(Bloomberg) -- A country that once embraced mass immigration to give it an edge in the global race to replace aging workers is now pulling the welcome mat away from newcomers. After record population gains strained housing, the job market and public services, Canada unveiled a plan Oct. 24 to drastically reduce admissions. Prime Minister Justin Trudeau’s government wants to shrink the population of international students and foreign workers in Canada and decreased the annual target for permanent residents — an unthinkable notion just a year ago.
What caused this turnaround?
An inflow of immigrants has led to Canada posting one of the fastest population growth rates in the world: around 3% annually. Record entries — comparable to adding all of San Diego’s residents in just over 12 months to a country that’s slightly more populous than California — exacerbated housing shortages, inflated rent prices, strained public services and pushed up the unemployment rate. Canadians have long looked at newcomers — who are often young and highly educated — as important contributors to the sparsely populated and rapidly aging country. But attitudes have changed as the numbers have gone up, with a long-running survey showing that for the first time since 1998, a majority of Canadian respondents believe there is too much immigration. Meanwhile, Trudeau’s support rate has cratered. The prime minister has faced calls within his own Liberal Party to step down as party leader as polling shows the opposition Conservative Party well ahead as the country heads toward elections that must be held by October 2025.
What was the situation previously?
For decades, sharing a land border with just the US and having a relatively orderly immigration system had insulated Canada from large influxes of newcomers. The strong control over the flow of arrivals — with clear targets set each year — produced a more positive view toward immigration in Canada compared to many peer countries.
The support for welcoming new arrivals was deeply rooted in a conviction that there’s a benefit from immigration. After the Covid-19 pandemic however, that belief came under strain, as did the well-run system. Record inflows were the result of eased travel restrictions, policies to address severe labor shortages by hiring foreign workers, and rising demand to go abroad from growing middle classes in developing nations.
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What’s the economic impact?
As the economy reopened, high levels of immigration boosted major sectors — including housing, retail, telecommunications and banking. Canada brought in new workers where they were needed, which helped accelerate a recovery from the pandemic. The country’s gross domestic product growth was much stronger than that in many other leading democracies. During the Bank of Canada’s aggressive interest-rate hiking cycle, rapid population growth buoyed consumer spending and helped the country avoid a recession, despite it having some of the world’s most indebted households.
But the breakneck pace of new arrivals soon exceeded Canada’s capacity to absorb them. Per-capita GDP, one measure of the standard of living, contracted for several consecutive quarters. Younger adults, who are a key voting bloc, as well as recent immigrants, now bear the biggest brunt of the labor market glut.
What went wrong?
An easy way to understand Canada’s immigration system is to think of it as two separate pools of newcomers — with a narrow canal connecting them. In one pool, there’s a well-established basin of permanent residents that is strictly controlled. When considering who gets into this main pool, authorities rank newcomers based on their age, education, work experience and language proficiency. Only those with the highest scores are invited. It’s the country’s main source of economic migrants and a pipeline for future citizens; many permanent residents can achieve citizenship after three years of living in Canada.
The pool on the other side is akin to a pond, where flows into the system are variable based on the volume of students, workers and asylum claimants — a group that’s collectively called temporary residents. For decades, it’s been a less significant source of immigrants and only contributed to a small fraction of population increases. But beginning around mid-2022, it expanded rapidly and brought in even more newcomers than the main pool. The easing of rules for hiring foreigners amid the labor crunch led to some of the growth. Colleges and businesses, many of which exploited the system, were also drivers for increased arrivals from abroad.
The points-based system awards additional scores to prospective permanent residents who have study or work experience in Canada. Many immigrants, who want to get a leg up in the applications, use the temporary-resident pool to try to gain entry into the country’s main permanent-resident pool.
What is Trudeau’s government trying to do?
The government is now cracking down on the temporary-resident pool, limiting the extent to which it can expand and putting more guardrails on who to allow in. Its goal is to reduce the number of entrants by more than 20% over the next three years. Key measures to help achieve the target include a cap on student visas and restrictions on the use of foreign labor.
Immigration Minister Marc Miller announced a first-ever target for temporary residents on Oct. 24. This cohort will see its numbers decline by about 446,000 in both 2025 and 2026, before a modest increase of 17,400 in 2027. That compares to an increase of 800,000 in 2023.
He also announced Canada will admit nearly 20% fewer permanent residents next year, or 395,000, compared to this year’s expected level of 485,000. The numbers will then continue to drop by about 4% annually through 2027.
Overall, the plan means Canada’s population would decline by 0.2% in each of the next two years, before rebounding with modest growth of 0.8% in 2027. That’s compared to annual growth of 3% in the second quarter of this year, one of the fastest rates in the world, and would mark the first decline in the country’s population in data going back to the early 1950s.
The decision to slash the permanent-resident target comes only about a year after Miller said he did “not see a world in which we lower it.”
What’s the expected outcome of the new policies?
In the longer term, tighter control of the immigration system could cut Canada’s current population growth rate by half, moving it closer to historical averages. But there’s also a risk of moderating it down too much. Immigration almost entirely makes up the gains in the labor force. A shortfall of new workers would hurt the economy and could reignite inflation.
©2024 Bloomberg L.P.