The Truth About Canada (13 page)

Keep this in mind next time you read yet another
National Post
article by someone like Jack Mintz about how we must have even more big tax cuts for corporations in this country.

There are other ways of comparing corporate profits. Statistics Canada compares the ratio of operating profit to operating revenue. In 2005, it was the highest since the agency began to make such comparisons.

Because of corporations’ huge profits, the ratio of corporate debt as a percentage of equity in Canada fell sharply, from over 70 percent in 2002 to 50 percent in 2006. From 2000 to 2005, business in Canada reduced its borrowing by an enormous $276.2-billion.

In 2005, the following sectors of the Canadian economy all had all-time record operating profits: primary industry, including oil and gas; transportation; finance and commerce; insurance; and real estate. Oil and gas companies in Canada, mostly foreign-owned, increased their profits by $10.5-billion in 2005, more than 47 percent over their 2004 results. In 2006, EnCana posted the biggest annual corporate profit in Canadian history, some $6.4-billion. The same year, the primary oil and gas industry in Canada had an all-time record operating profit of $39.9-billion.

All told, foreign corporations took almost 31 percent of 2005 profits and an estimated 34.1 percent of 2006 profits. In 2005, over $22.3-billion of foreign-controlled corporate profits left Canada, mostly for the United States.

Let’s not forget Canada’s banks. In fiscal 2007, their after-tax profits were a huge $19.5-billion.

In the next part of this book we’ll look at what corporate Canada is doing with its profits. It’s not a pretty picture.

PART FOUR

13

BIG-BUSINESS INVESTMENT IN CANADA

THE WEAKEST IN OUR HISTORY COMPARED TO RECORD PROFITS

A
mong the many lavish promises made by big business’s Business Council on National Issues (BCNI), now known as the Canadian Council of Chief Executives (CCCE), was that with guaranteed access to the U.S. market because of the FTA, Canada would surely become a secure base that would attract companies from around the world, and business investment in new machinery and equipment would explode. During the first 17 years of the FTA (from 1989 to 2005), however, what actually happened was that the rate of investment to GDP was almost identical to the previous 17 years, and more recently, in the period from July 2006 to July 2007, equipment imports actually fell, despite the huge increase in the value of the Canadian dollar. The growth of machinery and equipment capital stock in Canada has been a pathetic 0.3 percent during the last five years compared to 4.6 percent during the previous five-year period.
¹

Given the huge corporate profit increases, one would naturally have expected that there would also have been large increases in domestic business investment as a share of the economy. But this hasn’t happened. Let’s compare corporate profits to the extremely important business investment in machinery and equipment. In 1998, business investment in new machinery and equipment amounted to 86 percent of profits after taxes. After years of record corporate profits, in 2006 it fell all the way down to only 47 percent. Measured another way, business investment in
new machinery and equipment was 8.1 percent of GDP in 1998 and 1999, but in 2006 it was down to 6.5 percent of GDP. Business investment as a component of final domestic demand has fallen from a high of some 14 percent in late 2005 down to under 5 percent in late 2007.

So, as we’ve just seen in the preceding chapter, while there have been all-time record high corporate profits, far greater than in all other years in 2003, 2004, 2005, and 2006, business investment in machinery and equipment, instead of increasing, fell dramatically to new lows. Looking at real business investment in new machinery and equipment, taking inflation into consideration, with 2000 as a base year equalling 100, the number has fallen every year since, all the way down to only 83.5 in 2006.

Of course, all of this raises the question of why we should pay any attention at all to the apparently never-ending corporate clamour for even lower corporate taxes. The Mulroney, Chrétien, Martin, and Harper governments have all lowered corporate tax substantially, yet instead of investing a greater share of their burgeoning profits in new and better machinery and equipment to help increase productivity, corporations in Canada reduced investment to new contemporary lows.

