Key points

• This essay reviews comparative institutional and policy settings in Canada and Australia to help identify the sources of Canada’s relatively poor productivity performance since the mid-1990s.

• Canada and Australia are similarly ranked on measures of their institutional, policy, and regulatory settings. But Australia outranks Canada on measures of economic freedom (9th versus 14th place), FDI regulatory restrictiveness, its overall tax system, attractiveness to global talent, labour market flexibility (as measured by the unemployment rate and productivity gains from the reallocation of labour), product and financial market regulation.

• Canada outranks Australia on measures of globalization, corporate taxation, cross-border tax rules and complexity, and innovation. However, Canada’s advantages on measures of globalization are largely an accident of geography rather than superior institutions or policy settings.

• Australia suffers a global economic integration and productivity penalty based on its geography, but this only serves to underscore Canada’s underperformance in overall productivity growth.

• Much of Australia’s superior productivity performance is due to a stronger investment share of GDP adding to the country’s capital stock.

• While the investment share of GDP differential between Australia and Canada has narrowed in recent years, decomposing investment spending by asset type shows that around half of this narrowing is due to an increase in the share of GDP in Canada that encompasses investments in dwellings rather than to higher business investment. Addressing policies that may be acting as impediments to stronger private nonresidential investment spending should be a priority for Canadian policymakers.