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Unleashing Canadian competitiveness: Insights from a former Prime Minister

I recently had the opportunity to attend the Fraser Institute's 50th-year celebration event, and during the evening, I connected with Stephen Harper, former Prime Minister of Canada. As I reflected on our conversation, his time in office and listened to his Q&A dialogue on stage with the CEO of the Fraser Institute, Niels Veldhuis, the whole thing got me thinking about this country's competitiveness and how we got into this wild mess.

 

Traditionally a stable and attractive destination for investment, Canada has plunged into the abyss and is experiencing a significant decline in investor confidence. Case in point, the Conference Board of Canada's Index of Business Confidence fell by 3.6 points in April 2024 to 73.3 (2014 = 100). Several factors contribute to this trend, ranging from economic and political concerns to global market dynamics and sector-specific issues.

 

This article explores the key reasons investors hesitate to deploy capital into Canada right now and what we need to do to course-correct and get this country's economic growth and prosperity under control. As Stephen Harper said in a statement during the Year of the Entrepreneur, we should be "committed to promoting economic growth and creating jobs for Canadians." 

 

Economic uncertainty and market volatility remain, with elections on the horizon.

 

Starting at the macro level, economic uncertainty is one of the primary reasons for investors' reluctance to deploy capital. Canada's economic growth is moving in the wrong direction, partly influenced by internal domestic and external factors.

 

Domestically, high levels of household debt, a cooling housing market, and low levels of consumer confidence combined with net job security at its lowest since the onset of the pandemic have raised concerns with Canadians. According to the Fraser Institute, a decline in living standards is the third-steepest of any decline over the last four decades at -3.0 percent. Furthermore, the current decline has not yet ended, we could end up deeper in the hole and see more declines in living standards when the 2024 data is released. Simply put, Canadians could be experiencing the worst decline in living standards of the last 40 years, which is frightening.

 

Externally, trade tensions, particularly with the United States, have added to the pain. The USMCA (United States-Mexico-Canada Agreement) replaced NAFTA and has not been without complications, causing unease among investors about the stability and future of trade relationships. While the 2026 review of the USMCA may seem far away, complacency amounts to sleepwalking with a U.S. presidential election, a potential Trump presidency and a Canadian federal election around the corner.

 

Moreover, global market volatility has impacted investor sentiment. The COVID-19 pandemic, while it might seem like a distant memory, has exacerbated economic challenges with lingering impacts, leading to unprecedented fiscal measures and monetary policies. These measures were necessary to stabilize the economy. They also increased government debt to sky-high levels. According to Edelman Global Advisory, Canada's total debt has risen to a whopping $1.4T; the cost to finance this debt will be $47.2B this year and is forecast to increase to $64.3B by 2028-29. Investors are very cautious about the long-term implications of such debt levels on Canada's economic stability and its ability to make further investments into the country that is well needed.

 

The regulatory and political environment is both complicated and time-consuming.

 

Canada's regulatory and political environment has also played a significant role in deterring investment dollars. As I've said before, regulatory processes have become increasingly complex and time-consuming, particularly in the energy and natural resources sectors I focus on. Pipeline and mining projects face stringent environmental assessments and prolonged approval processes. For example, the Fraser Institute claims that the Canadian approval process for LNG projects, a key transition fuel, takes approximately 19 months longer than in the U.S., imposing substantial hindrances to project development. Furthermore, the development of mines in Canada, according to Mining Weekly, can take anywhere from 5 to 25 years. These extended timelines massively hinder Canada's aspirations to be a significant player in the US-led initiative through the Inflation Reduction Act to challenge China's rare metals and minerals sector dominance in the energy transition. This regulatory uncertainty also makes it difficult for investors to predict project timelines and returns on investment.

 

For further context, Canada ranks the highest among the G7 countries in OECD’s FDI Restrictiveness Index, a measure in determining a countries statutory restrictions to FDI. According to the OECD, Canada has a measure three times greater than the average score of its G7 peers, further acknowledgement of regulatory hurdles to enter the Canadian market.

 

Politically, Canada has also witnessed a period of instability. In November 2023, Alberta's conservative Premier Danielle Smith put the Canadian province's Sovereignty Act into motion to challenge the federal government's requirement for a net-zero electricity grid by 2035. While federal overreach needs to be carefully managed, the harsh reality is that investors are in for a rough ride, as they seek stable and predictable political environments to ensure that their money is protected and can yield returns over the long term. The current political landscape in Canada does not provide this assurance.


Tax and environmental polices are distortionary and complex and impede economic growth.

 

According to the University of Calgary's School of Public Policy, our corporate taxes and income taxes aren't as competitive as we think either, and they impact investment. In fact, in 2022, tax expert Jack Mintz said in the Financial Post that Canada's income tax is highly distortionary and complex and impedes economic growth. Canada's tax regime is often cited as a deterrent for investors. Corporate tax rates, while competitive in some respects, are accompanied by high personal income taxes and other levies that can reduce the overall attractiveness of investing in our country. More recently, the Fall 2024 Federal budget announcement on the proposed increase in capital gains tax may further hinder Canada’s ability to be an attractive country to invest, innovate, and grow.

 

Climate change is real, but Canada's commitment to environmental sustainability and stringent environmental policies can be a double-edged sword. While Stephen Harper once said, "Dealing with climate change and protecting the environment are critical goals," and these policies can jump start the fight against climate change, they can also create additional costs and regulatory hurdles for businesses. Carbon tax came into effect at $20 per tonne in 2019. It has steadily climbed from $65 per tonne to $80 on April 1, 2024. It is planned to go up another $15 annually until 2030 when it reaches $170 a tonne. The steady increases are meant to incentivize people and businesses to change their behaviour, burn fewer fossil fuels, and transition to greener forms of energy. The problem is, according to the Canadian Climate Institute, absolute CO2 emissions in Canada have increased, and as Harper said as part of the Economic Action Plan in 2015, "Anybody who tells you that a carbon tax is an environmental policy is trying to pull the wool over your eyes." 

