National Post (National Edition)
MISSING MOJO
TAX CUTS MAY NOT COMPENSATE FOR A LACK OF ENTREPRENEURIAL VERVE.
The quip of the week goes to Jack Mintz, an academic at the University of Calgary and the dean of Canadian tax wonks.
“Canada is becoming the Austin Powers of economies — increasingly passé and rapidly losing its mojo,” Mintz wrote in these pages on July 25 while pleading with Finance Minister Bill Morneau to cut taxes on corporate income.
Funny. And like Mike Myers’ groovy British spy, over the top.
There is reason for concern: the Bank of Canada, the International Monetary Fund, and the Organization for Economic Co-operation and Development all say the Canadian economy is less competitive than it could be. That’s been true for years, but only recently has the problem become acute. The uncertain future of the North American Free Trade Agreement has exposed how little Canada has done to find markets outside the United States. And President Donald Trump’s business-tax cuts eliminated one of Canada’s most important comparative advantages, leaving it with nothing to offset worries over excessive electricity prices, relatively higher wages, and chronically weak productivity rates.
Still, Mintz and those who share his world view tend to exaggerate the depths of the pit into which our economy has sunk. That wouldn’t matter, expect that Prime Minister Justin Trudeau and his advisers get obstinate when those they view as less progressive than themselves try to tell them what to do. Consider Morneau’s last budget. The document was all but silent on the question of competitiveness, even though every business lobbyist and economic think tank in the country was screaming for a response to Trumponomics.
“The responsible thing to do is to focus on the facts, not on speculation, anecdotes, and rumour,” Morneau wrote in a commentary for the Financial Post in May. “And the facts are clear: Canada, and Canadians, are competitive.”
That was Morneau sticking it to those who would goad him into a fight by pointing at the scoreboard. The unemployment rate was 5.8 per cent when he wrote those words, the lowest in at least four decades.
Canada has lots of mojo, according to Montreal technology entrepreneurs I interviewed recently. “Nothing really is holding us back,” said Steven Kramer, chief executive of WorkJam. “Canada, in general, stands out,” Frederick Townes, chief technology officer at NestReady, said from Boston, where he helped build Mashable, the media company, and Pacester, a real-estate platform that raised US$100 million.
Toronto might be even hotter. Canada’s biggest city added 29,000 tech-related jobs in 2017, the most in North America by a wide margin, according to a survey by CBRE Group Inc., the LosAngeles based property manager. (Next was Seattle, which generated 8,200 tech jobs.)
The hard data are pretty good, too.
Mintz stated in his column that export growth has “stalled in 2018.” That was true earlier this year, but not now. Merchandise exports surged this spring thanks to a combination of strong U.S. demand and higher oil prices; exports of services have increased by about 50 per cent since 2009. Statistics Canada’s monthly poll of households suggests hiring has slowed this year, but that is at odds with the agency’s more reliable survey of payrolls, which shows that employers added 386,000 workers in the 12 months through May, including more than 144,000 in 2018.
Mintz, Conservative Leader Andrew Scheer, and various business lobbies undermine their own credibility by trying to make a strong economy look weak. And that’s too bad, because they are right: Canada does have a competitiveness problem. The country’s share of international flows of foreign direct investment have fallen to about two per cent from about 4 per cent in 2014, and both Australia and Mexico now do better, according to United Nations data compiled by Daniel Schwanen of the C.D. Howe Institute, a think tank based in Toronto.
Taxes are part of the story, but it’s unclear whether they are as important as advocates such as the Canadian Manufacturers and Exporters (CME) would have us believe. In June, the CME called on governments to immediately reduce the combined federal and provincial levy on corporate profits to 20 per cent from 28 per cent. Once that’s done, it wants Trudeau to appoint a Royal Commission to review the tax system.
An independent review is an excellent idea. Both the IMF and the OECD have called on the Trudeau government to take a hard look at the tax code because it is overly complex, and because it contains too many examples of policies that reward idleness instead of ambition.
But the calls for a big tax cut before the review is finished smell of opportunism. Canadian and U.S. rates now are essentially the same; the CME’s request is therefore an admission that its members are scared to compete with American rivals on a level playing field. Can lower tax rates fix a chronic lack of entrepreneurial verve?
Questions also must be asked about whether Canadian governments can forgo any more revenue. The shortterm boost Trump is getting from faster economic growth and a jump in business investment will come at the cost of more debt; most forecasters see U.S. growth slowing in a few years when the cost of carrying that burden weighs on momentum.
According to the latest forecast by the Parliamentary Budget Officer, the federal government will need about a decade to balance the budget and get the debtto-GDP ratio back to around 25 per cent. That’s a comfortable path, but it doesn’t leave much room for error.
Maybe lower corporate taxes will fix everything, but we better study it first. The first Austin Powers movie came out in 1997. The world has changed a lot since then.