If Canadians were not familiar with the term "catalyze" before, they certainly are now, as the word has become the rhetorical centerpiece of the federal government’s economic strategy. Open Parliament records indicate a nearly five-fold increase in the use of the term from 2024 to 2025, marking it as the preferred lexicon of the Carney administration. This linguistic shift reflects a broader policy ambition: the urgent need to activate a moribund national economy and unleash the twin forces of private and public sector investment. However, as the government attempts to transition from the post-pandemic recovery era into a period of sustained growth, it faces a structural challenge that has bedeviled Canadian policymakers for decades. The persistent gap between corporate profitability and capital investment suggests that the traditional models of economic stimulation may no longer be fit for purpose.
For years, federal governments have harbored the hope of unlocking the "animal spirits" of the private sector—a term popularized by John Maynard Keynes to describe the human emotions and instincts that drive financial confidence and investment. Despite various incentives, the problem of stagnant productivity has proven resilient. To move the needle, the Carney government must now decide whether to double down on existing models or risk upsetting the cornerstones of Canada’s established economic framework. The emerging consensus among economic analysts suggests that unlocking investment and corresponding productivity gains will require more than just tax tweaks; it will require the introduction of genuine competition into a corporate sector that has thrived under the status quo.
The Disconnect Between Profits and Productivity
The Carney government’s current economic policy front is characterized by three primary pillars: comprehensive reforms to the tax system to encourage investment, a concerted effort to eliminate interprovincial regulatory barriers, and the mobilization of public sector funding bodies designed to de-risk and complement private sector ventures. The underlying narrative is that Canada’s productive capacity is being stifled by a trifecta of inhibitors: taxation that blunts financial rewards, a regulatory system that creates friction for private enterprise, and a public sector that has historically been too reticent to invest in industrial capacity.
The logic behind the taxation argument is straightforward: businesses are unlikely to invest if they cannot retain a meaningful portion of their profits. However, recent empirical data from both home and abroad provides a significant caveat to this remedy. If there were a direct, linear correlation between profit levels and investment, Canada would currently be experiencing an investment golden age. Since 2020, there has been sustained and significant growth in Canadian private sector profits. Yet, this surge in the bottom line has not been met with a corresponding increase in capital expenditures.
Data from the 2024-2025 fiscal period reveals a startling trend. Outside of the oil and gas extraction sector, the industries that have seen real growth in capital expenditures—such as mining, utilities, and transportation—have actually experienced relatively flat profits since the pandemic. Conversely, sectors with record-breaking profits have largely remained cautious, opting for share buybacks or dividend increases rather than reinvesting in technology or infrastructure. This suggests that the link between high profits and high investment is far more tenuous than the government’s narrative suggests.
A Chronology of Incentives and Their Limited Impact
To understand the current impasse, it is necessary to examine the timeline of federal interventions intended to "catalyze" the economy.
2022-2023: The previous administration introduced a suite of Clean Economy tax credits. These were designed to incentivize investment in green technologies, including carbon capture, utilization, and storage (CCUS), hydrogen development, and clean manufacturing.
Budget 2025: The Carney government doubled down on these measures, introducing the "Productivity Super-Deduction" and enhancing the Scientific Research and Experimental Development (SR&ED) tax credits. These moves were widely cheered by business lobby groups as necessary steps to level the playing field with the United States.
July 2025: A pivotal report from the Auditor General of Canada revealed a sobering reality. Despite the availability of billions in tax credits, there had been virtually zero uptake in the credits related to carbon management and green manufacturing. The report highlighted that even with significant financial incentives, the business case for these investments remained weak in the eyes of the private sector.
This lack of movement echoes the experience of the United States following the Tax Cuts and Jobs Act (TCJA) of 2017. The Trump administration’s signature economic policy reduced the federal corporate tax rate from 35% to 21% and included provisions for the immediate expensing of capital investments. While the tax cuts added more than a trillion dollars to the U.S. annual deficit, a 2023 analysis by the think tank American Compass demonstrated that the TCJA had no measurable impact on investment-driven growth. For Canada, the lesson is clear: making businesses wealthier does not automatically make them more industrious.
