Canada is experiencing a productivity crisis, with labour productivity increasing by only 10 percent over the past decade. In contrast, the United States has seen its productivity grow nearly two and a half times faster. A report by the Information Technology and Innovation Foundation’s (ITIF) Centre for Canadian Innovation and Competitiveness suggests that without reforms to enhance capital investment and update data collection methods, Canada will continue to lag in global competitiveness and economic growth.
The report highlights the importance of capital equipment in boosting labour productivity. It points out that Canada's consistent underinvestment in tools like software, industrial machinery, computers, electronics, and other advanced technologies is hindering its ability to maintain national interests.
Lawrence Zhang, head of policy at ITIF’s Centre for Canadian Innovation and Competitiveness, stated: “Improving Canada’s productivity performance is not just an economic imperative; it’s a strategic necessity.” He emphasized that rising trade tensions with the United States make it crucial for Canada to improve productivity to protect economic competitiveness and living standards.
Despite seemingly stable overall capital spending, from 2013 to 2023, capital investments as a share of GDP decreased by 20 percent. The productive capital grew by only 1 percent during this period. The report warns that investment figures are skewed due to low-impact assets like furniture and fleet vehicles being included in calculations.
Additionally, the decline in overall capital stock is affecting productivity potential. Since 2013, Canada’s productive capital stock has fallen by 8 percent as a share of GDP. Notably steep declines were observed in industrial machinery (19 percent) and computers and electronics (10 percent). Although software capital stock investment has increased, it remains insufficient to counteract these declines.
The report notes that Canadian firms are not keeping pace with international competitors. Between 2013 and 2023, U.S. firms invested an average of 11 percent of GDP annually in machinery, equipment, and intellectual property compared to Canada's 8 percent.
Meghan Ostertag from ITIF remarked: “The United States outpaces Canada in nearly every sector when it comes to capital investment—and the results are showing.” She pointed out that sectors such as agriculture and manufacturing demonstrate Canada's falling behind due to underinvestment.
Emerging technologies like robotics and artificial intelligence represent missed opportunities for Canadian firms to enhance productivity. The country ranks 17th globally in manufacturing robotics use while adopting AI at less than half the rate of U.S. firms across most industries except media and communications.
A significant issue identified is Canada's lack of detailed industry-specific data on capital expenditure. This makes it challenging to distinguish between productive investments like automation equipment or software versus less-productive assets such as furniture or uniforms.
Zhang noted: “Effective industrial strategy depends on understanding where and how capital is being invested,” emphasizing the need for better data collection practices.
To address these challenges, the report recommends several actions:
- Allow full expensing of all productive capital within the first year.
- Implement size-neutral policies so all firms face equal tax treatment.
- Establish a Prime Minister’s Productivity Innovation Award.
- Fund industry-specific productivity groups through Innovation, Science and Economic Development Canada.
- Enhance Statistics Canada’s data reporting capabilities.
ITIF President Robert D. Atkinson concluded: “Canada cannot compete in the 21st-century economy with 20th-century capital.” He stressed the urgency for bold policy reforms aimed at increasing investment in productivity-enhancing tools and improving data collection methods.
Read the report.