Investment, Oil and the State

At least 79% of the increase in Canadian non-residential investment this decade has come from the oil industry and governments.

Jim and others on this blog often note that, although corporate profits have ballooned, business investment has barely increased as a share of GDP. However, this fact means that business investment has grown along with GDP and it’s worth examining in which sectors this growth occurred.

Statistics Canada’s investment-intention figures provide a sectoral breakdown of private investment, but the figures for key sectors like oil and gas and manufacturing are “secure”. However, Statistics Canada released its biennial estimates of flows and stocks of non-residential fixed assets in December.

Since the 2007 figures came out before the end of the year, they cannot be totally precise. However, I believe that the fixed-asset estimates are more reliable than the investment-intention numbers.

The day after the December release, the Financial Post ran a front-page story about how the stock of fixed assets grew by 70% in Alberta and by 22% in Canada as a whole between 1997 and 2007. The story correctly argued that oil was responsible for this regional disparity, but did not provide a breakdown by industry. I have put one together for 2000 through 2007:

Non-Residential Fixed Investment in Canada ($ billions)

Investment in oil and gas extraction has more than doubled, accounting for more than one-third of the economy-wide increase in investment since 2000. In the rest of the primary sector, a comparatively modest rise in mining investment was largely offset by declining investment in agriculture, forestry, fishing, etc.

Not surprisingly, manufacturing investment has fallen. Real investment edged down in finance and insurance, but rose in non-financial private services.

Investment more or less doubled in healthcare, education, public administration and utilities, most of which are publicly owned. Arguably, investment in these areas is still inadequate after a decade of barely covering depreciation in the 1990s.

About one-eighth of non-residential investment growth occurred in businesses that provide investment goods: construction firms, real estate agencies, equipment-leasing companies, etc. Such investment is ultimately driven by households making residential investments, which is not what I am trying to get at, or by other businesses and governments making non-residential investments.

If investment by suppliers of investment goods is factored out, then the oil industry and the state accounted for 89% of the increase in non-residential capital spending. Of course, one could legitimately quibble with my definition of the state: there are some major private utilities and there is significant private investment in healthcare and education.

However, there is also public investment in other sectors. For example, capital spending by Canada Post, VIA Rail, CBC, SaskTel, etc. falls into the “Transport/Communication” category.

Whatever the exact percentages, a few major trends are clear: Canada’s public sector is reinvesting to rebuild its depleted capital stock, Canada’s private sector is becoming heavily oriented toward oil extraction, and investment in “new economy” service industries has largely failed to materialize.

These trends undermine the case for corporate tax cuts. In 2000, the federal government maintained a general rate of  28% and a manufacturing rate of 21%. By 2007, all industries paid only 21%.

These substantial cuts reduced the funds available for government investment. However, they do not seem to have generated much additional private investment. The oil investment boom mainly results not from corporate tax cuts, but from high energy prices, the geologic potential of the tar sands and the fact that most other petroleum-producing countries are closed to foreign capital.

The federal government’s pledge to slash its corporate tax rate to 15% by 2012 could cut into public capital spending. Indeed, the annual cost of this cut is projected to equal about half of the recent increase in government investment (utilities plus public services). However, recent experience casts doubt on whether it will stimulate much additional business investment.