That ’70s Budget
When i t comes to supporting private business i nvestment — the most important source of economic growth — Tuesday’s federal budget comes up short, to put it mildly. It’s not until page 288 in the excessively wordy 369- page Budget Plan that one even gets the inkling that something called business investment even enters the thoughts of this government.
And even there, the government isn’t thinking about it all that deeply about it, although it does put on a brave face in saying “recent indicators point to ongoing business investment gains.” On the same page, an accompanying chart on shows that business investment barely eked a positive gain in 2017 after sharp declines since 2014. Maybe 2018 will start seeing some improvement. It’s hard to imagine it getting worse ( although, as Philip Cross notes elsewhere in FP Comment today, Statistics Canada’s just-released survey of business intentions suggests it likely will). If by chance investment improves, it won’t be because of this budget. Instead, U. S. growth spurred on by tax reform and deregulation will do far more to increase growth in Canada than anything achieved by the sprinkling of federal tax dollars.
Anything in this budget that might be considered federal support for business investment is really just throwing bits of money here and there at various subsidies like the Industrial Research Assistance Plan, the Strategic Innovation Fund and host of other pet projects, with little policy evidence to show these programs lead to substantial gains in economic incomes and so probably hurt growth more than help it.
Real tax reform would have an immensely more powerful impact. Yet most provisions in the budget are aimed at raising taxes, whether its tightening international rules, throwing money at CRA to curb avoidance, and capping the deduction for small businesses on passive income (the Liberals’ third and final climb- down from their illthought- out small- business tax proposals).
There is one bright light in this gloom: a drop in Canadian tariff revenue (about a half-billion dollars per year) projected to come from the Trans- Pacific Partnership free- trade agreement. So, lower prices for consumers and businesses for a wide variety of imports, including manufactured goods.
To get any growth beyond that, the Liberals are relying heavily on government spending. It all hearkens back to the 1970s, when Pierre Trudeau’ s policy framework offered regional development, pol- itically driven grants, wage and price controls, a far-too-generous employment insurance program, and subsidized Crown corporations. Of course, much of that had to be undone by subsequent governments to battle the ballooning deficits it all helped cause.
It is therefore no surprise that a government l eaning left to steal NDP voters ahead of the 2019 election will only have global and American growth to keep the Canadian economy from stalling in the next several years. Export growth is expected to rise, the budget chirps optimistically on page 289, despite the fact that growth in exports of nonenergy goods has been virtually flat since mid-2015.
Exports in services and energy have done better. But we shouldn’t be too consoled by it. Investors are shying away from energy development in Canada: even shale gas and oil 2018 investment plans are down five per cent in Canada, while down in the U. S. those plans are growing at leaps and bounds.
And about all that U.S. tax reform? No word on the impact on our competitiveness and growth. Just an easy-tomiss comment on page 296 that the Department of Finance promises to monitor developments in the coming months to assess affects to Canada. While the possible termination of NAFTA is highlighted as a risk to our economic outlook, the budget seems oblivious to the reality, right now, that U. S. tax reform is already pulling investment dollars out of Canada.
So maybe Finance Canada needs some help grasping this. With the U. S. now allowing the immediate expensing of new equipment, businesses that were already considering major transformations can now find a tax system ( down there) that fully supports the adoption of new technologies. Bet your last dollar that investment capital would far prefer a market of 350 million people and an attractive investment climate over a small, northern periphery that has lost virtually all of its business-tax advantage.
And with new incentives in the U. S. for intellectual property, marketing and other intangibles to be created and held there, I’m already hearing about innovative companies deciding to move their labs and sales forces to the United States from Canada and Europe. Nor does it take a genius to figure out that U. S. multinationals will bring more dividends out of Canada to invest, reduce U. S. parent corporate debt, pay bonuses to U.S. workers and better returns to shareholders. These decisions are rolling out as Canada twiddles its thumbs.
What many analysts miss is that U. S. tax reform is not a story about growth and fiscal stimulus. It is a story about productivity — one where American businesses are going to be remarkably cost- competitive with offshore markets within a decade thanks to robotics, big data, artificial intelligence and other adopted technologies. That’s not really our plan.
Yes, there are good features of this budget, such as improving wage subsidies to low- income workers and a bigger emphasis on the health of Indigenous people, among other well- meaning social efforts. But to pay for nice things like that, we’re going to need economic growth. You won’t find a sustainable path for that anywhere in this budget’s 369 pages.
TO GET ANY GROWTH, THE LIBERALS ARE RELYING HEAVILY ON GOVERNMENT SPENDING.