New Brunswick must improve investment climate during COVID recovery

Among all the economic concerns arising from COVID-19 and the associated recession, New Brunswick policymakers should pay particular attention to the province’s poor performance in attracting investment.

A recent study by the Fraser Institute reveals just how bad the investment climate in New Brunswick has been. While the province has been a laggard relative to the rest of Canada over the past three decades, the situation worsened substantially in recent years. Between 2014 and 2018, New Brunswick had the lowest average annual rate of growth of “net capital stock” of any province, at just 0.7 per cent. This growth was less than half that of Prince Edward Island (1.9 per cent) and a fraction of Newfoundland and Labrador’s 4.2 per cent growth.

Net capital stock essentially measures the value of investment in fixed capital assets including residential and non-residential structures, machinery and equipment and intellectual property products. Increases in net capital stock over time, especially in business assets such as machinery, equipment and intellectual property products, are critical to economic prosperity as they underlie faster productivity growth and increased compensation for labour, including wages and more leisure time.

Reinforcing the importance of increased capital investment, another recent study found that Canadians could enjoy a four-day workweek by the year 2030 if only we could achieve productivity gains in line with historical trends. Increased investments in business assets would significantly improve the rate of productivity growth.

But a close look at New Brunswick’s recent investment experience reveals that non-residential (i.e. business) investment declined between 2014 and 2018, by -0.1 per cent annually. This contrasts with the province’s previous average annual rate of growth in this category between 1990 and 2014, which was substantially better at 1.4 per cent annually. In other words, not only is New Brunswick underperforming compared to other Atlantic provinces in business investment, it’s underperforming compared to its own record in this asset category.

So why is this happening?

One possible explanation is a failure to adjust to changing economic circumstances. Other research has shown that the Atlantic provinces, especially New Brunswick, tend to heavily rely on federal transfer payments such as equalization and employment insurance. This reliance arguably discourages businesses and workers from taking initiatives (new trade opportunities, new technologies, etc.) to adapt to changing economic circumstances. This is not to say that business dynamism is completely absent in New Brunswick, but the perverse economic incentives for the province—created by Canada’s current system of federal transfers—is undeniable.

So, what can the province do to improve its investment climate?

The Higgs government has policy tools available to help change things for the better. In particular, improving the province’s overall tax competitiveness is key to attracting and retaining businesses and skilled workers. Beyond that, the province must also provide a regulatory environment more conducive to business investment. For example, natural gas. Companies in New Brunswick are forbidden from hydraulic fracturing (also known as fracking). But a mature shale gas industry would likely add substantially to the province’s GDP, which would also increase investment and help create jobs and economic opportunity for New Brunswickers.

Prior to COVID, New Brunswick had been taking some steps to improve its public finances. As the Higgs government continues to work on economic recovery, improving the province’s poor business investment performance should be a primary focus of any recovery plan.