Enduring Virtues: Saving and Investing as National Priorities in 2017

Canada’s 150th anniversary is an apt time to reflect on past progress and how to build on it. A key lesson from our own history and global experience is that faster-growing economies have higher saving and investment. Forgoing consumption today adds to wealth: resources for the housing, capital, infrastructure and investments abroad that boost living standards tomorrow. But Canadians’ recent national saving – as households, as owners of businesses, and through our governments – has been feeble. Over the year to the third quarter of 2016, we consumed 98 percent of national disposable income. Our national saving rate was 2 percent, way below an average above 7 percent since the mid-1990s. The problem was not so much our individual behaviour: households saved almost $1, 700 per person. But losses by businesses – and, more important, governments running deficits – reduced national saving to barely $900 per Canadian. Such weak saving meant that, to finance net investment that totaled $3, 200 per Canadian, we had to borrow more than $2, 300 per Canadian abroad. Not necessarily bad – but about $2, 800 of that investment was in housing. Capital spending by businesses and governments – projects likelier to improve our capacity to export and service foreign debt – barely exceeded depreciation. Sagging national saving has its counterpart in a virtual flat-lining of national net worth. While some of this weakness is cyclical, we would be rash to count on surging world demand and higher commodity prices to pull us ahead. Our saving as households may look respectable, but with so much of our wealth in housing, and a subdued outlook for returns on financial assets, more would be better. Business profits will rebound, but to get corporate saving back to historical levels, we need greater efficiency. Policy can help private-sector saving: governments should be relying more on consumption taxes and treat household saving more generously, and reduce taxes that raise business’ costs and lower returns to investment. The top priority for governments, however, is fixing their own budgets. Much of what governments call “investment” is transfer payments and consumption. Federal capital spending does not even match depreciation: Ottawa’s net investment is negative. And notwithstanding the rhetoric, deficits have nothing to do with investment. Capital spending creates assets, not liabilities. When governments run deficits, consuming more than tax revenue net of transfers and interest payments can cover, their deficits erode national net worth – as they are doing now. We need less focus on near-term GDP and boosting consumption. Higher saving and investment, as households, through businesses and Canadian governments, is our surest path to a more prosperous future.

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