Canada is in a quandary. It wants to shore up domestic investment – and quickly – but has yet to introduce competitive corporate tax rates or tackle sluggish productivity. Canadian workers generate about US$75 in economic output per hour worked compared to the U.S. at nearly US$97, placing Canada 18th among OECD countries.
It’s a scenario that’s played out in many other countries, says Colin Busby, director of Policy Engagement at the C.D. Howe Institute in Ottawa, noting there are lessons to be learned from countries such as Sweden, Denmark, Norway and Finland.
Attractive tax systems and policy
Though many view these Scandinavian countries as welfare states, they’ve had a lot of success with very competitive tax systems that have drawn in investors. At the same time, they have robust public service systems and free-market economies.
“They have a very clear and obvious understanding that investment is mobile and investment is sensitive to tax rates,” says Busby. “So, they have some of the lowest statutory corporate tax rates in the OECD, while relying much more heavily on consumption taxes to fund government.”
Rather than taxing business investment heavily, Scandinavian countries introduced consumption taxes added to the price of goods and services.
“Investment is something we need,” says Busby. “Consumption is much less sensitive to taxation, so you should tax the things that are less mobile and be more competitive on the things that are.”
In addition to tax changes, Canada should also consider policy changes that boost productivity, improve competition and encourage both businesses and ordinary Canadians to invest for the long term.
What Canada should do
Busby believes Canada should weigh its tax mix and determine whether it makes sense at a time when business investment has lagged behind many peer countries. He says people’s willingness to pay taxes is overlooked by governments – and believes that people will pay higher taxes if they feel they are getting high-quality public services.
“There’s a relationship between how people perceive the quality of public services to be in their country, and their willingness to pay taxes directly towards that,” says Busby.
But tax policy is only part of the story.
“Our biggest problem is really one that’s accumulated over 35 years,” says Moshe Lander, senior lecturer at Montreal’s Concordia University. “It’s fundamentally a productivity problem.”
He argues that unlike countries such as Sweden and Finland, that faced financial crises in the early 1990s, Canada has yet to learn from such an experience.
“They all faced a crisis where they realized something had to change,” says Lander. “Canada hasn’t reached that point yet.”
Instead, it has had decades of weak productivity growth, slower wage growth, affordability issues and declining domestic savings.
Those affordability challenges matter because investment begins with savings, says Lander, and household savings provide much of the capital businesses rely on to finance factories, infrastructure and expansion. But Canadians have few savings after they’ve paid for food, housing and transportation.
He says that the seemingly endless tariff dispute with the U.S. and regulatory uncertainty compound this issue – and businesses don’t like what they’re seeing.
“If businesses don’t have confidence they’ll earn a return, they’ll either delay investment or invest somewhere else,” he says.
Here are some key takeaways for Canada:
Don’t wait for a crisis.
Sweden and Finland reformed after financial crises in the early 1990s, says Lander, while Germany reformed its labour markets during a period of high unemployment. The key for Canada is not to wait until there’s a crisis, he says.
Raise productivity
Weak productivity is a major issue for Canada, says Lander. It reduces wages, which in turn erodes Canadians’ savings. Lower savings mean there is less available investment. “You can raise RRSP limits or TFSA contribution room all you want,” he says. “If people don’t have money left after paying the bills, those incentives don’t change very much.”
Provide regulatory certainty
Busby says pension investors are looking for predictability in governance, regulations and dispute resolution mechanisms. And that predictability is not present in Canada due to the multiple levels of government involved in the development of infrastructure. “There’s multiple levels of potential government jurisdiction involved, and it just gets more complicated,” he says. “We need to do a better job of sorting that out to make domestic investment more attractive.”
Keep building the sovereign wealth fund
Canada established its first national wealth fund this year, targeting equity ownership in strategic domestic assets across sectors like energy, critical minerals and advanced manufacturing to deliver long-term commercial returns for Canadians. But it’s got a long way before it reaches the level of Norway’s enormous sovereign wealth fund which was funded by oil revenues and has allowed the country to become one of the world’s biggest institutional investors. Busby points out that Norway’s fund was inspired in part by Alberta’s Heritage Savings Trust Fund. “It’s a bit of a tragedy,” he says. “It was really a Canadian idea that another country took much further.”
Embrace more competitive markets
Norway, Sweden and Denmark are more market-oriented than many people realize, says Lander. “They’re anything but state socialist today – they’ve moved much more toward free markets than a lot of people realize,” he says. Similarly, reforms in countries such as Germany and Spain increased competition and improved labour-market flexibility.
Lander says Canada should remove barriers to competition, including supply management, to improve productivity over time.
“I think it’s coming, and that’s where the government’s going to say, ‘All right, our hands are tied – we have to now address this.’”
