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Government stifles business in Ontario and Quebec, report says

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Canada is becoming a country of two solitudes when it comes to business investment.

Provinces are increasingly falling into one of two camps, according to a report being released Wednesday by the C.D. Howe Institute. In the West, business spending powers the economy. In much of the rest of the country, government spending is swallowing an ever greater share of economic activity, most notably in Ontario and Quebec.

The report puts a new spin on the "dead money" debate and why Canadian companies have been running up growing cash reserves since the recession.

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The C.D. Howe report theorizes that governments in parts of the country may be crowding out and dissuading private investment.

Canada's corporate cash holdings have continued to grow in recent months, according to Statistics Canada. Non-financial companies had cash holdings of $630-billion in the first quarter, up from $621-billion in the final three months of last year.

Part of the reason is that some provinces are creating a more business-friendly environment, while others are scaring away investment, argued the report's author, Philip Cross, the former chief economic analyst at Statistics Canada and member of the C.D. Howe Institute's Business Cycle Council.

"It's not a case of dead money and companies not willing to invest," he said in an interview. "You can see that in certain provinces, they are willing to invest like mad men."

It's more than just about the Alberta oil sands and other resources projects, Mr. Cross said. "The West has had resources for a long time. What unlocked them were good policies," he said.

Mr. Cross said the blockage lies in Quebec, Ontario and much of Atlantic Canada, where high deficits and the prospect of higher taxes are crowding out access to capital and discouraging business investment, according to Mr. Cross.

And efforts to kickstart business investment with government money clearly are not working, he explained. "If I was a firm in Ontario, what I'm planning for next year is a hike in minimum wages, higher income taxes and the introduction of a new pension plan," he said. "I'm dealing with all these things and I'm not planning on the future of my firm."

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Private-sector investment has grown rapidly in all four western provinces, particularly since the resource boom took off in 2003. In Alberta, business investment as a share of GDP reached 25.5 per cent in 2012, the highest of any province. Public-sector investment has stabilized at less than 3 per cent.

In much of the rest of the country, there has been a "marked shift" the other way. In Quebec and Ontario, for example, private-sector investment slumped to 7 per cent of GDP in 2012 from 10 per cent in the 1990s. Government spending in Quebec is now the highest in the country at 5.7 per cent of GDP. In Ontario, it's roughly 4 per cent, up from 3 per cent in the mid-2000s.

A separate report released Tuesday by Toronto-Dominion Bank presents a much rosier picture of the investment environment. Senior economist Randall Bartlett is predicting that business investment is poised to "rev up" in Canada over the next two years after a long slump.

He says six things will drive investment – the strengthening U.S. economy, a rebound in corporate profits, stronger corporate balance sheets, shrinking spare capacity, low interest rates and growing business optimism.

Business investment will lead GDP growth over the next couple of years, expanding at an annual rate of 4 to 5 per cent through the rest of 2014 and in 2015, the report said. "As investment increases, so does productivity, and ultimately wages and incomes in the long term," Mr. Bartlett said.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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