 

The complexity and high rates of Canadian taxes can dissuade domestic and international investors from committing capital. Furthermore, the Parliamentary Budget Office findings echo those of a 2021 study published by the Fraser Institute, which states that a $170 per tonne carbon tax will cause the economy to shrink by about 1.8 percent, cause a permanent loss of nearly 185,000 Canadian jobs, and reduce real income in every province.

 

Due to these and other policies like the oil and gas emissions cap, manufacturing, mining, and energy investors may face higher compliance costs and operational constraints. The bottom line is that investors seek environments where the tax burden allows for better returns on investment.

 

Infrastructure deficits & lack of affordable housing are making everyday living a challenge.

 

Stephen Harper once stated in London, Ontario that “Infrastructure is the cornerstone, literally of economic success.” The challenge is Canada's infrastructure, including transportation networks and utilities, lags behind other developed nations. According to the Canadian Infrastructure Report Card, nearly 40 percent of roads and bridges are in fair, poor or deplorable condition, with roughly 80 percent being over 20 years old. Between 30 and 35 percent of recreational and cultural facilities are in fair, poor or very poor condition. Inadequate infrastructure can also increase business costs and complexity, making it less appealing to investors. For example, transportation bottlenecks can hinder the fast movement of goods across a vast country. At the same time, gaps in digital infrastructure can limit the growth of technology and other modern industries.

 

In addition, access to affordable and suitable housing remains a critical issue for many individuals and communities across Canada. Several key hurdles impede this access, including affordability constraints and skyrocketing housing costs, particularly in urban centres, which have created a significant affordability gap. A report by banking giant RBC, states that more than half—one million—of 1.9 million new households by 2030 will not be able to buy a home. Furthermore, the rental vacancy rate dropped to 1.5% nationwide in 2023—a historical low. Only 45% of all households would have the income to own a condo, and a smaller 26% have enough for a single-detached home.

 

Demographic trends point to an aging population, which impacts productivity.

 

Stats Canada data indicates that between 2016 and 2021, the number of people aged 85 and older grew by 12%, more than twice as high as the growth seen for the overall Canadian population (+5.2%). Over the next 25 years (by 2046), the population aged 85 and older could triple to almost 2.5 million.

 

This challenge is not new, and in fact, when Stephen Harper was in power, he argued at the World Economic Forum that "if not addressed promptly, this has the capacity to undermine Canada's economic position." The country's aging population can strain public resources and lead to a shrinking workforce. This demographic shift can impact economic growth prospects and create uncertainties about future market sizes and labour availability. Investors are cautious about long-term commitments in markets where demographic trends suggest potential productivity and consumer spending declines.

 

While Canada looks to combat the aging population with an aggressive immigration policy, it has become evident that there is a clear skill mismatch in today’s economy, with a need to reskill, upskill, and new skill the growing labour force to improve Canada’s productivity challenge.

 

Geopolitical risks also seem to be emerging with increased regularity.

 

Regional and global geopolitical risks also play a role in shaping investment decisions. Canada's geopolitical positioning, including its relations with major trading partners like the United States and China, can also out investors on uneven ground.

 

Trade tensions, changes in international agreements, and global political instability can create an unpredictable business environment. Stephen Harper rightly claimed that "freedom and human rights are universal values that must be defended." However, while commendable, Canada's firm stance on human rights and environmental issues can sometimes lead to diplomatic friction and impact trade relations. For example, tensions with China over human rights create a political rodeo given how important they are economically to us, according to the World Bank, our second most important trading partner.

 

Global competition and attractive alternatives for investment remain.

 

On a global scale, Canada faces stiff competition from other countries that may offer more attractive investment opportunities. Look at how quickly Chile developed its Lithium mines or how Australia and the U.S. developed LNG export capacity. Emerging markets with high growth potential and developed economies with more robust recovery trajectories post-pandemic are drawing capital away from Canada. Investors have many options to back and are increasingly looking at markets that provide better returns, lower regulatory hurdles, and more dynamic growth prospects.

 

Let’s buck the trend and make Canada competitive again.

 

The data speaks for itself in terms of the hole we find ourselves in. A new study published by the Fraser Institute assessed per-worker business investment, which includes spending on equipment, machinery, factories and new technologies and found that from 2014 to 2021, business investment per worker in Canada declined by 20.0 percent, from $18,363 to $14,687. Furthermore, compared to the United States, our performance was even worse. During that same period in the U.S., business investment per worker increased by 14.6 percent, from $23,333 to $26,751.

 

Addressing these significant issues and emerging from our depth of economic despair requires drastic and concerted efforts from both the government and private sector to kick-start a more conducive environment for investment. This includes streamlining regulatory processes, ensuring political stability, diversifying the economy, rein in inflation, implementing significant tax reforms, investing in infrastructure, and fostering innovation. By tackling these challenges, Canada can and should regain its position as the destination for global investors. As Stephen Harper eloquently stated, "We are living in a very different world now, with new challenges and opportunities," so let’s handle the challenges and unleash the countries future potential.

 

By Dr. Lance Mortlock, Managing Partner, Energy & Resources, EY Canada, and Haskayne School of Business Adjunct Associate Professor, with input from Dr. Mauricio Zelaya, Partner & National Economics Leader, EY Canada.

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