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Macdonald-Laurier Institute

Cross in the Post: What’s wrong with central Canada?

March 26, 2014
in Columns, Domestic Policy Program, Economic policy, In the Media, Latest News
Reading Time: 4 mins read
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Writing in the Financial Post, MLI senior fellow Philip Cross looks at Statistics Canada’s recent annual survey of investment intentions and finds a stark difference between Ontario and Quebec and other parts of Canada. He writes: “The provincial breakdown of investment growth clearly points to a reluctance to invest in Central Canada … This is not a new trend; business investment has fallen in both provinces since 2012”. The blame can be placed on political uncertainty and policies that raise costs for businesses, not “just the luck of geography”, Cross explains. 

Philip Cross, March 26, 2014

For Canada to break out of its persistent slow growth, the Bank of Canada has emphasized the need for higher exports and business investment. More exports are likely once the U.S. economy emerges from its winter hibernation. However, business investment in Canada remains stuck in neutral, according to Statistics Canada’s recent annual survey of investment intentions. Planned outlays are up only 1.6% for 2014, slightly below last year’s microscopic growth.

Investment is booming in many regions and sectors of our economy, showing it is not an aversion to investing in Canada that is holding back capital spending. Excluding Ontario and Quebec, investment in the rest of Canada is up a heady 65% since 2009. Energy investment continues to be spectacular, nearly doubling in just five years to $116-billion, rivalling investment in all other industries combined. Capital spending on oil and gas extraction has spearheaded this surge, with the oilsands more than tripling. To carry the tsunami of crude oil requires more investment in pipelines, which has tripled in three years to $9.2-billion (pipelines have displaced urban transit as the largest part of our investment in transportation). Add in sustained high levels of spending by utilities, and Canada’s investment in the energy sector continues to redefine our economy.

So why is overall business investment in Canada lacklustre? The provincial breakdown of investment growth clearly points to a reluctance to invest in Central Canada. Business cut planned investment in both Ontario and Quebec. This is not a new trend; business investment has fallen in both provinces since 2012. Since the recovery began in 2009, investment in these two provinces is up only 12%, one-fifth the gain in the rest of Canada.

It is not hard to see why firms are hesitant to invest in Central Canada. Political uncertainty certainly creates a poor investment climate. The election of a separatist anti-business minority government in Quebec in 2012 led to two years of falling investment, and now the prospect of another referendum. Over the same period, Ontario’s minority Liberal government has struggled to hang on to power.

However, the problem in Central Canada extends beyond political uncertainty. Both governments have openly embraced policies that discourage business. While preaching fiscal discipline, neither has made any progress in tackling the massive debt problems that cloud their long-term outlook. Both provinces pursue trendy environmentalism, ignoring the harm rising costs impose on economic growth.

Each province has adopted specific legislation injurious to business investment. In Quebec, this was most obvious in its increase in the regulation and taxation of mining, which helped lower its ranking from the most attractive jurisdiction in the world to 21st place in just four years, according to the Fraser Institute. This change in legislation coincided with a marked downturn in metals prices—in other words, it couldn’t have happened at a worse time. Quebec’s moratorium on shale gas production also helped strangle its mining industry, although there are some signs the government is easing its anti-fossil fuel rhetoric, recognizing how new supplies from Alberta could revitalize its large oil refineries.

Not to be outdone, Ontario has adopted a raft of measures designed to raise business costs in a weak economy. These include increasing the minimum wage and threatening higher corporate income taxes and a hike in pension costs to finance an ill-considered expansion to the CPP. These are just the latest in a long string of measures that demonstrate a complete lack of understanding of how to create a positive business environment. They include everything from the highest electricity costs in North America as a result of its green energy policies to imposing an extra paid “Family Day” vacation starting in 2008, saddling firms with higher costs just in time for the recession later that year.

Surging investment in the rest of Canada is not just the luck of geography. The oil sands boom in the late 1990s was triggered by both new technologies and a new royalty scheme. Instead of approaching their ample natural resource base as an asset, Quebec and Ontario have openly discouraged its development, apparently buying into the erroneous Dutch Disease philosophy that natural resources and manufacturing have an adversarial relationship.Besides changing mining royalties, the PQ scrapped the Liberal government’s symbolic Plan Nord to foster the development of its rich natural resource base. Ontario was unable to provide basic infrastructure to keep the main “Ring of Fire” mining proposals alive. As a result, mining investment in Central Canada has fallen from $9.3-billion to $5.4-billion.

The wonder is not that business investment is weak in the People’s Republics of Central Canada. The wonder is that falling investment in Ontario and Quebec has not caused their economies to relapse into recession, given the central and determinant role investment plays in economic growth. Only surging investment in resources elsewhere in Canada is sustaining growth at even a moderate pace. One benefit of political uncertainty is that the possibility of new regimes in Quebec and Ontario offers the best hope that these provinces will adopt policies allowing them to join the investment boom the rest of Canada is enjoying.

Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada.

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