Dead money could put drag on Canadian growth, says report

Canada is falling behind the rest of the OECD nations in business investment, with a steady decline in per worker investment in the last five years, according to a C.D. Howe report.

The think-tank estimates Canadian business investment will average $13,200 per worker in 2014, compared to $14,800 in the OECD and $18,500 in the U.S.

New investment is needed to provide tools to make existing workers more productive and to add building and equipment for new jobs.

“Canada cannot be complacent about its performance in equipping its workers with the capital they need to do their jobs and raise their living standards,” the report says.

Businesses in Ontario and Quebec have a particularly poor record, with per-worker investment plunging to $5,700 in Quebec and $7,000 in Ontario, the lowest levels in 10 years.

Dead money issue

The report raises the issue of “dead money” — the $626 billion in cash holdings that Statistics Canada reported among private companies in the first quarter of 2014.

On Wednesday, Bank of Canada governor Stephen Poloz said the Canadian economy was “a long way from normal” and said a lack of business confidence and investment was contributing to the malaise.

The C.D. Howe report points out that Canada has long lagged the U.S. in investment, but seemed to be catching up from 2008 to 2012. However, since then, the amount invested per worker in Canada has been in decline – and it now stands at 71 cents for every dollar invested in the U.S.

There has been a steep decline in investment in mining, an area hard-hit by a decline in demand from China, but oil and gas, another key sector of the economy, has also seen a lack of momentum for the past three years, the report said.

One of the report’s authors, Benjamin Dachis, said lack of investment now will hurt Canadian productivity in future.

“Private investment is what separates developed countries from poorer countries,” said Dachis, a senior policy analyst with the think-tank.

Recommends tax, policy changes

“Look around the world at the close relationship between the quality of tools and equipment workers have (and economic well-being) … if we’re not getting enough investment, the long-term growth in Canada is going to be in serious jeopardy.”

The C.D. Howe report recommends policy-makers take steps to encourage investment spending to reverse the trend. Among its ideas:

  • Encourage private-sector financing of infrastructure projects.
  • Reduce sales taxes and land-transfer and business-property taxes.
  • Reduce taxes on profit from innovation.
  • Create an investment-friendly royalty regime in oil and gas. 

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