Let’s measure business investment in new machinery and equipment another way. As corporate profits increased, business investment in machinery and equipment declined as a percentage of GDP. In both 1998 and 1999, these investments represented 8.1 percent of GDP. Since then, they declined over the next three years to a low of 7.0 percent and then declined even further to only 6.6 percent of GDP for the next three years. In 2006, they were down to only 6.5 percent. The decline of 1.6 percent of GDP since 1999 represented lower machinery and equipment investment of a huge $23.1-billion in 2006.

One would have thought that the sharply increased value of the Canadian dollar would have encouraged large increases in investment in new imported machinery and equipment. David Crane of the
Toronto Star
explains: “When our dollar was at 65 cents, a $2 million (U.S.) piece of machinery would cost $3.1 million (Canadian); when our dollar is at 95 cents, the same technology costs $2.1 million (Canadian) or one-third less.”
²
But even with a high dollar and record profits, the rate of real
investment growth fell from over 25 percent in 1998 to only 10 percent in 2005. Meanwhile, hourly productivity growth in the business sector, as we shall see, has been very weak. Statistics Canada summed things up: “Over much of the last decade, corporations have been posting record profits. Meanwhile, business fixed capital investment has been relatively sluggish in recent years.”
³

In a February 2006
Globe and Mail
column, economist Jim Stanford wrote:

Canadian corporations are raking in more money than at any time in history. And they aren’t spending it on what our economy needs — in this case productivity-enhancing investments in technology and equipment. The corporate sector has amassed a hoard of cash.… [There has been] a 50 percent surge in after-tax cash flow since 2000. Canadian businesses currently sit on $280-billion worth of cash, foreign currency and short-term paper.

And all this while large dividends and inter-corporate fees have flowed out of the country, with much of it headed for tax havens.

It’s interesting to compare investment by business in Canada and the United States as a percentage of GDP. The Ottawa-based Centre for the Study of Living Standards had this to say in their fall 2005
International Productivity Monitor
under the heading “Under-Investment in Capital”:

Between 1991 and 2003, Canada’s private sector invested about 13 percent less per dollar of GDP in machinery, equipment and software than their counterparts in the United States. This under-investment slowly eroded the relative strength of our capital stock. This erosion in turn reduces the productivity of our labour force and hence our prosperity.

Our under-investment is a major factor in explaining the $7,200 GDP per capita or 15.7 percent shortfall between us and the United States.

Buzz Hargrove, president of the Canadian Auto Workers, had this to say: “Measured as a share of GDP, new business investment spending (excluding the booming energy sector) has been weaker since 2001 than during the last recession. And measured as a share of corporate cash flow, it is the weakest in our history.”

Aside from the above criticisms, somehow very few commentators have tackled our business leaders’ failure to invest in our own country while they pump billions of dollars out of Canada every year.

The OECD is to the point: “Non-residential investment has decelerated.… In particular investment in machinery and equipment has slowed sharply.”
⁴
In fact, in 2006 there was actually a decline in manufacturing investment.

Even the usually pro-big-business TD Bank Financial Group chief economist Don Drummond, a former federal associate deputy minister of finance, says Canada’s business leaders have not “fully responded to the investment opportunities offered by strong profit growth and declining prices of imports of machinery and equipment due to the stronger Canadian dollar.”
⁵
And James Milway of the Institute for Competitiveness and Prosperity describes the “lethargy” among business leaders: “Our businesses are not investing enough in machinery and that is why we are not as competitive.”
⁶

To repeat: all this despite the combination of much higher corporate profits, much lower corporate taxes, and a substantially strengthened Canadian dollar. In November 2005, Ottawa’s
Economic and Fiscal Update
said, “Corporate profits, at 14 percent of GDP, are at the highest level in 30 years.” The JP Morgan Chase chief Canadian economist said, “Corporate earnings and corporate balance sheets are in their best shape on record … earnings are at a record level to GDP.”
⁷
Contrast this with a Statistics Canada study that describes business investment as “sluggish,” noting, “There has been slower capital expenditure. In particular, capital expenditure on machinery and equipment has accounted for more of the weakness.”
⁸

