Business Investment Key to Addressing Canada’s Productivity Crisis – Canadian Energy News, Top Headlines, Commentaries, Features & Events – EnergyNow

By Tegan Hill – Fraser Institute

The Bank of Canada’s senior deputy governor Carolyn Rogers recently raised the alarm on Canada’s productivity crisis, saying “it’s an emergency—it’s time to break the glass.” But to address Canada’s productivity problem, which is contributing to our stagnant living standards, we must first address Canada’s weak business investment.

For perspective, Canada’s economic growth in the fourth quarter of 2023, as measured by per-person GDP, a common indicator of living standards, was $58,111, which is slightly less than it was at the end of 2014 at $58,162 (after adjusting for inflation). That means that over roughly the last decade, Canadian living standards have not increased. Indeed, our economic problems span well beyond the pandemic. In the five years prior to 2019 (the last pre-COVID year), Canada’s per-person GDP (inflation-adjusted) was the 4th weakest out of 38 advanced countries.

Unfortunately, prospects for the future are dim. According to the OECD, Canada will record the lowest rate of per-person GDP growth among 32 advanced economies over roughly the next 40 years. Countries such as Estonia, South Korea and New Zealand are expected to pass Canada and achieve higher living standards by 2060.

Given that growth in productivity—essentially, the value of economic output per hour of work—is key to higher living standards, it’s no surprise that Rogers and other analysts are raising alarms. But what’s at the heart of our productivity crisis?

Put simply, weak business investment. While the federal and many provincial governments have prioritized immigration and bigger government in an effort to stimulate productivity growth and grow our economy, they’ve ignored business investment, which has significantly declined in recent years.

From 2014 to 2022, inflation-adjusted total business investment (in plants, machinery, equipment and new technologies but excluding residential construction) in Canada declined by C$34 billion. During the same time period, after adjusting for inflation, business investment per worker declined (on average) by 2.3 per cent annually. In contrast, business investment per worker grew (on average) by 2.8 per cent annually from 2000 to 2014.

While business investment has generally declined in Canada since 2014, in other countries, including the United States, it’s continued to grow. As a result, Canada’s GDP per hour worked—a key measure of productivity growth—is among the lowest in the OECD.

Think of it this way; when businesses invest in physical and intellectual capital they equip workers with the tools and technology (e.g. machinery, computer programs, artificial intelligence) to produce more and provide higher quality goods and services, which fuels innovation and higher productivity. Because Canada has lower levels of investment in tools and technology, our workers are less productive.

But here’s the good news. Governments across Canada can enact policies to help stimulate business investment, productivity gains, and ultimately, stronger economic growth. The key is to reduce onerous regulations, rein in high government spending, and create a pro-growth tax environment that makes Canada a more attractive place for business to locate and invest. These policies have a proven track record of improving business investment in Canada.

Clearly, without a change in the investment climate and stronger productivity growth, the economic outlook looks grim. Fortunately, Canadian governments can respond to this emergency with pro-growth policy reform.

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