Canadian companies need to more aggressive investors in capital goods, according to a report from TD Bank economists.

“The performance of Canadian firms in fostering new investment is not impressive,” TD says. It looks at Canada’s investment performance from a historical and international perspective, and concludes that Canada is not keeping up.

“The past decade has seen a declining trend in business sector investment intensity in Canada compared to other OECD and G7 countries. The comparison with the U.S. is even worse,” it finds. “And while relative underinvestment in Canada is not new, this adverse trend continues despite the loonie’s recent meteoric rise, which has lowered the relative price of machinery and equipment — much of which is imported — and might therefore have been expected to bolster investment.”

The problem, TD says, is that investment in physical capital is imperative for economic and productivity growth — it creates new products for consumers, jobs for workers, profits for investors, and taxes for governments. “When businesses invest in capital, especially machinery and equipment, they equip their workers with the necessary tools to create more sophisticated goods and services and earn higher salaries. It also expands and renews the capital stock and enables new technologies to enter the production process,” it explains.

It also notes that international comparisons clearly show that countries with more capital per worker have higher incomes per worker. “For these reasons, Canada’s investment performance matters for future prosperity and the ease with which Canadians can enjoy higher living standards,” it says.

As important as this sort of investment is, TD finds that the rapid growth in corporate profits over the past few years has not been accompanied by a matching increase in capital spending, with the result that M&E as a share of GDP has declined, “and this has happened during a period of rapid strengthening in the Canadian dollar that has reduced the cost of capital,” it notes.

“This conservative behaviour is likely in response to an uncertain economic environment – including worries over lofty energy prices, a higher exchange rate and the prospect of rising interest rates — but it will not help to improve Canada’s pitiful productivity performance,” TD adds. “The main message is simple — the private sector, aided by the public sector, must put greater weight on productivity enhancing capital investment in the coming years.”

The possible role for governments includes: greater funding for education, and lowering taxes on business investment. “There is a lot more that can be done, particularly in reducing corporate tax rates, eliminating the remaining provincial capital taxes and harmonizing all provincial sales taxes with the federal GST– under which ICT investment is not taxed (or at least making the tax value-added),” TD counsels.