Canada’s investment crisis
Poor government policy driving away new capital investment
Central bankers have slashed interest rates reducing borrowing costs to help keep businesses afloat. Governments continue to inject billions of dollars of borrowed money into their economies. In Canada, pandemic financial supports are nearing $500 billion.
Low interest rates mean cheap money for all including our federal Liberal government which has driven debt to GDP ratios from 34 per cent in 2019 to near 100 per cent in 2021.
The amazing thing about cheap money today is that no one seems to care or even notice how much debt Canadians and our governments are accumulating. And there appears to be no urgency for repayment.
Governments seem more than ready to throw money (our tax dollars) at Canadians whether they need it or not. As a result, they have enabled an unhealthy dependency on government (taxpayer) to solve everyone’s problems. That negatively impacts innovation, creativity and productivity in Canada.
Soon we will have a federal budget. The first in almost two years. Rumours are afloat there will be lots more borrowed stimulus cash to reboot the economy as the pandemic subsides and vaccines get rolled out later this year.
A major concern for most Canadians is the slow rollout of pandemic vaccines. We are all painfully aware that Canada has no domestic COVID-19 vaccine production and is totally dependent on foreign producers.
There are a couple of reasons why Canada does not have large scale domestic vaccine production.
First is Canada’s unfavourable patent protection laws which guarantee shorter windows of time for exclusive marketing of products developed in Canada by the manufacturer before generic production is allowed.
This means when a drug company brings an approved drug to market after investing many years and billions of dollars in research and development, they may not have enough time to recover those large investment costs plus a reasonable profit before Canada allows generic production to compete with the drugmaker.
Secondly, the income tax climate for large drug manufacturing corporations in Canada is not as favourable as it is in other countries such as the United States or India.
To further emphasize Canada’s disadvantages as a place to do business let’s look at corporate investment in Canada over the last few years.
A recent report, "From the Chronic to the Acute: Canada’s Investment Crisis" by the C.D. Howe Institute, tells a bleak story of a nation that will struggle to compete
when it emerges from the COVID-19 pandemic.
The study calculates that new investment in Canada per available worker has fallen to 58 cents for every dollar of investment in the U.S. In other words, the Americans are eating our lunch when it comes to attracting new capital investment dollars. This is a reflection of ill-founded policies on the part of our governments that drive investors away from Canada.
That should be concerning for all Canadians.
Over the past five years, the investment gap between Canada and other advanced countries has become “unprecedentedly” wide. By the middle of the past decade when the Liberal government took power it was 81 cents in Canada to every dollar spent in the
OECD. That has shrunk to 60 cents now. That is a sure sign of a government working against you, not for you.
The C.D. Howe Institute study looks at three kinds of investment: machinery and equipment, buildings and intellectual property (IP) that drives innovation. Of these, IP investment is by far the worst, sinking steadily since the mid-2000s to just 29 cents to the U.S. dollar in 2020.
Why does it matter? It’s another reason why Canada doesn’t have a world class domestic vaccine producer. And Canada desperately needs capital investment to pay back the $1 trillion in government debt we are leaving our grandkids.
It puts Canada at a competitive disadvantage to other advanced countries and increases the economy’s dependence on consumers for growth.
For example, Canada now has an unhealthy dependence on the domestic housing market to stimulate its economy. The nation’s mortgage debt is now over $1.75 trillion which is scary. 2020 was the fastest year ever for mortgage debt growth due to cheap money availability.
The prospect that Canadians will find themselves increasingly relegated to lower-value-added jobs relative to workers in the United States and OECD, who are raising their productivity and earnings faster, should encourage the Canadian government to take action on many fronts. There will be little investment in Canada’s “green economy” if we continue down this road.
Government can’t influence all factors affecting business investment. But government can be supportive by investing in infrastructure, particularly oil pipelines, cutting business taxes, reviewing regulations that hamper competition, resolving international trade uncertainties and loosening inter-provincial trade restrictions.
Can the current Liberal government figure this out? Let’s see if needed government policy changes show up in the next federal budget. If not, we will continue to lose traction in attracting new capital investment to Canada and the needed jobs that brings. And we still won’t have a world class vaccine producer based in Canada.