Canada is falling behind the rest of the OECD nations in business investment, with a steady decline in per worker investment in the last five years, according to a C.D. Howe report.

The think-tank estimates Canadian business investment will average $13,200 per worker in 2014, compared to $14,800 in the OECD and $18,500 in the U.S.

New investment is needed to provide tools to make existing workers more productive and to add building and equipment for new jobs.

“Canada cannot be complacent about its performance in equipping its workers with the capital they need to do their jobs and raise their living standards,” the report says.

Businesses in Ontario and Quebec have a particularly poor record, with per-worker investment plunging to $5,700 in Quebec and $7,000 in Ontario, the lowest levels in 10 years.

Dead money issue

The report raises the issue of “dead money” — the $626 billion in cash holdings that Statistics Canada reported among private companies in the first quarter of 2014.

On Wednesday, Bank of Canada governor Stephen Poloz said the Canadian economy was “a long way from normal” and said a lack of business confidence and investment was contributing to the malaise.

The C.D. Howe report points out that Canada has long lagged the U.S. in investment, but seemed to be catching up from 2008 to 2012. However, since then, the amount invested per worker in Canada has been in decline – and it now stands at 71 cents for every dollar invested in the U.S.

"Compared to the U.S., Ontario and Quebec are falling behind in investment per worker. It’s not just manufacturing – it’s something systemic that’s causing some serious reductions in Ontario and Quebec compared to the rest of the world," said one of the report’s authors, Benjamin Dachis.

In an interview with CBC's The Lang & O'Leary Exchange, Dachis said Atlantic Canada's investment is stronger, especially in Newfoundland and Labrador, which has benefited from policies that encourage oil and gas investment. 

He urged Ontario to review its taxes and rules on infrastructure investment.

"We need to be thinking about some of the taxes that governments should be axing in order to increase investment rate of return.  We could look at it, say, the tax system we should have in Ontario’s electricity system where the government is discouraging private investment in the electricity sector – both the generation side and the distribution side," said Dachis, a senior policy expert at the think-tank.

There has been a steep decline in investment in mining, an area hard-hit by a decline in demand from China, but oil and gas, another key sector of the economy, has also seen a lack of momentum for the past three years, the report said.

Dachis said lack of investment now will hurt Canadian productivity in future.

"Private investment is what separates developed countries from poorer countries," he said.

Recommends tax, policy changes

"Look around the world at the close relationship between the quality of tools and equipment workers have (and economic well-being) ... if we're not getting enough investment, the long-term growth in Canada is going to be in serious jeopardy."

The C.D. Howe report recommends policy-makers take steps to encourage investment spending to reverse the trend. Among its ideas:

  • Encourage private-sector financing of infrastructure projects.
  • Reduce sales taxes and land-transfer and business-property taxes.
  • Reduce taxes on profit from innovation.
  • Create an investment-friendly royalty regime in oil and gas. 
With files from the Canadian Press