September 12, 2024 – Persistently weak business investment is driving a significant drop in Canadian productivity and living standards, according to a new C.D. Howe Institute report.
In “Underequipped: How Weak Capital Investment Hurts Canadian Prosperity and What to Do about It,” William B.P. Robson and Mawakina Bafale identify a troubling trend: Capital available per Canadian worker has been shrinking since 2015. Worse, the gap between investment per worker in Canada and other Organisation for Economic Co-operation and Development (OECD) countries is widening. Strikingly, Canadian workers now receive just 66 cents of new capital for every dollar their OECD counterparts receive, and a mere 55 cents compared to workers in the United States.
“Investment is the lifeblood of productivity growth,” says Robson. “When businesses invest, they equip workers with better tools, driving productivity and, in turn, higher earnings and improved living standards. The fact that Canadian workers are increasingly underequipped compared to their peers abroad signals less competitiveness and lower wages – a threat to our quality of life.”
The authors find Canada’s investment in machinery and equipment (M&E) and intellectual property (IP) products is alarmingly low. M&E investment per Canadian worker is only 41 cents for every dollar invested in the US, while IPP investment per Canadian worker is just 30 cents compared to US counterparts.
Among Robson and Bafale’s recommendations, they outline potential responses to reverse the decline in business investment and boost Canada’s productivity, drawing attention to both immediate and structural reforms:
- Reform corporate taxes to encourage business growth and scaling.
- Offer tax incentives, such as a general investment tax credit, to spur immediate investment.
- Reduce regulatory barriers, particularly in sectors like fossil fuels, to foster a more investment-friendly environment.
- Promote IP investment through targeted tax incentives to encourage the commercialization of IP products.
- Address policy uncertainty and streamline regulatory processes to create a more stable and predictable investment environment.
Additionally, the report warns that the looming threat of US protectionism, particularly since 2016, has likely discouraged investment in Canada. Ensuring access is critical to Canadian business competitiveness and long-term economic prospects.
“Governments need to prioritize pro-growth policies that encourage business investment,” warns Bafale. “Without urgent reforms, Canadian workers risk being relegated to lower-value-added activities, falling further behind their international peers.”
For more information, contact: William B.P. Robson, President and Chief Executive Officer, C.D. Howe Institute; Mawakina Bafale, Research Officer, C.D. Howe Institute; Percy Sherwood, Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.