Morneau set to tackle trade issues
Under pressure after U.S. cut corporate taxes
Finance Minister Bill Morneau is turning his full attention to helping businesses tackle competitiveness challenges in the face of U.S. tax cuts and uncertainty around trade that have become a drag on investment.
Morneau, in an interview with Bloomberg News in Buenos Aires, said his governing Liberals will come up with a response only after undertaking a complete analysis of the impact of the U.S. reforms. But he cautioned tax issues are only one part of the competitiveness equation, and rejected criticism from business groups he could have done more in his February budget.
“Job 1 on the centre of my desk for the next six months is going to be about competitiveness in Canada,” Morneau said Tuesday on the sidelines of a Group of 20 meeting in the Argentine capital. “We have to do our homework to get to a conclusion.”
He added: “There was no place in our budget for saying speculatively what we might or might not do in the future based on analysis that hasn’t been completed.”
Businesses say the problem was brewing even before the U.S. cut its corporate tax rate from 35 per cent to 21 per cent. They’ve called for a mix of reforms to address challenges from regulatory changes and new carbon prices, to minimum wage hikes and high electricity prices. Uncertainty over the fate of the North American Free Trade Agreement has added to that, prompting the Bank of Canada and others to warn some firms are simply choosing to invest south of the border instead.
Morneau, whose February budget was focused on gender equality, has come under heavy attack from businesses for what they say was a failure to address the changing international tax landscape. The Business Council of Canada had pressed the finance minister for an immediate response.
“We’re hoping for a signal that the government is on the case. There’s really no indication in the budget they’re on the case,” John Manley, a former Liberal finance minister and head of the business group, said in an interview. “The first step to solving the problem is admitting that there is one. And they’re not admitting that there is one.”
Canada’s average corporate tax rate is about 27 per cent, three percentage points above that of the world’s advanced economies, according to the Business Council. Morneau has said the Trump administration’s reductions will lower the average American rate to about 26 per cent.
Investment is waning in the face of the 2014 oilprice collapse and, more recently, uncertainty around NAFTA. Non-residential business investment totalled $205 billion last year, up slightly from 2016 but still well below the record $236 billion companies spent in 2014. Canada is also struggling to attract capital from abroad, with foreign direct investment plunging last year to the lowest since 2010.
“The issue is that our competitiveness has been eroding for years, and I can only point to the data,” said Dennis Darby, president of the Canadian Manufacturers and Exporters, an advocacy group for industry. “We have spoken to minister Morneau’s people and made our case.”
The finance minister said he plans to keep all options on the table but seemed to doubt the benefits of economy-wide tax relief, casting it as a blunt tool to fuel investment. While federal corporate tax rates have fallen from 28 per cent in 2000 to about 15 per cent today, Morneau said it’s not clear the cuts have had much of an impact on investment.
“Has the lower Canadian tax rate over the last decade generated a significant difference in terms of business investment in Canada versus what would otherwise have been the case? I don’t think there is clear evidence to support that,” Morneau said.
Industry-specific issues beyond taxes have a larger influence, he said. Investments in the oil and gas sector for example are driven largely by prices and pipeline constraints, he said, not taxes. Canada’s banking sector, meanwhile, is already more profitable than the U.S. and it’s not clear they need another tax cut to remain competitive, Morneau said.