By Tegan Hill and Joel Emes
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. In 2014, businesses spent $18,363 per worker on new structures and equipment. Seven years later, in 2021, the latest year for which data are available, they added only $14,687 per worker — fully 20 per cent less in inflation-adjusted dollars. 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.
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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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.
Tegan Hill and Joel Emes, economists with the Fraser Institute, are co-authors of “Comparing Business Investment per Worker in Canada and the United States, 2002–2021.