Turning investors – and prosperity – away at the door

The federal government's disinterest in private-sector investment and entrepreneurship is devastating for Canada's economy

By Jason Clemens
and Milagros Palacios
The Fraser Institute

Confidence in Canada as a destination for business spending is in steep decline. Given the importance of business investment and entrepreneurship to prosperity, the federal government should be concerned. But by all accounts, they’re not.

The latest evidence of government disinterest comes in the form of last month’s federal budget.

Jason Clemens
Jason
Clemens

According to Statistics Canada, every category of business investment has declined (except residential housing) since peaking in the final quarter of 2014. Total business investment, excluding residential structures, (adjusted for inflation) is down 16.8 per cent. That includes declines in non-residential structures (down 23.3 per cent), machinery and equipment (down 6.6 per cent) and intellectual property (down 13.8 per cent).

And StatsCan’s survey of the investment intentions of private businesses shows further declines in 2018 are expected – the fourth straight year of decline.

And foreign direct investment (FDI) in Canada has dropped 56.0 per cent since 2013, to $31.5 billion from $71.5 billion. In addition, for the first time since data has been collected, foreigners sold more Canadians assets than they bought in 2017.

Milagros
Palacios

Canada’s results are not typical among industrialized countries. A 2017 analysis by StatsCan’s former chief analyst found that Canada ranked second last among 17 industrialized countries – including the United States – for business investment over the 2015 to 2017 period. This is a substantial decline from 2009 to 2014, when Canada ranked eighth among the same 17 countries.

Moreover, data for business startups, a key measure of entrepreneurship, shows similar worrying declines. The rate of small business startups (less than 20 employees) declined 16.2 per cent from 2006 to 2015, the latest year of available data. Startups of medium and large firms nearly collapsed, falling 51.5 per cent since 2006.

Given the importance of business investment and entrepreneurship to the economy, it’s more than a little worrying that the federal government seems detached and disinterested. The budget didn’t even acknowledge business investment until page 288.

Perhaps most puzzling is why federal Finance Minister Bill Morneau, a former Bay Street titan, could be so oblivious to the near-crisis in business investment and entrepreneurship. One potential answer, as evidenced by his comments after last year’s budget, is that the minister and the government are simply not interested in private-sector investment. During an interview, Morneau talked about the government’s approach to long-term, sustainable economic growth. Notably, he rarely mentioned the private sector.

Instead, he focused on the government’s ability to direct investment, revealing the government’s confidence in being able to actively and prescriptively direct and manage investment. “We’re investing in sectors where we know we can beat the world,” he said, adding that “we’re definitely choosing places where we can win globally” and “we’re making investments to grow our economy.”

Perhaps even more worrying is that the minister and the government continue to tell Canadians that the plan is working, despite dismal private-sector investment and entrepreneurship data. A key goal of this government is to improve rates of economic growth. However, its budget, as well as Bank of Canada and Department of Finance forecasts, indicate that growth is expected to markedly slow.

The disinterest in private-sector investment and entrepreneurship, the too-frequent hostile rhetoric of the government towards business, and anti-business policies including higher taxes, deficits and counterproductive regulations, are having a real impact on the Canadian economy. The evidence can be seen in declining investment and entrepreneurship, and lower rates of economic growth.

Creating the right environment for businesses, investors, workers and entrepreneurs to flourish, rather than trying to actively direct investment, remains the proven approach to a better, more prosperous economy. That means reversing much of the economic policies introduced by this federal government and many of its provincial counterparts.

It’s time Canada dusted off its “Open for business” sign.

Jason Clemens and Milagros Palacios are economists with the Fraser Institute.


prosperity

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