The Role of Competition as an Economic Flywheel
If tax cuts and subsidies are not the primary drivers of investment, what is? The answer, according to a growing body of economic research, lies in the rivalrous process of competition. While a sufficient return on investment is a necessary condition for business activity, it is the fear of being outperformed by a competitor that serves as the true catalyst for innovation.
In the Canadian context, many sectors are dominated by long-standing oligopolies that have faced little pressure to innovate. From telecommunications to groceries and banking, the lack of "contestability" in these markets allows firms to maintain high profit margins without the need to invest in productivity-enhancing technologies. Studies from organizations like the OECD and various academic bodies have consistently shown that competition is the primary driver of productivity. When a firm is chased by a rival attempting to steal market share, it is forced to find new and better ways of doing business.
The Carney government has made some initial, encouraging moves in this direction. The push to reduce interprovincial trade barriers is, at its heart, an effort to expose regional businesses to greater competition. Furthermore, the government appears committed to following through on the modernization of Canada’s banking sector—a move that would finally open up the country’s infamous banking oligopoly to fintech challengers and new entrants.
Breaking the Walled Gardens: Banking and Beyond
The 2026 Spring Economic Update, titled "Driving Productivity and Affordability Through Competition," hinted at a "whole-of-government" approach to breaking down market barriers. However, critics argue that the government’s actions have yet to match its rhetoric. To date, much of the focus has remained on "cutting red tape," a catch-all phrase that often misses the nuance of effective regulation.
True competition policy requires an imaginative approach where regulation is used as a tool to open markets, not just deregulate them. This involves forcing long-standing oligopolies to "spin off" certain business lines or implementing regulations that erode the "walled gardens" built by dominant players. The banking sector serves as a cautionary tale. While the push for "Open Banking" and the modernization of payment systems has been on the agenda for years, incumbent banks have successfully "thrown sand in the gears," delaying implementation through technical and regulatory objections.
The Carney government’s success will be measured by its ability to overcome this resistance. If the "catalyst" for investment is competition, then the government must be willing to act as the enforcer of that competition, even when it draws the ire of the country’s most powerful corporate entities.
The Labor Market Paradox: High Wages as a Driver of Innovation
A frequently overlooked aspect of the productivity puzzle is the role of the labor market. For decades, Canada has pitched itself to the world as a source of high-quality, relatively low-wage labor. While this strategy has attracted foreign investment and generated "recognizable logos on buildings," it has created a structural disincentive for productivity growth.
When labor is cheap and plentiful, businesses have little reason to invest in automation or labor-augmenting technology. This is the "low-wage trap." Paradoxically, to drive productivity, the government must foster a labor market where competition for workers is intense and wages are high. As seen in the recent oil price shocks, when an input becomes more expensive, firms are incentivized to reduce their reliance on it or find ways to use it more efficiently.
The Temporary Foreign Worker (TFW) Program has recently come under intense scrutiny for its role in suppressing wage growth in certain sectors. Critics argue that by providing a steady stream of low-cost labor, the program has allowed businesses to postpone necessary investments in technology. A tighter labor market, characterized by higher wages, would force a shift in corporate strategy toward capital intensity and technological adoption. This runs counter to the traditional corporate plea for "labor flexibility," but it is a necessary tension if Canada is to break out of its persistent productivity slump.
Analysis of Implications and Future Outlook
The Carney government stands at a crossroads. The "catalyze" narrative is a recognition that the status quo is no longer sustainable, but the tools being used—primarily tax incentives and subsidies—are rooted in an era that has failed to deliver meaningful productivity gains.
The broader impact of this policy shift is significant. If the government successfully transitions to a competition-first model, it could lead to a more dynamic economy with lower prices for consumers and higher wages for workers. However, it also risks a period of creative destruction that may be politically difficult to manage. Established players in the Canadian economy will fight to protect their market share, and the transition to a high-wage, high-productivity model will require a level of political courage that has been rare in Ottawa.
As 2025 progresses, the focus will remain on whether the Carney government can move beyond platitudes about red tape and take the "imaginative approach" required to restructure the Canadian economy. The path forward involves embracing the discomfort of competition in both markets and labor. Only by breaking the complacency of the corporate sector can the government hope to truly catalyze the sleeping animal spirits of the Canadian economy and secure long-term prosperity for its citizens. Through this lens, the success of the "Carney Era" will not be judged by the growth of corporate profits, but by the growth of the investments those profits are supposed to fuel.
