Jack M. Mintz: Weak investment is economic problem number one – Financial Post

Ottawa needs to recognize that Canada’s economic potential depends on private investment, not government spending
Canada’s business investment is the weakest it has been in years, though you wouldn’t know it from the pre-holiday throne speech or the fall economic and fiscal update. These documents focused on social spending, climate change, tax hikes and big deficits. That the private sector is crucial to Canada’s economic recovery is not in the prime minister’s vocabulary. But It should be — and it should also be a central theme for this spring’s federal budget.
According to a recent report from the National Bank, for the very first time the stock of capital invested in businesses is now less than that invested in housing. Manufacturing capital stock is the lowest it has been in 35 years. Writing for the Fraser Institute, Professor Steven Globerman has shown that business investment dropped in seven of 15 sectors from 2014 to 2019.
In our 2020 tax competitiveness report, Phil Bazel and I show that since 2015 Canada’s investment record has been one of the worst in the OECD. Even in the first half of the last decade, Canada’s business investment as share of GDP lagged behind that in resource-based countries such as Australia, New Zealand, and Norway. It also lagged the OECD in general although it did better than the United States. After peaking in 2014, however, our business investment declined sharply as a share of GDP, falling behind the United States and the other OECD countries.
Why does our poor business investment record matter? Capital deepening improves labour productivity: the same working hours produce more output. When companies invest, they adopt the latest innovations, enabling them to reduce their production costs. Our poor investment performance is a leading cause of our per capita economic growth declining to virtually nil from 2015-20.
Will lower labour productivity result in lower worker compensation? Some argue that productivity and wage growth have become de-linked as machines have replaced workers, causing wages to be pushed down. But that’s not the case. In a new International Productivity Monitor paper, Jacob Greenspon, Anna Stansbury and Larry Summers conclude that growth has helped boost worker pay.
Excluding the public and non-profit sectors, where productivity usually is proxied by input costs rather than impossible-to-value public services, Summers et al. find that in the U.S. each percentage point increase in labour productivity from 1973 through 2019 led to roughly a three-quarter point increase in average pay, all else equal. True, the linkage was weaker in the last two decades (1997-2019) but it was still there.
In Canada, on the other hand, the labour productivity/average wage growth link was about half a point from 1961 to 2019. The authors conjecture that a smaller, more open economy like Canada’s is more influenced more by international trade, which weakens the relationship between labour productivity and wage growth.
The Summers et al. paper should lay to rest any notion that labour productivity does not matter to middle class pay. The policy question — and not an easy one to answer — is how to improve Canada’s productivity growth, which has generally lagged the United States in the past four decades. As Summers et al. show, labour productivity grew 1.3 per cent per year and median compensation 0.7 per cent from 1976 to 2019 in the United States. In Canada, productivity growth was just 1.0 per cent and median compensation just 0.5 per cent. That may not sound like much but over 45 years it adds up to a big difference in real per capita incomes.
Many factors influence labour productivity, including education, innovation, labour force participation, private investment and government policy. While Canada has a relatively well-trained work force, we lag other countries in private investment and research and development.
Policy has a lot to do with that. Our tax policies are no longer attractive. Our corporate tax system is riddled with special preferences that encourage companies to pursue tax avoidance rather than better economic opportunities. Our personal income taxes on skilled labour are among the highest in the OECD. Our GST, which we take such pride in, is sub-par in the OECD with its many base-narrowing exemptions.
Our “tough-to-build” regulatory system slows down infrastructure projects. Whether building a condo in Toronto, a bridge in Ontario or a solar plant in Alberta, the gears move very slowly for federal, provincial and municipal approvals. And now we are embarking on a society-wide energy transition that focuses exclusively on targets without regard to the least-cost path for reaching them.
The federal government needs to recognize that Canada’s economic potential depends on private investment, not government spending. Its aim should be to spark economic growth, not douse it with deficits, taxes and regulations.
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