
A big part of this is that Canada’s parliamentary system doesn’t provide the same direct openings that the U.S. political system offers for new entrants. You can’t simply declare that you’re going to run for Prime Minister, for example, so there aren’t Canadian equivalents of Michael Bloomberg or Ross Perot.
But could that ever change? What would it take for more successful, experienced tech leaders to enter Canadian politics?
The tech industry has always been very diverse when it comes to political ideologies, so this isn’t about left or right. It’s about pragmatism vs. ideology.
As I watch the shift happening in San Francisco right now, I see the weight and influence of the tech industry slowly pulling the city back from political extremes that did not reflect the majority of the city’s population. San Francisco isn’t suddenly becoming conservative — it is and has always been one of the most progressive cities in the U.S. — it’s simply becoming more functional and sustainable.
Canada has the same opportunity.
Regardless of the reaction to the recent budget and the results of the next election, Canada isn’t suddenly going to become a conservative country — it has always been a progressive beacon for the world — but Canada is a country that at its best balances business, economic and social interests for the betterment of all.
Regardless of your political beliefs, if we want Canada to remain competitive in the long term and maintain its standing as an example for the world, we simply can’t afford to sacrifice innovation and competitiveness in the name of ideology. As the world continues to become more competitive, the countries that continue down that path will lose.