For every dollar of new investment enjoyed by the average U.S. worker in 2017, a Canadian worker enjoyed a mere 59 cents.
Federal Finance Minister Bill Morneau and economist Jack Mintz debated Canada’s competitiveness for business investment in Wednesday’s FP Comment. Morneau said Canada’s competitiveness is good, and showed a chart to support his view. Mintz said it is bad, and showed a chart to support his view.
Morneau is a former chair of the C.D. Howe Institute’s board of directors and Mintz is a former president of the institute, so perhaps it will help if the institute’s current president weighs in. And I say that Mintz is right. Canada’s relative investment performance is the worst on record. And growth-friendly tax changes are a key tool Morneau should use to improve the situation.
The topic Morneau and Mintz were debating is critically important to Canada’s economic future. Capital spending by businesses turns saving into new buildings, machinery, information technology and intellectual property — the tools Canadian workers need to make the products that earn the incomes that support our quality of life. From country to country and from year to year, high rates of investment and high rates of economic growth run together, as do low rates of investment and low rates of economic growth. If we want Canadians to live better tomorrow — higher wages for workers, good returns on our saving and revenues for our public programs — we need robust investment today.
Morneau cited an uptick in business investment in late 2017 as evidence that Canada is doing all right. But non-residential private-sector investment for the year as a whole was more than one-sixth below its 2014 peak. Meanwhile, consumption has been growing: As Mintz showed, investment has fallen as a share of GDP. And StatsCan’s survey of intentions earlier this year suggests that private-sector capital spending will fall in 2018.
Neither Morneau’s nor Mintz’s figures addressed the competitiveness question directly. That is crucial, because the world economy has been on an upswing, and we are at the stage of the cycle when investment should be strong. How do the new tools Canadian workers will get this year compare to what their counterparts abroad will get?
Time for my chart. We can benchmark how well Canada is equipping its workers against what is happening abroad by comparing per-worker investment, adjusted for changes in exchange rates and the costs of capital equipment, against other developed countries, including the United States. The results are dismal.
For every dollar of new investment enjoyed by the average worker in all OECD countries, the average Canadian worker enjoyed less than 70 cents last year — down from 90 cents in 2013, and the worst performance since comparable figures began in 1991. And if we compare intentions in Canada against OECD projections for other countries, it suggests a further dip this year — to 65 cents.
A comparison with the United States is even worse. For every dollar of new investment enjoyed by the average U.S. worker in 2017, a Canadian worker enjoyed a mere 59 cents — by far the worst performance on record. Yet 2018 seems likely to set a new low.
A key point of contention between Morneau and Mintz is whether Canada should respond to the U.S. tax reforms that took effect January 1. My bet is that when we get the final numbers for 2018, they will be even worse than these estimates, because the OECD projections preceded those U.S. reforms, which were designed to, and will, boost capital spending south of the border. Mintz argues that growth-friendly tax changes in Canada starting in the late 1990s helped Canadian investment, and the per-worker numbers back him up. Canada’s performance did improve over the following decade and a half. We need action in both Ottawa and the provinces to reverse the dive that followed.
Fixing this mess is not Morneau’s job alone. But he can help. Headline tax rates, depreciation schedules, treatment of income from investments in intellectual property — these are all in his purview. The federal government plays a key role (lately, not very well) in the regulations and intergovernmental policies that affect major projects such as pipelines and other infrastructure. Even a change in tone would help: Less denial that we have a problem and more respect for the businesses, large and small, that we want to tool up.
So Mintz wins this debate. Canada’s competitiveness for business investment is bad. Morneau should stop arguing about it and start fixing it.
William Robson is president of the C.D. Howe Institute.
Published in the Financial Post.