In these provinces, government spending accounts for nearly half the economy

C.D. Howe Institute says Quebec, PEI, Nova Scotia and New Brunswick need to attract more business investment

Investment from businesses is driving growth in Alberta, Saskatchewan, and Newfoundland, while other provinces need to get on the private-sector bandwagon, according to a report from the C.D. Howe Institute.

Public-sector investment has grown to a level almost equal to that of private enterprise in Nova Scotia, Prince Edward Island, New Brunswick and Quebec, according to The Public Purse versus Private Wallets: Comparing Provincial Approaches to Investing in Economic Growth.

Chart showing ratio of private to public investment by province

It’s important for laggard provinces to catch up because private investment goes hand-in-hand with growth, according to the report:

Large investments such as the oil sands, industrial plants or large office buildings require years of planning and building before completion. After the investment is made, production begins on a regular basis. As such, investment is a leading indicator of future spending. The commitment to invest is also a good indicator of a firm’s willingness to hire more employees. As a result, periods of robust business investment almost always are periods of strong economic growth.

The solution to stagnant growth and looming deficits is to make a play for privately-held money, according to the report. There’s a double incentive to try and attract corporate spending: the promise of growth, and the increasing difficulty of finding funds for public investment in a rough economic climate.

Canada already has one of the most business-friendly tax environments in the world. Provincial differences in private-sector investment levels seem partly a result of differential resource development timelines: oil and natural gas have flourished, while mining projects like Ontario’s Ring of Fire have stalled.

Then-Bank of Canada head honcho Mark Carney slammed the country’s businesses last year for sitting on an estimated $600 billion cash pile:

The bank sees it as unneccesary and views the cash stockpiles as the only available lever to goose the economy. Canada’s debt-saddled governments aren’t in a position to reprise the 2009 stimulus spend, and Canadian consumers definitely shouldn’t be further stressing their credit cards and bank lines. Yet on an aggregate level, business fixed investment hasn’t been pulling its weight, contributing 1.4% to annual real GDP growth in 2011, but only 0.5% in 2012, according to a recent Bank of Canada report.

That stashed money could right the investment imbalance for provinces like Quebec or Manitoba. But companies may be holding out for sunnier financial skies, creating something of a chicken-and-egg problem for governments seeking to boost the economy while reining in spending.

It seems governments across Canada are going to have to get creative if they want to see more corporate cash invested in their provinces.