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Tooling up: Canada Needs More Robust Capital Investment

William Robson () and Jeremy Kronick

C.D. Howe Institute Commentary, 2018, issue 520

Abstract: 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 has slipped badly since mid-decade. The latest figures from Statistics Canada and the Organisation for Economic Co-operation and Development (OECD) suggest that Canadian businesses will invest about $13,900 per worker in 2018. By contrast, businesses across the OECD will invest about $19,700 per worker, and businesses in the United States will invest about $23,200 per worker. That means that for every dollar of new capital enjoyed by the typical OECD worker this year, her or his Canadian counterpart will enjoy only 71 cents. And for every dollar of new capital enjoyed by the typical US worker, Canadian counterparts will enjoy a dismal 60 cents. Notwithstanding a major decline after oil prices fell in 2014, investment per worker in Alberta, Saskatchewan, and Newfoundland and Labrador remains relatively strong – better than average investment per worker abroad. In the remaining provinces, however, investment is anemic. In Ontario and Quebec, 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. One of the most troubling features of Canada’s lacklustre investment performance is low spending on new machinery and equipment (M&E) – a category of spending that appears particularly important for spurring economy-wide productivity. About a decade ago, fixed capital investment on M&E and structures – non-residential buildings and engineering – was similar in value, but lately, spending on M&E has been only about half the spending on structures. This weakness in M&E investment contrasts sharply with robust US M&E investment, which is likely to accelerate after capital-spending-friendly US tax changes. This far into an expansion, with many other measures showing little slack in the economy, deficient demand is an unlikely suspect to explain weak investment. Bottlenecks getting energy resources to market are a problem. Taxation is a likely culprit, with other countries improving their tax competitiveness and Canada struggling with a particular burden in its business property taxes. In Ontario, relentlessly rising electricity prices hurt the climate for investment. Trade uncertainty is likely also a factor, inducing businesses not to invest, or to invest in the US in preference to Canada. The particular importance of assetbased lending in financing M&E investment suggests that policies to improve access to capital in that sector might help. Weak capital spending is a threat to Canada’s future prosperity – one all levels of Canadian government should address. More competitive tax rates, internal and international trade liberalization, and removing frictions that impede the raising of capital can all help Canadian businesses equip their workers better to compete and thrive.

Keywords: Innovation and Business Growth; Financial Services and Regulation (search for similar items in EconPapers)
JEL-codes: E22 (search for similar items in EconPapers)
Date: 2018
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