Many astute observers have noted the shift of economic activity from central to western Canada in recent years. Most focus on GDP growth or population shifts, but a clear harbinger is capital investment, which is most related to long-term prospects. (China, for example, has been growing by almost 10 per cent annually in terms of GDP for the past 20 years due to its extraordinary push to modernize, with capital formation at close to a half of GDP.)
When businesses invest in machines or structures, they do so because they expect markets will support long-term growth. Once physical capital is put in place, it is not easy to move, since it is hard to dismantle. So investment in fixed assets is a good indicator of the predictions made by private investors as to where markets are headed.
Today, the Canadian capital investment story is all about a shift from central to western Canada as reflected by the importance of Alberta, where investment is now little different than much bigger Ontario. In 2011, Alberta attracted 26.7 per cent of total private-sector investment in fixed assets; Ontario was not much far ahead at 29.5 per cent. Back in 1994, Ontario’s share of private investment was 35 per cent, more than double Alberta’s 16.6 per cent.
Add in Saskatchewan’s share of private capital investment at 5.7 per cent in 2011, which has grown from 3.5 per cent in 1994, and we see that the two Prairie provinces now account for more investment dollars than Ontario.
What about other provinces? Quebec investment has been on a downward trend for many years. Back in 1994, it attracted the second-largest share of private investment, at 19.1 per cent. Now Quebec garners only 16.3 per cent of capital investment in Canada, even though it accounts for more than one-fifth of Canada’s population.
British Columbia’s share of private investment declined from 16 per cent in 1994 to 11 per cent in 2000. In the past decade, it has somewhat reversed this trend, growing to 12 per cent of Canadian investment in 2011. It will be interesting to see if the latest shift from the Harmonized Sales Tax to the provincial sales tax, with its heavy levies on capital purchases, will start having a negative impact on private capital investment in the next few years.
What explains these trends? Various economic studies conclude that growing demand for products, industry shifts, interest rates, inflation and public policies such as taxation and regulations have a significant impact on capital investment.
No doubt the growth of Alberta’s investment share has been due to the booming resource sector; but policies including Ralph Klein’s corporate tax and oil sands tax regime changes helped move things along after 1999. Ontario has been losing its share in part due to a declining manufacturing industry, but also to an unfavourable policy regime that only changed after 2009, with the adoption of the HST and corporate tax reforms.
Jack M. Mintz is Palmer Chair, School of Public Policy, University of Calgary.
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