By Tegan Hill and Joel Emes
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In recent years, economists have warned of Canada’s weak business investment, particularly compared to the United States. Business investment provides workers with the tools and technologies to produce more and better goods and services. And as firms become more efficient, improve productivity and increase profits, they’re able to pay higher wages. Business investment is therefore key to higher incomes and living standards. So weak business investment is bad news for Canadians and should raise alarm bells for policy-makers.
In a new
study published by the Fraser Institute, we assess per-worker business investment in Canada. That includes spending on equipment, machinery, factories and new technologies, but not homebuilding. We find that from 2014 to 2021 (the latest year for which data are available), business investment per worker adjusted for inflation declined by 20.0 per cent, from $18,363 to $14,687 per year. Over the same period, business investment per U.S. worker (adjusted for inflation, in Canadian dollars) increased by 14.6 per cent, from $23,333 to $26,751. Put differently, businesses in Canada went from investing approximately 79 cents per worker for every dollar invested in the U.S. to only 55 cents.
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Why the steep decline?
The energy sector accounts for a bigger share of our economy than it does of the American economy. After oil prices collapsed in 2014, oil and gas investment did not fully recover in this country, as it did in the U.S. Why the difference in recovery rates? In large part, it was due to an increase in
regulatory constraints,
policy uncertainty and an unfavourable
business environment for energy development in Canada.
But declines in the energy sector aren’t the only reason for Canada’s faltering business investment. As
many analysts have indicated, the federal government’s recent tax and regulatory policies have spurred a flight of investment capital from Canada. According to
one analysis, roughly two-thirds of Canada’s 15 main industries experienced declines in business investment from 2014 to 2017, including wholesale trade, accommodation and food services, utilities, professional services, and manufacturing, while nearly half (seven of 15) saw the decline continue through 2019. Note that these declines predated the pandemic, which only exacerbated what was already a serious problem.
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Recommended from Editorial
Canada’s recent overall economic performance has been
poor in historical terms, particularly when measured
per worker. The OECD
forecasts that Canada will record the worst economic growth among advanced economies from 2030 to 2060. If we are to have any chance of proving that gloomy forecast wrong, policymakers urgently need to enact reforms that will make Canada a more attractive place to invest and do business.
