Sluggish Investment Threatens Canada’s Prosperity

The only way to raise living standards and incomes for Canadians is by building a more productive economy. Yet politicians are mum on the subject

The recent federal election campaign saw much discussion about climate change, energy policy, housing, the social safety net, and the well-being of the never-defined “middle class.” One subject that was ignored by both the media and those seeking office was productivity.

That’s unfortunate and somewhat puzzling.

After all, in the long term the only way to raise living standards and incomes for Canadians is by building a more productive economy. Yet it seems that most of the country’s political class would prefer to talk about almost anything else.

Even as the election unfolded, there was fresh evidence that Canada is struggling to remain in the top tier among the advanced economies.

The World Economic Forum’s latest global competitiveness report finds that Canada has fallen two notches since 2018 and now sits in 14th place overall. Since 2017, we’ve dropped four spots among the 140 countries tracked by the forum.

Canada continues to trail the U.S. and other leading economies in several key areas that affect competitiveness, including the burden of taxation, the state of innovation, the regulatory environment for business, the speed at which new technologies are diffused across the economy and – relative to the U.S. – aggregate market size.

Perhaps the greatest threat to Canada’s future living standards is the weakness of business investment. The C.D. Howe Institute periodically benchmarks business investment in Canada relative to other affluent jurisdictions by determining how much companies spend every year on various types of capital, measured on a per employee basis. Investment in housing is excluded, since this form of capital spending does nothing to lift productivity or spur innovation. For Canadian policy-makers, the assessment is not at all comforting.

Capital investment boosts the economy in two ways: first, when businesses undertake the investment; and second, as companies and their employees become more productive by being able to work with more and better equipment, machinery, advanced technology products, factories and buildings, engineering infrastructure, and intellectual property.

Looking at the data for Canada and other industrial countries, the C.D. Howe Institute researchers estimate that Canadian businesses collectively are investing about $15,000 per worker per year. The average amount for all of the industrial economies is $21,000 per worker. In the U.S., businesses are investing the equivalent of $26,000 per worker annually in machinery, equipment, buildings and other things that help to raise productivity. Canada has lost ground compared to most other advanced economies since 2015.

Business Investment Per Employee, 2015 and 2019

(Canadian dollars)

2015                2019

Canada                                               $14,300            $15,000

United States                                      $21,900            $26,000

Average for all advanced economies     $18,200          $21,000

Comparing Canada and the U.S., for every dollar that American companies allocate to expand and improve the private sector’s stock of productive capital, Canadian businesses spend just 57 cents.

If it persists, over time this investment gap will show up in the form of slower growth in real wages for Canadian workers vis-à-vis their U.S. counterparts, lost global market share for Canadian industries, proportionately fewer large Canadian-based companies, and a lower overall standard of living in Canada relative to jurisdictions that are more successful in attracting investment.

What explains Canada’s decidedly mediocre performance?

Referring back to the World Economic Forum’s report, energy infrastructure bottlenecks, an outdated tax system, an increasingly complex legal and regulatory environment for business, and Canada’s fragmented internal market are among the factors inhibiting investment and slowing capital formation.

If the members of Parliament elected on Oct. 21 want to see a more prosperous Canada, they should turn their attention to these issues and leave behind the sound bites and often simplistic narratives that dominated the recent campaign.

By Jock Finlayson

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

www.troymedia.com