Taking stock of British Columbia's capital stock
The accumulation of productive capital is a sure path to prosperity and higher average living standards over time.
Report highlights:
The capital stock is important because people are more productive when they have more modern and advanced facilities, tools, technology, and intellectual property to work with. All else being equal, a country or province with large stocks of non-residential capital per worker will have high labour productivity (real GDP per hour worked), real GDP per capita, and real market incomes. In other words, the accumulation of productive capital is a sure path to prosperity and higher average living standards over time.
B.C.’s overall capital stock per available worker is growing. This growth is overwhelmingly concentrated in just two assets: residential structures; and engineering structures
B.C.’s capital stock per available worker of residential structures (note, this metric excludes land) is larger than the entire non-residential capital stock, having surpassed it about 2015. In 2020, the residential structures capital stock was $116,100 per available worker, 12% larger than the total non-residential capital stock of $103,800 per available worker.
B.C.’s non-residential capital stock per available worker in 2020 consists of $54,700 for engineering structures, $26,500 of non-residential buildings, $13,400 of machinery and equipment (M&E), and $9,200 of intellectual property products (IPP).
B.C. has a smaller non-residential capital stock per available worker than Canada because of Alberta’s positive impact on the national average. A better comparison is the “Rest of Canada” (i.e., Canada excluding B.C. and Alberta), relative to which B.C. has a modestly larger non-residential capital stock per available worker. B.C.'s advantage over the Rest of Canada is concentrated in engineering structures.
Apart from engineering structures, the rest of B.C.’s non-residential capital stock per available worker (i.e., stocks of non-residential buildings, M&E, and IPP) was only 6% larger in 2019 than in 1981. It has been shrinking since 2008 and is smaller than in the Rest of Canada.
Federal and provincial policymakers should be unnerved by the unbalanced nature of growth in the capital stock per available worker and question how long this model of economic growth is sustainable. An economy where the residential capital stock accounts for an unusually large share of the aggregate capital stock, and the lion’s share of investment, is likely to struggle to advance prosperity through high labour productivity growth. Outside of Alberta, Canada’s non-residential capital stock per available worker has barely grown since the 1970s. This helps explain Canada’s serially poor growth in labour productivity.
Policymakers should holistically review and reform the structural impediments and disincentives facing non-residential capital investment to put the economy on a path to higher labour productivity and real market incomes for Canadians and British Columbians.
Key takeaways:
Policymakers should be unnerved by the unbalanced nature of growth in the capital stock per available worker in Canada and B.C. They should question whether this model of economic growth is sustainable. Higher stocks of non-residential capital per available worker are needed to grow labour productivity, real GDP per capita, and real market incomes. This means gross non-residential investment must increase and must exceed depreciation – the rate that assets wear out and become obsolete. However, outside Alberta, Canada’s non-residential net capital stock per available worker has barely grown since the 1970s.Federal and provincial policymakers should holistically review and reform the structural impediments and disincentives to non-residential capital investment. Areas to reform include:
the outdated federal and provincial tax systems;
byzantine regulatory approval systems;
punitive corporate taxes on business scaling around and beyond $0.5 million of net income;
in B.C., an inefficient provincial sales tax (PST) regime;
the B.C. carbon tax’s lack of revenue neutrality and its lack of relief for energy-intensive, trade-exposed industries unlike the backstop federal carbon tax;
high internal barriers to cross-Canada trade; and Canada and B.C.’s retreat from international trade since about 2000.