From Europe to Canada: Lessons in tackling the investment gap
THE CANADIAN PRESS/Spencer Colby
Innovation Minister François-Philippe Champagne’s portfolio includes ensuring Canada’s economic productivity. ‘Policies that ignore impacts on investment come at a cost to long-term economic health,’ writes Theo Argitis.
Mario Draghi's long-awaited report on EU competitiveness and productivity has made a big splash in policy circles across the Atlantic, where it’s ignited an important debate on how Europe prepares for a world dominated by geopolitical challenges and digital transformation.
Draghi, the former European Central Bank president who has also been Italian prime minister, offered a sobering diagnosis of the EU’s current economic struggles, but complemented it with an ambitious vision that highlighted, in particular, the need to act decisively to attract more investment to remain competitive with the U.S. and China.
The report is a reminder that Canada isn’t alone in its productivity challenges — Europe has also seriously lagged the U.S. on that front. But the Europeans are showing a sense of urgency. So should Canada.
Investment crisis
The importance of putting investment at the forefront of our economic policy debate is something I’ve tried to draw attention to on these pages. The issue was also the central theme of an op-ed, published on Thursday in the Globe and Mail, that I co-wrote with Robert Asselin, head of policy at the Business Council of Canada.
Robert and I argue that Canada’s productivity crisis—which is manifesting in falling per capita income levels—is fundamentally an investment crisis. As a share of GDP, non-residential private sector investment is hovering at the lowest in two decades.
We also argue that policy matters, and we draw attention to three specific and immediate risks that can be addressed:
The uncertainty around corporate taxation
The regulatory chokehold on energy investment
Risks to the investment landscape in the telecom sector
Our underlying point is that while policymakers can prioritize things other than investment, Canadians need to understand and debate the trade offs. Policies that ignore impacts on investment come at a cost to long-term economic health.
Taxes
There’s a high level of concern in Canada’s boardrooms that the governing Liberals—who are desperate to reverse their slide in the polls—will turn to some type of new corporate tax to pay for new spending, or simply to fire up support among left-leaning voters. Another windfall profit tax or levy, for example. We did a whole panel on this in August, which you can find here.
Energy, telecoms
Robert and I also highlight specific issues in the energy and telecom sectors, reflecting the large amount of capital spending in those two industries. But there are other examples. (Please reach out to us here at Means & Ways to tell us more about the investment outlook for your sector.)
The issues for oil and gas have been widely discussed, though they will come to a head soon with the government set to release draft regulations for a new emissions cap for the industry along with final regulations to decarbonize Canada’s electricity grid.
The concern about investment is clearly reflected in data, which shows capital spending in the oil and gas sector as a share of sales has dropped to the lowest since at least the global financial crisis. According to quarterly data from Statistics Canada, capital expenditures in oil and gas have averaged about 14.3 per cent of sales this year through June, versus more than 20 per cent in the decade before the pandemic.
Sweeping changes
The telecom case has been less publicized, but could also have a material impact on investment.
Under a 2023 directive from Innovation Minister François-Philippe Champagne to hurry competition in the high-speed Internet space, the regulator has introduced sweeping changes that will allow major incumbents to access each other’s fibre networks for the first time.
The question is whether companies will continue to invest in new fibre networks or any other networks when they’re forced to share them at regulated rates? CRTC has promised a five-year grace period for any new fibre investments going forward, and appears to be downplaying the potential impact on capital spending. Some of the telco players are warning otherwise.
The whole switch in the regulatory regime also poses some questions about policy certainty and the stability of the investment climate. The regulatory changes took place midway through an investment surge—effectively moving the goalposts after the telcos had already started spending heavily.
And the uncertainty could spill over into any other new technologies beyond fibre — for example, as the industry considers areas such as coverage via satellite.
