Lack of business investment leads to lower living standards


Canada’s low productivity rate due to a lack of business investment is leading to a fall in our living standards

Renaud BrossardThe Trudeau government has been crowing about how Canada has had “the strongest economic growth in the G7” coming out of the pandemic, which is true. But it neglected to mention that this growth was the result of Canada’s population getting bigger rather than richer. Per person income has stopped growing in this country.

The data on per capita GDP couldn’t be clearer. Adjusting for inflation, we currently have the same level of output per person as we had in 2018. Our neighbours to the south, meanwhile, have seen continued growth in recent years. Output per person in the U.S. is up by 5.4 percent since 2018.

The stagnation of Canadian output and income per person is the result of a long-standing problem: Canada’s productivity struggles to keep up with other advanced economies. What this means is that the value the average Canadian worker creates in an hour lags behind what workers in other G7 countries produce.

According to OECD data, each hour worked by a Canadian creates an average of US$53.30 of value, on a purchasing power parity basis (i.e., currencies are converted into U.S. dollars using a rate that considers variations in domestic prices between countries. This ensures that a U.S. dollar can purchase equivalent goods and services in Canada as it can in the U.S., rather than using the actual market exchange rate.)

Fifty bucks an hour might not seem so bad, but it places us next-to-last among G7 members, just ahead of Japan. The average productivity of G7 countries is US$63.90 per hour worked. As for our friends south of the border, they create US$72.10 of value per hour worked.

We can say that this is no big deal, that we’re just a few dollars per hour behind, but we need to understand that the gap has a direct impact on our personal finances. The less value we produce per hour worked, the less we can be remunerated by our employers. If we’re not literally “delivering the goods” (and services), how can they pay us more? Lower hourly productivity means less income for workers.

If, for the sake of argument, we assume Canadians work 35 hours a week, 48 weeks a year, our US$10.60 per hour gap in value produced compared to the G7 average per hour translates into a US$17,808 gap per year, which most Canadians almost certainly will regard as being real money. If we were able to close the gap with Americans, that would raise our living standards by $31,584 per year.

Closing this admittedly large gap is not impossible. The economic literature is very clear on how to increase productivity: more investment. When companies invest in new, more efficient production processes, workers can do more, and do better, with each hour spent working. This produces more value, which ultimately increases potential remuneration.

Canada has been lagging behind for years when it comes to investment, the lifeblood of productivity. In 2018, for instance, non-residential private investment amounted to $17,389 per job in Canada. In the United States, still on a purchasing power parity basis, the level of non-residential private investment was $27,307 per job. In Sweden, it was $33,214 per job.

Our governments, both federal and provincial, are trying to make up for the lack of private investment with subsidies, but the subsidies required to close the private investment gap with the United States are simply not sustainable. We would need $200 billion a year in taxpayer money to catch up. And that’s assuming subsidies are just as efficient as private investment, which seems unlikely.

The good news for taxpayers is that closing the productivity gap does not require diverting our taxes toward the private sector. If other countries succeed in attracting more investment, it’s because their business environment is sufficiently attractive for the private sector to be willing to risk its money there.

The longer it takes to get a project through approval stages and then ultimately built, or the higher the taxes levied on its eventual output, the less attractive we are to domestic and foreign investors. The opposite also holds true.

Becoming attractive again, therefore, requires that we lower the expenses associated with conducting business in Canada, particularly the fiscal and regulatory burdens. Eventually, our self-improvement policy could lead to companies seeing investment in Canada as equally or even more profitable than investing in the United States, France, or Sweden, to name just a few of our competitors for investment.

As long as we do not address this problem of our uncompetitive fiscal and regulatory environment, we will risk seeing our living standards stagnate, both relative to the rest of the world and maybe even in absolute terms.

Renaud Brossard is senior director of communications at the Montreal Economic Institute.

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