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Philip Cross

Philip Cross

PHILIP CROSS

Testing the limits of a public-sector economy Add to ...

Philip Cross is a fellow with the C.D. Howe Institute and author of the report The Public Purse Versus Private Wallets: Comparing Provincial Approaches To Investing In Economic Growth.

The upcoming Ontario budget will be a key determinant of whether future jobs and growth in the province will come from the public sector or the private sector. But Ontario is not the only province that needs to make this choice. It’s time that the provinces that have seen dismal private-sector investment, especially the Maritimes, Ontario and Quebec, focus on boosting their languishing private-sector investment.

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Business investment is the lifeblood of economic growth. It determines what the economy will look like years from now and how competitive its workers will be. Private-sector investment embodies the innovations – from 3D printing to new ways of producing oil and gas – that fuel productivity growth.

While some public-sector investments can boost economic growth and productivity, notably for infrastructure, the private sector makes most of the key investments that determine long-run growth.

Since 2000, Canada’s provinces have split into two groups. In most of Western Canada and Newfoundland, the private sector is the driving force behind investment growth, rising at a much faster clip than the public sector.

In Central Canada and the Maritime provinces, however, public- and private-sector investment are converging in importance. The convergence is the result of years of increasing public-sector investment accompanying weak or falling business investment. As a result, private-sector investment as a share of GDP is the lowest in Ontario, Quebec and the Maritimes. More public-sector spending may even hinder business investment, by crowding out the supply of capital or by signalling the expansion of government in many areas of the economy.

The regional breakdown of these investment patterns is noteworthy for several reasons. The surge in Western Canada and Newfoundland shows that firms need both the financial capacity and the willingness to invest, which depend on the proper incentives. The natural resource bases of these provinces plays a role, but they’re not the only factor. It’s often forgotten how technological innovations, embodied in new investments in the oil sands and fracking for oil and gas, have helped fuel the energy boom over the past decade.

Meanwhile, Central Canada potentially has a large natural resource base, but firms have not invested more for over a decade. Even profitable industries, such as finance, have been reluctant to step up investment. Quebec has relentlessly expanded the role of the public sector in its economy and discouraged some investments in fossil fuels.

Central Canada’s investment malaise highlights the importance of public policies that encourage business investment. Ontario’s next budget should reverse the course of the past decade and encourage firms to invest in making its industries more competitive.

Writing government cheques to pay for rising public-sector investment has limits. With many provinces putting public-sector investment further than ever ahead of private-sector investment, we may soon find out what those limits are.

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