Red tape, rising taxes, tax reform, increasing minimum wages and other policy initiatives all smother business investment
By Philip Cross
The Fraser Institute
Persistently weak investment is a major reason why Canada’s growth has lagged in recent years. And governments carry some of the blame, having increasingly failed to encourage a positive business climate.
The importance of business investment to economic growth is widely acknowledged. Investment boosts productive capacity and embodies new technologies that raise productivity and living standards over the long term. In the short term, business investment plays an outsized role in fluctuations in economic growth.
However, despite the lip service paid to its importance, Canada seems complacent or uninformed about business investment.
Perhaps Canadians assume that investment has faltered in all the major industrialized countries and that our energy megaprojects would sustain capital spending.
However, even before the energy sector collapsed in 2015, Canada had one of the lowest levels of investment in the major industrial countries. As a share of gross domestic product, business investment in Canada stands around 11 per cent, second last among the 17 Organization for Economic Co-operation and Development (OECD) countries for which there are comparable data. This is almost half as much as investment as in South Korea, and less than the 12 per cent to 15 per cent prevailing in most major European countries and the United States.
The amount of capital investment each employee in Canada has to work with is less than US$10,000, the third lowest in the major industrial countries, ahead of only New Zealand and the United Kingdom. Americans, by comparison, have 60 per cent more capital to work with.
And this isn’t a new development. Even with the boom in energy investment over the past decade, investment in Canada has been low by international standards, especially in manufacturing and services where spending on machinery and equipment has been particularly weak (trailing even Greece).
In turn, low demand for machinery and equipment inhibits the growth of our technology sector, a major supplier of machinery and equipment.
The reasons for Canada’s low investment are complex. Several factors should be encouraging more investment, such as low interest rates, high capacity use in manufacturing and an aging labour force. Nevertheless, investment lags across the country.
Governments have raised the effective tax rate on new investment since 2012, following reductions after the turn of the century. Large budget deficits and increasing debt promise more tax increases in the future.
The weakness in manufacturing investment has been especially pronounced in Ontario, which has adopted several policies that increase the cost of doing business there.
It’s a disgrace that Canada provides less capital investment to its employees on average than almost every other OECD country. Every federal-provincial conference of government and summits of business leaders should focus on this problem with the sense of urgency it deserves.
Instead, our governments seem to do everything possible to discourage investment. Governments are hiking marginal tax rates, raising Employment Insurance premiums next year, increasing Canada Pension Plan contributions, boosting minimum wages markedly (in Ontario and Alberta, with British Columbia likely to follow), introducing a new carbon tax and costly new labour regulations, and raising corporate income taxes in B.C. and Alberta.
Meanwhile, the federal government is considering tax reforms that further alienate the business community and tax small business savings. Even our once buoyant energy sector has fallen out of favour – the Energy East pipeline project was cancelled after innumerable delays and changes to the review procedure, foreign oil companies en masse have fled the oilsands, large investments in B.C.’s liquefied natural gas sector have languished after years of waiting for approval.
It’s no wonder business confidence among small and large businesses is plummeting. The Business Council of Canada found that 64 per cent of the chief executive officers of large firms say the investment climate in Canada has worsened over the last five years, specifically the growing tax and regulatory burden. Meanwhile, the Canadian Federation of Independent Business reports confidence among small businesses fell for the fourth consecutive month, with the fastest rate of decline since the 2008-2009 recession.
Any chance of an incipient recovery of business investment seems to have been smothered by recent government initiatives. By depressing investment, we dampen productivity growth, inhibit wage increases and reduce our competitiveness in global markets.
Philip Cross is the author of the Fraser Institute study Business Investment in Canada Falls Far Behind Other Industrialized Countries, available at www.fraserinstitute.org