CANADA – Weak business investment is a threat to Canada’s future prosperity, according to a new report published by the C.D. Howe Institute. In “Tooling up: Canada Needs More Robust Capital Investment,” authors William B.P. Robson, Jeremy Kronick, and Jacob Kim find business investment in Canada has slipped badly relative to the United States and other countries since mid-decade, and the outlook remains weak for 2018.
Capital investment that adds to Canada’s stock of machinery, buildings, engineering infrastructure and intellectual property boosts the economy, and equips Canadian workers to raise their output and earn higher incomes in the future. Unhappily, after many years of relatively robust performance, business investment in Canada sagged after 2014, limiting future improvements in wages and living standards.
“A relatively good environment for business investment helped Canada catch up to international competitors for more than a decade – but higher taxes, transportation bottlenecks and trade uncertainty have set us back since.” says Robson.
The latest figures from Statistics Canada and the Organisation for Economic Co-operations and Development (OECD) suggest that Canadian business will invest about $13,900 per worker this year, while in the United States the commensurate figure is $23,200. Machinery and equipment (M&E) investment – a category of spending that appears particularly important for spurring economy-wide productivity – contrasts sharply with robust M&E investment in the United States, a gap likely to widen after the recent US tax cuts.
Provincially, investment is anemic in Ontario and Quebec, where investment per worker is running below $10,000 annually, and in the Maritime provinces, it is running below $8,000 annually. In 2018, workers in these provinces will benefit from less than 50 cents for every dollar invested per worker in the OECD as a whole, and less than 40 cents for every dollar invested per worker in the United States.
The paper recommends that Canada:
- Reduce and restructure taxes that raise costs and squeeze returns on investment.
- Avoid policies that raise the prices of key inputs, such as energy.
- Improve measures to ensure competitive, well-functioning markets for different types of financing, such as asset-based financing and non-bank lending.
- Reduce protectionism at home to improve market access in the NAFTA, with other trading partners, and interprovincially.
“More competitive tax rates, including quicker capital-equipment write-offs, regulatory measures that cut red tape, internal and international trade liberalization, and removing frictions that impede the raising of capital can all help Canadian businesses better equip their workers,” concludes Robson.