A budget to show we’re serious
When the finance minister presents his budget on Tuesday, expect to hear yet another round of the Liberals’ shopworn, sleep- inducing talking points about helping the middle class in an innovative and inclusive society. What you probably won’t hear is that Canada’s has in recent years racked up one of the developed world’s saddest records in attracting business investment. In fact, private capital formation actually declined in 2015 and 2016, with just a small uptick in 2017.
If this trend continues, the middle class can kiss future pay increases goodbye as Canadian businesses fail to compete internationally. The budget could at least change the current perception that the government is just sitting by and letting that happen.
As shown in the accompanying table, Canadian corporate investment was only 10.9 per cent of GDP in 2016, vastly lower than in China, low- tax Ireland and the slow- growth euro zone. In fact, Canadian corporate investment plummeted since 2014, largely due to the fall in energy prices. But even our commodity-based cousin Australia has done better. And while in the U. S. in 2016 the corporate investment share of GDP was lower than Canada’s, this changed suddenly after the U.S. election, with corporate investment in America growing at a rate of 4.5 per cent, almost three times higher than Canada’s in 2017.
It didn’t used to be this way. Canada performed better than the U.S. for corporate investment from 2001 to 2012. This was obviously due to the commodity-price boom, but was helped by business tax reductions under federal and provincial governments of all political stripes.
But after 2012, Canada began increasing regulatory and tax burdens on investment. The tax burden on capital since then has risen by roughly 13 per cent. The most heavily taxed sector in Canada is services ( excluding those for oil and gas), as research I’ve done with my colleague Phil Bazel has shown. That includes industries in transportation and communication, which is a terrible way to begin the supposed economy of the future, since those are going to be its critical foundations.
Today, i nvestors view Canada as an unappetizing country, with the federal Liberals’ demonstrated commitment to ongoing corporate and personal tax hikes and our hamstrung regulatory processes in everything from building permits to pipelines. Losing NAFTA would kick another leg out from Canada’s weakening competitive appeal. No wonder so many businesses are extremely cautious about making big investments.
Investment matters. If you eat the entire corn crop and save no kernels for planting, you won’t have corn to eat next year. The innovation that the Liberal government keeps saying it wants depends on businesses making investments for the future.
If the government thinks innovation will happen because it announced funding for five “supercluster” projects across Canada, it’s missing perspective. In Trump-like bravado, the government claims that $50 billion in GDP will be created in a decade — $ 5 billion a year — but that’s based on pro- jections using a patently unrealistic growth multiplier. Here’s the reality: five supercluster projects investing $ 2.4 billion — $ 950 million paid by taxpayers — is a drop in the bucket of a $ 2 trillion economy.
As the federal government sanctimoniously attacks wealth and corporations for their supposed immorality, while handing out taxpayers’ money to well-connected rent seekers, it’s doing increasing damage to private investment. Raising Canada’s top personal income tax rate to 53 per cent — now one of the highest in the OECD — was a direct blow to innovation and investment. When early angel investors cash out of successful innovative companies, they typically use the proceeds to invest in new start- ups. In Canada, those important investors now face an extraordinary tax hit as government grabs the majority of the profits left after inflation.
And the poorly thoughtout tax changes to private corporations — that will presumably see taxes raised in this upcoming budget on earnings invested in “passive” assets — will encourage many private equity investors to shift assets out of Canada. The idea should be flat out dropped so Ottawa can at least signal that it wants a competitive tax system.
After the Republicans’ highly competitive, pro- growth tax reform in the U.S., Canada looks like the kid on a stairwell watching the grown- ups partying below. For years, most businesses with U. S. operations would push investment and profits out of the U. S., and Canada, with its business tax advantage, attracted much of it. That has now reversed. Companies will now shift investments and profits into the U.S., with its lower corporate tax rate, favourable treatment for intellectual property and accelerated cost deductions for investment.
Canada has to absolutely up its game to start attracting investment again. Finance Minister Bill Morneau has said he won’t respond impulsively to the U. S. tax cuts. He doesn’t want to rush Canadian reform without a better understanding of the complicated details of the U. S. changes. Fair enough. But given his government’s explicitly expressed hostility to those who create jobs, it is time to at least signal a change. Even a one- point reduction in the corporate income tax rate would help change the anti- business tone while the government assesses future steps.
If, instead, the government buries its head in a sandbox full of bromides about sharing and caring, businesses will read that as a signal that they should keep looking elsewhere to generate wealth and jobs. Canada’s investment performance will keep getting worse and the business operations that leave may never come back.
CANADA LOOKS LIKE THE KID ON A STAIRWELL WATCHING THE GROWN-UPS PARTYING.