How does Canada compare with other countries aside from the United States? Looking at the most recent three-year period for which
comparative international statistics are available, 2003 to 2005, Canada was way down in 18th place in gross fixed capital formation (fixed assets which will be used in production for several years) and in investment in machinery and equipment as a percentage of GDP. All of the following countries had a better record than Canada. In order, China, Korea, Spain, the Czech Republic, Australia, the Slovak Republic, Ireland, Greece, Iceland, New Zealand, Japan, Hungary, Portugal, Switzerland, Austria, Luxembourg, and Italy.
⁹

On August 14, 2007, the TD’s Don Drummond and economist Ritu Sapra produced a “special report” titled
Canadian Companies Not Taking Advantage of Investment Opportunities
. As a result of companies’ failure to invest,

Canada’s productivity growth record has been dismal, both from a historical and an international perspective.

One of the main causes is our lagging machinery and equipment investment, both in absolute terms and relative to other countries. And yet, the investment climate of recent years could scarcely be any more positive.

Corporate profits have soared to their highest share of GDP since at least the early 1960s.

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.

To illustrate, for every dollar of new investment enjoyed by the typical OECD worker in 2006, his or her Canadian counterpart got only 87 cents. And for every dollar per employee spent on new investment in the United States, only 75 cents were spent in Canada.

Put another way, in 2006, the average Canadian worker received some $594 less in investment spending than the typical worker in OECD countries a good $1131 less than the average G7 worker.

The Canada-U.S. investment gap is almost entirely the result of lagging machinery and equipment investment.

In 2006, investment in new machinery and equipment as a share of profits was at an all-time low. One wonders when enough will be enough for big business and their never-ending demands for even lower taxes. Is there no limit to corporate greed?

Incredibly, after record-breaking profits yet again in 2006, new corporate investment in Canada was forecast to grow only by a tiny 1.9 percent in 2007.

14

RESEARCH AND DEVELOPMENT

ANOTHER BIG-BUSINESS FAILURE

H
ere’s a warning. If you read this chapter you may find it very difficult to suppress a laugh the next time you go to a chamber of commerce or Rotary meeting and hear someone from the Canadian Council of Chief Executives (CCCE) or the C.D. Howe Institute give a scary speech about low productivity and the inevitable resulting fall in our standard of living, plus the crucial need for increasing innovation and more tax cuts in Canada.

In the next chapter, we’ll turn our attention to the important question of productivity. But first, we’ll look at the dismal record of big business — despite huge corporate profits and among the very best tax incentives in the world — to do anywhere near the amount of research and development necessary to spur productivity.

Let’s begin by comparing R&D expenditures in Canada to R&D in other OECD countries as a percentage of GDP. In the period from 1997 to 2002, Canada was down in 15th place at 1.9 percent. Israel headed the list at 5.1 percent, followed by Sweden at 4.3 percent, the Netherlands at 3.5 percent, and then the United States and Iceland at 3.1 percent.
¹

The 2006 United Nations
Human Development Report
list of R&D expenditures for the period from 2000 to 2003 also placed Canada 15th on the list, again at only 1.9 percent of GDP. But in another comparison, this one from the OECD, Canada is way down in 25th place in the percentage of R&D performed by industry.

Some further comparisons: in Luxembourg, business accounts for just under 90 percent of all R&D. Canada’s industrial companies’ R&D of roughly 47 percent was below the G7 average (62.75 percent), the EU average (53.66 percent), and the total OECD average (61.93 percent). Canada’s business R&D is far below that of countries such as Korea, Japan, Switzerland, Sweden, Belgium, Finland, Germany, and Denmark. Other countries that also have a higher percentage of business-sector R&D than Canada are Australia, Greece, Ireland, Mexico, Portugal, Spain, and Turkey.