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opinion

New survey data from Statistics Canada show just how big a hole the pandemic has put in Canada’s private-sector capital investment – a hole that the expected bounce-back in spending this year won’t come close to filling. If this recovery is going to have legs, governments are going to have to focus their attentions on closing that yawning investment gap.

Statscan last Friday released its annual report on capital spending intentions, based on a survey of 25,000 private- and public-sector organizations. The agency estimated that overall capital investments – on things such as machinery, equipment and non-residential structures – are expected to jump by 7 per cent this year, recovering much of 2020′s estimated 9.2-per-cent slump.

But within those numbers, there’s a big difference between the private and public sectors.

In the public sector – fuelled by government spending, which has surged during the pandemic – capital spending rose an estimated 5.7 per cent in 2020, and is expected to jump more than 9 per cent in 2021. In the private sector, by contrast, those investments plunged nearly 17 per cent last year, and are seen recovering by a relatively modest 5.6 per cent this year.

If the survey intentions hold true, private-sector spending in 2021 will remain more than 12 per cent below the prepandemic levels of 2019.

That’s an alarming loss – especially considering that by the end of 2021, the overall economy is expected to have recovered to within roughly one percentage point of its prepandemic level. The lag in private-sector investment looks to be one of the deepest and slowest-healing scars from the COVID-19 crisis.

That poses a serious impediment to Canada’s postpandemic recovery. Capital investments are critical to creating new productive capacity, to improving productivity (that is, increasing the amount of goods and services that each worker can produce), and to fostering growth in employment and the overall economy. As it stands, the country has lost literally years of private-sector capacity growth.

The Statscan report certainly provides clear direction for public policy makers, both in Ottawa and the provinces, on where to focus their efforts as they devise strategies to aid the economic recovery this year. In 2020, income replacement was the top job. In 2021, the priority has become investment replacement.

Public investment in infrastructure not only injects demand into the economy to make up for what remains missing from the private sector, but it also focuses that spending on growing productivity and economic capacity, where the missing private-sector investment poses the biggest lingering economic threat.

While there’s no question that governments have already been doing this to some degree, there’s room to do a lot more in 2021. That’s in no small part because a key concern going into the pandemic – the household sector – already looks well-primed to thrive as the pandemic fades, even without further support from government. The federal government’s huge income-replacement programs of 2020, combined with the restrictions during the pandemic that limited retail consumption, have contributed to a glut of household savings that could be unleashed in the recovery.

In a report last week, Canadian Imperial Bank of Commerce economists Benjamin Tal and Katherine Judge estimated that the surge in household savings has left consumers with about $100-billion in excess cash in the bank. Much of it is held by higher-income Canadians who, a recent CIBC survey suggests, appear poised to release their pent-up appetites in some of the areas hardest hit by the pandemic when they reopen, such as tourism and recreation. The economists assume that consumers will dip into at least a modest portion of their swelled savings accounts – say, 20 per cent – “propelling the economic recovery and negating the need for additional fiscal stimulus.”

“At the minimum, it will allow the government to use any extra spending on productivity-enhancing projects, as opposed to simply replacing or supplementing income,” the CIBC economists said.

While some of that spending could and should go directly into public capital investments, there’s also a window here for government to indirectly spend by providing incentives to help kick-start the private sector. For example, Bank of Nova Scotia chief economist Jean-François Perrault recently pitched Finance Minister Chrystia Freeland on the idea of giving businesses a matching grant for, say, 25 per cent of their capital spending.

“Maybe what they want to do is temporarily subsidize the cost of investment,” he said in a recent interview.

Some combination of public spending and private-sector incentives is certainly called for, if we are going to close this investment gap. The priority is clear. Let’s get building.

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