Too Little Investment Puts Prosperity at Risk

July 21, 2014
Jock Finlayson

Canadian economists and policymakers have long worried about the country’s sluggish productivity growth and a seemingly ever-widening gap with the United States on this important measure of economic performance. At the heart of Canada’s poor productivity record are relatively low levels of investment, particularly in certain categories of assets that are strongly associated with productivity improvements in modern economies – machinery, equipment, software, and business research and development. A decline in investment in physical infrastructure as a share of gross domestic product over the past several decades is another aspect of Canada’s broader capital spending shortfall.

A new paper from the C.D. Howe Institute provides an updated estimate of the Canada-US investment gap and also shines a spotlight on investment trends across the provinces. The figures show British Columbia lagging the Canadian average and badly trailing the United States in investment per worker. This underscores the need for BC policymakers to step up efforts to pinpoint and address the factors that may be holding back capital spending in the province.

Figure 1: Investment Per Worker
-- Canada and BC as Share of US and OECD Average, 2014

Source: C.D. Howe Institute.

Over 2008-12, the value of investment per worker in Canada averaged less than three-quarters of the US level, with the figure set to fall to 71% in 2014 (see Figure 1). British Columbia comes out even worse, averaging just 66% of the US national benchmark for investment per worker over 2008-12 and losing more ground to a dismal 57% of the US level by 2014. It should be noted that BC’s absolute investment performance improved following the adoption of the HST in 2010; but as many economists expected, the investment climate has deteriorated now that the HST has been replaced by the provincial sales tax, which imposes more than $1 billion in additional costs on a wide range of business inputs.

The C.D. Howe Institute study highlights the low levels of investment in central Canada and most of Atlantic Canada compared to the US and the OECD as a cause for particular concern. Of interest, the western provinces and Newfoundland score better, which is partly explained by the presence of sizeable capital-intensive energy and other natural resource industries within their economies.

A continuing pattern of relatively low levels of investment in machinery, new plant and equipment, and advanced process technologies compared to many other advanced countries means that Canada will find it difficult to boost productivity and real wages over time. As the C.D. Howe Institute authors observe, “Business investment is critical to economic growth. Capital spending produces the new tools that workers use on the job, the structures they work in, and the engineering infrastructure that makes them more productive.”

From the Business Council’s perspective, the absolute decline in investment per worker in British Columbia in the past few years is a troubling development, one that we believe signals an erosion of the province’s overall competitive position in a North American context. That is why we are working to flesh out a policy agenda designed to make BC a more attractive place to deploy capital, to create and sustain jobs, and to produce the exportable goods and services that all small jurisdictions must rely on to drive long-term growth in real incomes.

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