At a Canadian Chamber of Commerce virtual conference Wednesday, Bank of Canada Governor Tiff Macklem urged business leaders to step up investment – to deliver the supply capacity and productivity improvements that the economy increasingly needs to keep growing without further fuelling an already troublesome inflation fire.Justin Tang/The Canadian Press
When Tiff Macklem chose to spend much of his Wednesday afternoon talking about the need for Canada to seriously step up business investment, you have to wonder if he didn’t do so out of at least a bit of frustration.
After all, the Bank of Canada Governor kept a guarantee of record-low interest rates in place for a year and a half, making borrowing costs as attractive as they could possibly be as demand roared back with the easing of COVID-19 pandemic restrictions. Employment surged above prepandemic levels, and the economy has essentially returned to full speed, despite continued limits imposed by public-health measures. Corporate Canada has built up an estimated $175-billion in extra cash during the course of the pandemic, leaving the private sector flush with funds to spend on expansion and upgrades of machinery, equipment, technology and facilities.
And yet capital investment has not kept pace. Businesses have told the bank in surveys that they’re ready to spend, but they sit stubbornly, firmly on their ample wallets. In doing so, they have badly lagged the U.S. corporate sector, which has consistently out-invested Canadian business throughout the pandemic.
Mr. Macklem laid this out in a speech to a Canadian Chamber of Commerce virtual conference Wednesday, urging the business leaders who made up most of the audience to step up investment – to deliver the supply capacity and productivity improvements that the economy increasingly needs to keep growing without further fuelling an already troublesome inflation fire. But given the conditions in place, it’s pretty clear that what’s been missing isn’t a timely cajoling from the country’s top central banker.
“There is a shared responsibility,” Mr. Macklem acknowledged in a news conference following the speech.
“Public policy needs to focus more on the supply side.”
Bingo.
Canada should boost business investment to fuel non-inflationary growth, BoC’s Macklem says
Canadian governments have consistently leaned their policies toward keeping demand growing in the economy, on the assumption that the demand will, in itself, be the catalyst to make the capital investments to expand their capacity to provide the supplies of goods and services to meet that demand. But it wasn’t enough to drive vibrant business investment before the pandemic, and this policy imbalance has only been magnified in the current recovery.
In the previous prepandemic economic expansion, it was clear that businesses preferred investing in labour over capital to increase their capacity. Jobs boomed; investment did not.
In the recovery from the COVID-19 recession, we’ve seen that continue, but it doesn’t work so well when the labour supply has been so severely shaken, disrupted and fractured by the massive scale of the health crisis and the policy response to it. We have tested the limits of a labour-reliant expansion, and come up wanting.
In the pandemic, government policy again stacked the deck in favour of supply, leaning heavily on income supports and wage subsidies to keep consumers buying. A year ago, economists were urging Ottawa to shift its focus to the supply side by, for example, offering subsidies to help pay for a share of capital investments. Such proposals were met with crickets from the Finance Department. Job creation and income supports remained the focus (albeit in scaled-down form).
Last week, Finance Minister Chrystia Freeland talked about the need to grow economic capacity and productivity as she launched prebudget consultations. But to date, her government’s best ideas to promote long-term capacity haven’t been directed toward investment, but rather labour supply. It has expanded immigration. It will spend billions a year on subsidized child care. Fine solutions, but to a different problem.
In a paper being published Thursday by the University of Calgary school of public policy, economist Jack Mintz argues that the biggest barrier to business investment is our convoluted, antiquated corporate tax code.
“To put it in simple terms, Canada’s corporate income tax is a mess. It discourages capital investment most heavily in many service sectors, is highly distortionary and overwhelmingly complex, impeding economic growth,” Dr. Mintz writes in the report.
“To build up productive capacity in a post-COVID world, a big-bang approach is needed to put Canada into a better position to attract investment and reduce distortions in the business tax system.”
To be clear, he’s not talking about corporate tax cuts. We’ve tried that; the governments of Jean Chrétien, Paul Martin and Stephen Harper cut the federal corporate tax rate nine times between 2000 and 2012. In the subsequent decade, business capital spending has barely budged, after adjusting for inflation.
As a start, Dr. Mintz proposes that corporate profits that are reinvested into capital be exempt from taxation. That would provide a powerful incentive to pour profits back into expansion, modernization and productivity.
It’s obviously not the only proposal out there. But this is the direction Ottawa needs to look as it grapples with not only its current inflation and supply capacity problems, but the country’s long-term growth challenges. We need to move beyond nagging the private sector to invest, and redirect our policy levers to actually do something about it, for a change.
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