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BCBC: Ottawa is still behind on spurring capital investment and productivity growth

As a result, the typical Canadian employee has fewer and less up-to-date “tools” and Canada continues to underperform peers on productivity
Ottawa has been under pressure to respond to the U.S. Inflation Reduction Act, write columnists Jock Finlayson and Ken Peacock.

There has been much discussion of the Trudeau government’s preternatural fondness for deficits and its halting efforts to address hot-button issues like escalating living costs and the challenges posed by the blockbuster (albeit misnamed) U.S. Inflation Reduction Act (IRA).

The latter features an eye-popping US$370 billion in subsidies and incentives to accelerate the United States’ clean energy transition, and to boost domestic production of low-carbon goods, renewable energy and clean technologies.

Canada, understandably, has been under pressure to respond to the IRA. Budget 2023 is Ottawa’s attempt to do so. It puts flesh on the bones of the government’s fledgling green economic strategy. We believe the strategy should be appraised by asking whether it is likely to improve Canada’s performance in two areas that are vital to future prosperity: Business investment and productivity.      

On investment, it has become commonplace to bemoan the sluggish pace of non-residential capital spending by Canadian businesses. The C.D. Howe Institute estimates that such private-sector investment per worker has been running at just 55 to 65 per cent of the U.S. level since the mid-2010s. Canada is also lagging well behind the average for advanced economies.

As a result, the typical Canadian employee has fewer and less up-to-date “tools” – machinery, plant, equipment, advanced process technologies, infrastructure and intellectual property products – to work with than a counterpart in the U.S. or much of Europe. Even more troubling, business investment has been so weak that it isn’t even matching depreciation across large swathes of the economy. Canada’s private-sector capital stock is at best stagnant if not declining outright.

A second area of Canadian underperformance is productivity. Here, too, the picture is sobering. Labour productivity hovers around 75 per cent of the U.S. benchmark. The pattern of weak Canadian business investment is a major driver of the productivity gap. Other contributing factors include the smaller size of the average firm in Canada and the slower take-up of digital and advanced technologies by Canadian businesses.

Will Budget 2023 reverse these trends? We are skeptical. The only significant new economic announcements are focused on advancing the Trudeau government’s ambitious climate agenda. They include tax incentives to encourage “green” manufacturing, spur the development of renewable electricity and hydrogen, promote the adoption of clean technology products across industry and support carbon capture and storage.

This suite of tax credits carries a sizable price tag: $21 billion in the next five years, and up to $80 billion over the coming decade. The incentives are designed to help counter the magnetic pull of the U.S. for companies looking to invest in clean energy projects and technologies. Canadian firms involved in clean energy and clean tech sectors should benefit from Ottawa’s green-tinged industrial policy. So will some natural resource and manufacturing firms looking to slash greenhouse gas emissions.

But it’s hard to see how the government’s plan to decarbonize the economy will improve the broader investment environment or stimulate faster productivity growth. For one thing, what Statistics Canada defines as the “environmental goods and clean technology” sector makes up just three per cent of GDP (and 1.6 per cent of payroll employment), with renewable electricity and waste management services together accounting for more than half of that. Even if the sector flourishes, the effect on Canada’s $3 trillion economy will be very modest.

Second, Ottawa is piling on ever-higher energy taxes and adding more costly regulations – steps which increase production and operating costs for many Canadian businesses. At the margin, this policy mix is likely to dampen private-sector investment in things that would make our firms and workers more productive over time.

So, while Budget 2023 will yield some positive outcomes for segments of the Canadian business community, it won’t do much to tackle the country’s chronic weaknesses in capital investment and productivity growth. 

Jock Finlayson is the Business Council of British Columbia’s senior adviser; Ken Peacock is the council’s senior vice-president and chief economist.