If Mark Carney wants to hit his $1 trillion investment goal for Canada, baby steps won’t do

As published in the Toronto Star

One of the more welcome developments from Prime Minister Mark Carney’s Nov. 4 budget was the adoption of explicit macroeconomic goals, specifically around investment.

The government is targeting an increase of about $1 trillion in total investment over five years, including about $500 billion in new investment from business.

It’s an important commitment because policy can now be measured against a tangible economic outcome.

Carney is telling us that, yes, he will run higher deficits, but those higher deficits will pay off in the form of new investment, which will boost productivity and competitiveness and ultimately raise incomes for Canadians. And he’s putting numbers behind that commitment that we can benchmark him against.

We applaud his ambition and rigour.

Back-of-the-envelope calculations suggest annual increases in the order of eight per cent a year in investment would be needed to hit those goals. These are bold targets, to be sure. But they are not unprecedented.

We’ve done it before. The last prolonged (and uninterrupted) investment surge occurred in the dozen years leading up to the global financial crisis in 2008, when gross fixed capital formation grew on average by roughly that amount annually.

As leaders representing two of the country’s largest business organizations, we share the optimism that Canada can aspire to become an investing nation again. We hear from our members that their intent and ambition are there. They tell us we can replicate that sort of performance under the right conditions.

So, what do we need to get there? Again, it’s worth looking at the past for guidance.

The period from the mid-1990s to the late 2000s was one of many tailwinds. We had low inflation and falling interest rates. The business environment was supported by fiscal discipline. Strong global growth drove demand for our exports. We benefited from a catch-up effect following weak investment in the early 1990s.

Continental free trade was beginning to bear fruit. Rapid technological innovation helped spur spending. And a commodity-price boom stoked business confidence and investment in resource infrastructure.

The bad news is that today many of those favourable conditions no longer exist.

Some, like the uncertainty around continentalism, have become serious headwinds. The challenges are clearly more daunting, and the force needed to change the trajectory must be greater. If Carney is trying to replicate the heydays of investment, there’s a lot of work to be done.

There are some tried and tested rules of thumb for building a more productive economy: a more competitive tax system, fewer regulations, attracting the best talent from abroad, and providing financing for infrastructure. In every instance, the budget moves in the right direction.

We also welcome Thursday’s memorandum of understanding between the federal and Alberta governments, which represents a long-overdue recognition that Canada’s energy sector is central to developing a strong, independent and resilient economy. Improved access to global markets can drive investments into Canada and generate meaningful benefits for all Canadians. 

And we’ll need more bold action just like this to truly increase investment at the scale required to meet Carney’s lofty goals. 

Canada faces a deep investment crisis that will not be solved by incrementalism. We worry the economy is stuck in a low-investment trap, driven by uncertainty and, frankly, disillusionment after a decade of neglect. This will require a major economic re-anchoring.

On the tax side, the budget’s measures to incentivize investment, including more generous capital cost allowances and targeted tax credits should help, but these steps were temporary and not large in scope. They don’t provide enough of a long-term advantage to offset the other negatives weighing down investment.

Given the allure of the U.S. right now, Canada would need to distinguish itself in a big way on the tax front if that’s the route we want to take. Given the level of uncertainty, it is unclear how sensitive business investment is to marginal tax changes.

Which brings us to the broader business environment.

Canada’s investment crisis is a deep systemic problem. Major investment decisions are constrained by a range of policy costs.

The factors dominating investment decisions right now include lengthy regulatory timelines, permitting uncertainty, poor clarity around carbon pricing, concerns over our future access to the U.S. market and a lack of internal political consensus on reforms.

And while we welcome the Major Projects Office’s efforts to initiate large capital investments, it’s worth noting that relying on an agency to bypass Canadian laws and regulations is not the flex the government may think it is. In fact, it highlights the very problems businesses face.

If the government truly wants to hit its investment targets, much can be done with the stroke of a pen to unleash private enterprise and capital without costing taxpayers a penny.

Thursday’s announcement illustrates how the most immediate way to spur investment is to remove the structural impediments standing in the way.