Thin Capitalization: Weak Business Investment Undermines Canadian Workers

• Main Author: William B.P. Robson
• Format: Article in Journal/Newspaper
• Language: unknown
• Subjects: Newfoundland; Canada; Prince Edward Island
• Online Access: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary%20550_0.pdf

Capital investment boosts the economy in the short run and equips Canadian workers to raise their output and earn higher incomes over time. It does so by adding to Canada’s stock of machinery, buildings, engineering infrastructure and intellectual property. Unhappily, after years of relatively robust performance, business investment in Canada has recently slipped ominously. The latest figures from Statistics Canada and the Organisation for Economic Co-operation and Development (OECD) suggest that Canadian businesses in 2019 are investing only about $15,000 per worker. By contrast, businesses across the OECD are investing about $21,000 per worker, while US businesses are investing about $26,000. For every new capital dollar enjoyed by OECD workers this year, their Canadian counterparts will receive only 71 cents. And for every new capital dollar enjoyed by US workers, Canadian counterparts will receive a dismal 58 cents. Although weak prices and market-access problems have hurt capital investment in Alberta, Saskatchewan, and Newfoundland and Labrador, investment in these provinces remains relatively robust on a per-worker basis. Manitoba is also above the Canadian average, with investment per worker on track to hit $15,800 in 2019. In other provinces, however, per-worker investment is feeble. The 2019 B.C. tally will come in around $12,900, Ontario $10,800, and Quebec and New Brunswick around $9,000. Nova Scotia at $8,400 and Prince Edward Island at $6,400 round out a discouraging picture. In only one province – Newfoundland and Labrador – is per-worker investment above the US level, and investment per worker in most provinces will be less than half that garnered by US workers. Because investment in new machinery and equipment (M&E) is particularly important for spurring economy-wide productivity, Canada’s weak performance there is particularly troubling. Notwithstanding some recent encouraging quarterly numbers, the international comparisons show Canada as a chronic underperformer. The contrast with the US, ...