Why we have a terribly imbalanced economy

TORONTO—Despite tax cuts, tax incentives, and significantly increased government subsidies, “business investment (non-residential structures and machinery and equipment) has not made an important contribution to growth in the last decade," Statistics Canada tells us in a new report. Instead, consumer spending has been a key source of economic growth since 2015. But that option—never the right one—is running out. This explains why we now have a terribly imbalanced economy. Canadians now have the highest household debt relative to household income in the G7, and one of the poorest performances in innovation and productivity in its business sector. The two are linked. The past decade has been, in many ways, a lost decade. COVID-19 was a big challenge—but it does not excuse Canada’s failure to build for a better future. What we have been doing is simply not working. Our per capita GDP is declining, not growing. Neither the Harper nor the Trudeau governments came to grips with the big strategic challenges facing Canada—and the current alternative looks no better. Our country needs leadership that is honest about the challenges we face and thinks big on strategy, but we have neither. In December, Canadians—through pension funds, mutual funds, insurance companies, and individuals—invested a record $29.4-billion in foreign in stock markets. Canadian savings were not invested in growing the domestic economy, but supporting growth elsewhere. As we have for years, we pay our bills by relying on dividends from growth elsewhere while importing innovation from others. The burden of household debt—higher interest rates—is already having a significant impact on young families and low-income householders, and it could get much worse. Almost half of mortgages held by Canadian families must be renewed in 2024 and 2025, with great risks of much higher mortgage payments for those that have already been squeezed by inflation in food and other prices at a time of job uncertainty and weak growth in incomes. The group that has truly benefitted in wealth and income recent years, according to Statistics Canada, has been the top 20 per cent of Canadian households. Perhaps another sign of a discouraged population is the sharp decline in the percentage of immigrants seeking citizenship as they find the Canadian dream no longer works for them. Even after taking COVID-19 into account, the proportion of immigrants who have reached the residency requirement for citizenship and sought citizenship declined faster from 2016 to 2021 than for any other five-year period since 1996, Statistics Canada reports. While there are important issues of income, wealth distribution, and environmental sustainability, the biggest challenge today is a growth strategy for the future based on investment, innovation, and productivity. In an important study published at the start of the year—Data, Intangible Capital, and Economic Growth in Canada—Wuling Gu and Ryan Macdonald, two analysts from Statistics Canada, and Rupert Allen, an analyst from Canadian Heritage, concluded that “Canada is not taking advantage of opportunities to increase output and labour productivity through investment, especially in knowledge intangibles and innovation in products and processes.” That’s what must change. There are two forms of investment that matter: investment in tangibles—buildings and machinery and equipment—and investment in intangibles such as research and development, data, business processes and organization, training and skills development, branding, cultural products and software. Both are important for economic growth and productivity, but it is investment in intangibles that increasingly drives innovation and productivity. While in both Canada and the United States the contribution of tangibles investment to labour productivity growth was similar, in this country, the contribution of intangible capital is much lower. American business has invested much more heavily in intangibles than Canadian business which, the analysts said, the lower reductivity growth in Canada was due to the lower contribution of intangibles. Low Canadian business investment in R&D is just one example. So Canada’s biggest weakness is in intangibles. Even though it’s in this area that the greatest growth has been occurring, this must increase even more rapidly in the future. In 2019, investment in tangibles was valued at $256-billion while investment in intangibles was valued at $213-billion. What was significant—and a signal for the future—was the increased importance of intangibles. The ratio of intangible investments to tangible investments growth rose from 0.73 per cent in 2000 to 0.83 per cent in 2019. What was also significant was that the largest share of intangibles investment was from data—about $57-billion in 2019—underscoring, the analysts said, “the importance of data and data-derived tools for modern production processes.” This would suggest that keeping intellectual property and data in Canadian hands is critical for our future capacity for innovation, growth and productivity. Between 2000 and 2019, tangible investments by the business sector were equivalent to about 15 per cent of GDP while for intangibles the investment rose from 11.7 per cent to 13.5 per cent. A separate report by StatsCan’s Gu—Investment Slowdown in Canada After the Mid-2000s: The Role of Competition and Intangibles—found that investment per worker by Canadian businesses declined by about 20 per cent between 2006 and 2021, with the weakness coinciding with a change in the mix of investment towards intangible investment. The share of intangible assets as a portion of total fixed assets in business balance sheets rose from eight per cent in 2006 to 17 per cent in 2021, with investment in intangibles growing 2.4 per cent a year in the business sector while investment in tangibles grew at a much lower 0.3 per cent a year. If we can improve our capacity in intangibles—investing more in R&D, data, marketing, business organization and processes, software, and skills upgrading, for example—we are more likely to raise the needed investment in tangibles, including much-needed new machinery and equipment, as well. So it is with intangibles that we need much more urgent focus. So how do we do better? Next week, I will offer some ideas. David Crane can be reached at crane@interlog.com. The Hill Times

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Why we have a terribly imbalanced economy

Canadians now have the highest household debt relative to household income in the G7, and one of the poorest performances in innovation and productivity in its business sector. The two are linked.

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