Fill 'Er Up: Business Investments Fueling our Economic Growth and Standards of Living

About a year ago, I wrote in my monthly column that productivity growth is closely related to growth in our standard of living and that Canada’s underwhelming productivity performance will make it difficult for future generations to enjoy the income growth that current generations have enjoyed.

Less than four months ago, Dr. Andrew Sharpe from the Centre for the Study of Living Standards, echoed my statement and testified before our Committee on Banking, Trade and the Economy that “productivity growth is the only sustainable source of increases in the standard of living of Canadians.”

And now, just two weeks ago, our committee published a report entitled “The State of the Canadian Economy and Inflation” in which we relate expert-witness testimony including from David Dodge, the former Governor of the Bank of Canada, who also believes that Canada’s productivity growth is weak. He argues that digitization, robotization and increased use of artificial intelligence can help raise productivity in Canada, both in the goods sector and for our service providers. However, to do so, Canada needs to find ways of encouraging greater business investments from at home and abroad. 

There is widespread agreement, as we suggest in our report, that business investment is an important driver of productivity and, perhaps more importantly, living standards.  Jean-François Perrault, Scotiabank’s Senior Vice-President and Chief Economist, explained to our committee that the government should focus on policies that increase competition and improve Canada’s productivity to help Canadian companies compete and take advantage of international markets.

As a report from the firm Deloitte recently suggested, “although the notion of business or economic competitiveness often sounds like it is about greater business revenues or profits, it is actually the primary source of a rising standard of living for Canadians.”

While it may not be the panacea for increasing everyone’s standard of living, I’ve often argued that business investment can have positive economic and societal spinoffs. As Dr. Sharpe pointed out, while Canada does appear to have a positive business climate, governments cannot force businesses to invest; rather, businesses have to see the opportunities to want to invest. Right now, the reality seems to indicate that entrepreneurs and investors are not keeping pace with other jurisdictions in terms of injecting much needed capital in their businesses, and by the same token, in their employees.

The reality is, according to Dr. Sharpe, that “aggregate labour productivity growth in Canada since 2000 has been around 1% year”, which is a far cry from the 3% average in the three decades after the Second World War. Clearly, living standards are advancing at a much slower rate than in the past. This needs to change and begs the question:

What additional opportunities or incentives are needed to attract and encourage greater business investments to help increase our standards of living?

The answer is not simple and certainly not one-sided. Some would call for a reduction in capital taxes to make the investment environment more attractive. This would help innovation and automation which are two critical components of economic growth and productivity.  

Others, like Kevin Page, Canada’s very first Parliamentary Budget Officer, would encourage the government to look at regulation and its role as a fundamental policy instrument to structure the markets. Addressing Canada’s oft-criticized regulatory environment is seen by many as undermining economic efficiency and productivity. Deloitte advances that “a regulatory regime that protects the public interest with the least economic disruption, and facilitates the unlocking of technical progress, would give Canada a competitive advantage in world markets, and support sustainable, inclusive economic growth.”

When he appeared before our committee, Dr. Jack Mintz, professor of economics at the University of Calgary, explained that federal and provincial regulatory policies with respect to permitting have a negative effect on Canada’s productivity, and he stressed that this will be of particular importance during Canada’s energy transition.

As we advanced in our report, contemporary and future budgets must address the prolonged problems of investment in Canada and our competitiveness abroad without exacerbating market forces that will continue to drive inflation up. Thankfully, our committee is embarking on a new study to shed some light on the business investment climate in Canada. Inspired by the testimony we received in recent months, Senators agreed that this is such a critical issue, particularly in a post-pandemic world where international competition is more aggressive than ever and where rising interest rates and inflation is affecting economic growth and making life increasingly unaffordable for many Canadians.