Red Ink, Dry Powder: Provincial Budgets Betting Big on Capital Funds

By Laurent Carbonneau
CCI Vice President of Policy and Advocacy

It’s spring! We’ve sprung the clocks forward, we’re thinking about gardening plans, and in gentler climates than mine, you might be tentatively opening windows for fresh air. 

Here in the underground Mooseworks action station, however, we’re feverishly pondering what the annual crop of provincial budgets means for innovators, for economic growth, and for Canada’s ability to determine our own future.

This year’s provincial budgets, despite posting big deficits, retained a lot of dry powder in challenging fiscal circumstances for investment funds. Governments will have to make sure that those investments pay off by focusing on the right things - fueling scale and the development of critical intangible assets.

Every provincial government posted a deficit this year, ranging from 0.5% to about 3% of its provincial GDP. This is not particularly surprising when growth is weak and uncertainty is high, but big deficits can be politically costly and create pressure on key services.

That’s why I was a little surprised to see that even when provinces dipped into their reservoirs of red ink, several budgets included a new or recapitalized vehicle for provincial economic investments.

Ontario transitioned the remaining $4 billion in its Protect Ontario Fund, announced last year, to cushion the province’s big industries from tariff shocks into the new Protect Ontario Account Investment Fund. The fund is to be professionally managed and aims to crowd in private capital (particularly from pensions) into advanced industries like AI, defence, manufacturing, life sciences and biotech.

B.C. has created a $400 million Strategic Investment Fund to set B.C. up to match or draw in federal dollars in strategic industries like shipbuilding and life sciences. This complements the ambitious industrial strategy Look West that the province launched last November.

Meanwhile, Québec’s budget is reserving up to $2 billion on its balance sheet for strategic funds, with $1 billion in new money to create a new Critical and Strategic Minerals Fund and another $1 billion to top up the Québec Enterprise Growth Fund. The latter will have a focus on making investments “in promising sectors to accelerate their development and spur the emergence of new world-class players.”

The adjective ‘strategic’ gets used a lot when governments talk about these investment vehicles. Historically, they don’t live up to it. When we look at the now-defunct federal Strategic Innovation Fund, for example, investments tended to track significant world news and trends. When the federal government was re-negotiating NAFTA during the first Trump Administration, for example, they made a cluster of investments in the trade-impacted steel and aluminum sectors.

It’s fine for governments to respond to events. It’s part of the job description. But what often happens to pools of cash sitting on government books waiting to be deployed to the right long-term strategic opportunity is that they become very tempting solutions to short-term political problems. 

As B.C., Ontario and Québec start to deploy these new tools, they should keep in mind some guardrails to maximize chances of success. 

First, invest in building the future, not the past. The important assets to bet on are intangibles: data, patents, and other forms of IP. Firms that don’t have a really keen sense of what intangible assets they own and need aren’t likely to get very far.

Second, invest in deepening entrepreneurial excellence. Canada’s economy has historically struggled to turn small firms into big ones. This has knock-on effects. Big, successful organizations exposed to competitive global markets cultivate excellence, and that excellence tends to spread. 

I often think about where I grew up, close to Redmond, Washington. Aerospace giant Boeing developed engineering and business talent for decades, and put the region on the economic map as a hub for complex industries. Microsoft, as it grew, similarly developed a pool of human capital that Amazon was able to draw on in its growth to global scale. Big companies beget more big companies. 

But that’s an argument for scale and for innovation clusters. So why does it matter that they’re homegrown rather than just drawing in investments from foreign companies? 

One of the economic quirks of intangible assets is that they are scalable in a way that tangible assets fundamentally cannot be. 

Entrepreneurial and managerial excellence matter even more for companies whose value grows out of intangible assets. Because they’re so scalable, there is no real ceiling on the value they can create. This creates a small club of top performers that capture huge value. This phenomenon is extremely visible in the rise of superstar firms in the innovation economy. 

If we’re not developing world-class leadership talent at home that makes decisions that shape the future of their firms, then we are missing the boat on a tremendously important economic asset.

Provincial governments will have a lot of opportunities knocking on their doors. They should focus on the ones that will build the assets, skills and firms that Canada needs more of.

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Laurent Carbonneau is CCI's Vice President of Policy and Advocacy. He can be reached at lcarbonneau@canadianinnovators.org. Mooseworks is the Council of Canadian Innovators' innovation policy newsletter. To get posts like this delivered to your inbox, sign up for CCI's newsletter here .