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Canada has experienced sluggish productivity growth over the past 25 or so years, due partly to weak business investment. Carolyn Rogers, senior deputy governor of the Bank of Canada, has called the situation a “crisis.”
In its first budget released on Tuesday, the Carney government noted the need for more private-sector investment in productivity-enhancing assets. The budget contained a variety of initiatives aimed at encouraging business investment in key areas including artificial intelligence (AI).
And according to a recent Fraser Institute study, growth of labour productivity—that is, the value of the output produced in the economy divided by the labour hours used to produce that output—in Canada has lagged growth in the United States for more than four decades, but especially after 2014.
For perspective, from 1981 to 2001, labour productivity in Canada increased by 38 per cent compared to 47 per cent in the U.S. However, from 2001 to 2024, labour productivity in Canada increased by only 16.5 per cent compared to 55 per cent in the U.S. In short, over the last two or so decades, Canada’s productivity gap with the U.S. widened dramatically.
It’s no coincidence that U.S. companies also far outpaced Canadian companies in information, communications and technology (ICT)-related investments post-2001 and especially post-2014. The ICT category includes computer hardware and software assets that are critical to the transition of economies away from analog electronic technology to digital technology. The transition to digital technology, in turn, has enabled the growth of mobile communication and computing, and social network business activities.
The transition to digital technology was arguably a major source of productivity growth over the past few decades, and U.S. businesses clearly leveraged this source much more successfully than their Canadian counterparts. The leading digital services companies in the U.S. such as Amazon, Alphabet (formerly Google) and Meta (formerly Facebook) are the dominant global suppliers of such services. Indeed, the capitalized value of Amazon is 13 times the capitalized value of Shopify, arguably Canada’s most successful digital services company to-date.
And while there was not much difference between Canada and the U.S. in terms of startup rates for digital services companies over the past two decades, several U.S. startups enjoyed outstanding commercial success while very few Canadian startups did. The failure of Canadian digital services companies to scale-up and achieve commercial success helps explain why ICT investment and productivity growth in Canada has lagged behind the U.S., as digital services companies were the main investors in ICT assets.
Unfortunately, there are no simple solutions to address this problem. However, with the emergence of AI as the next major technological change epoch, a failure to scale up Canada’s AI firms will likely mean that Canadian productivity growth and living standards will fall even further behind those in the U.S.
The Carney government’s first budget includes a number of measures meant to encourage business investment broadly and investment in AI-related activities specifically including funds to support the expanded use of AI in government operations and hundreds of millions of dollars to be invested by the Canada Infrastructure Bank for AI infrastructure projects. The government will also spend $1 billion to build large-scale Canadian-owned computing infrastructure along with millions to help small and medium-sized companies deploy AI-related solutions.
The budget’s focus on encouraging AI-related business investment is critical to addressing Canada’s productivity problem. Unfortunately, the budget did not contain major tax reforms, which would fundamentally improve the environment for entrepreneurial investment. While the budget includes government subsidies to attract research and engineering talent from the U.S. and elsewhere, it did not lower marginal personal tax rates and only modestly lowered business tax rates. If the Carney government wants to make Canada the preferred location for talented entrepreneurs who will create and grow world-class AI companies, it should reduce taxes for individuals and businesses.
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