More investment needed

By Jock Finlayson, Business Council of British Columbia

Economists have long worried about Canada’s sluggish productivity growth and the seemingly ever-widening gap with the United States on this key indicator of economic well-being.

It is widely recognized that the problem stems in large part from relatively low levels of investment in Canada, particularly in certain types of assets that are strongly associated with productivity improvements in modern economies – machinery, plant, equipment, software, and digital and other advanced and process technologies.

A decline in capital spending on physical infrastructure as a share of gross domestic product over the past few decades is another aspect of Canada’s broader investment shortfall. In addition, Canada also underperforms the U.S. (and many other wealthy economies) when it comes investment in less tangible forms of capital, such as skills training and business research and development.

A recent paper from the C.D. Howe Institute provides an updated picture of the Canada-U.S. investment gap and summarizes trends in capital spending across the provinces. It shows British Columbia lagging the Canadian average and woefully trailing the U.S. in the amount of investment per worker. Of interest, the C.D. Howe Institute study does not count investment in the housing stock. British Columbia, not surprisingly, channels lots of capital toward the housing sector, but unfortunately this kind of investment doesn’t really help to build a more productive or competitive economy.

Over the period 2008-12, the value of investment per worker in Canada averaged less than three-quarters of the U.S. amount, with the figure projected to decline to 71 per cent in 2014. B.C. fares worse, averaging just two-thirds of the U.S. benchmark for investment per worker over 2008-12, and slipping below 60 per cent of the American level by 2014. It should be noted that B.C.’s investment performance improved following the adoption of the Harmonized Sales Tax in 2010; but as many economists predicted, the climate for business investment deteriorated once the HST was replaced by the provincial sales tax, which imposes more than $1 billion of additional costs on companies producing goods and services in the province.

A continuing pattern of low investment in new machinery, plant, equipment, and advanced process technologies compared to the United States and some other affluent countries means that Canada, including B.C., will find it difficult to boost productivity and real wages over time. As the C.D. Howe Institute authors observe, “Business investment is critical to economic growth. Capital spending produces the new tools that workers use on the job, the structures they work in, and the engineering infrastructure that makes them more productive.”

The decline in investment per worker in B.C. in the past few years is a troubling development, one that signals an overall erosion of the province’s competitive position in a North American context. Put simply, B.C. seems to have become a less attractive location for many companies to deploy capital, compared to some other provinces and many American states. Unfortunately, the provincial budget unveiled by Finance Minister Mike de Jong on February 17 won’t do much to improve the situation, as it contains little in the way of new measures designed to stimulate greater private sector capital spending.

Policymakers in the province and in the major municipal governments in B.C. need to step up efforts to pinpoint and address the factors that may be holding back investment spending – in existing businesses, as well as in newer “greenfield” projects. They should start by frankly acknowledging the problem, and then look for ways to make the province a more desirable location in which to place capital.

Above all, B.C. needs more investment in industries that produce the tradable goods and services which small jurisdictions ultimately must rely on to drive long-term growth in both real incomes and high-paying jobs.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.

— Troy Media



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