An ‘attractive place to invest.’ Really, prime minister?
BUT SCRATCH THE SURFACE, AND LITTLE REASON FOR OPTIMISM IN CANADA’S GROWTH
The prime minister is off to Davos, where we are told he will “champion Canada as an attractive place to invest.” That’s nice to hear, and certainly one wouldn’t want him to suggest he had any doubts on that score. But, er, is it?
The question might strike many Canadians as strange. Isn’t our economy the envy of the western world, growing at a solid (if unspectacular) 3 per cent over the last four quarters? Hasn’t unemployment fallen to its lowest level in 40 years?
But those numbers describe where we’ve been, not where we’re going. To be sure, rebounding oil prices have helped the economy snap back from its mid-decade doldrums. (Though let’s not overstate this. Fun fact: the economy has grown more slowly, on average, over the last two years — roughly 2.2 per cent annually — than over the previous six.) And exports, spurred by a broad-based expansion in the world economy, should help prolong growth in the short term.
But the longer-term outlook is decidedly less rosy — the Finance department projects growth in future decades at just 1.7 per cent per year — and even in the short term the barriers to investment, notwithstanding the prime minister’s optimism, are accumulating. You can only boast about how well our banking sector survived the financial crisis so many times.
As it is, business investment has been a chronic weak point for Canada for years. Though it rebounded somewhat in 2017, it remains well below its 2014 peak, in real terms. At roughly 11 per cent of GDP, it ranks 16th out of 17 OECD countries surveyed in a recent study by former Statistics Canada chief economist Philip Cross, and has flatlined for most of the last two decades.
Worse, investment in machinery and equipment — the kind that leads to increases in productivity — has fallen, from over 6 per cent of GDP in 2000 to just 4 per cent. Want to know why productivity lags in Canada? Business investment per worker in Canada, at roughly $9,300 (in 2010 US dollars), is 40 to 50 per cent less than it is in high-productivity countries like Switzerland, Norway and the United States.
The prime minister can bend famous ears in Davos, but what do investors, foreign or domestic, see when they look at Canada? They see, first of all, a foreign trade situation that is rapidly deteriorating: not only NAFTA, where negotiations, after months of mutual antagonism, are in serious jeopardy of collapse, but the bungling of the Trans Pacific Partnership and China initiatives, with collateral damage to relations with Japan.
Not long ago, a business could locate in Canada with reasonable prospects of barrier-free access to most of the major markets of the world. Now, even the American border looks more and more like a wall: an investor today will think twice before putting a plant on this side. Much of the blame for that, certainly, can be attached to the Trump administration, but what are we doing to compensate on other fronts?
What, say, of taxes? Much attention has focused on the sharp reduction in business taxes arising from the recent U.S. tax reform: a marginal effective tax rate on capital investment, federal and state combined, of less than 19 per cent, according to calculations by University of Calgary economist Jack Mintz, down from 34.6 per cent. Rather less attention has been paid to the steady rise in the same taxes in Canada, from 17.5 per cent in 2012 to 21 per cent today.
An investor looking at Canada must also reckon with a marginal rate of personal income tax exceeding 50 per cent in much of the country, not only on his own income but those of his top employees. And that’s not including pending increases in Canada Pension Plan levies: not technically taxes, though employers and employees could be forgiven for thinking of them as such, especially when they look at how the CPP investment fund spends their money.
What of government deficits and debt? We’ve grown used to thinking of the federal debt as being under control, but provincial debts have been exploding. At 30 per cent of GDP, net provincial debt is up from 20 per cent a decade ago — this, even before the costs of an aging population have really begun to bite.
And while the fall economic statement showed federal deficits steadily declining over the next few years, a new study by the Institute of Fiscal Studies and Democracy shows them steadily increasing, from $20 billion last year to $32 billion four years from now. The difference? Finance numbers depend upon direct program expenses, which have been growing at 7 per cent annually, suddenly and permanently slowing to a little over 1 per cent.
Add to this the escalating cost of carbon taxes, imposed not as a replacement for existing subsidy and regulatory programs but on top of them; sudden and massive minimum wage hikes in several provinces; skyrocketing electricity prices in Ontario, temporarily suppressed at the cost of still higher prices to come; the increasing impossibility of building pipelines anywhere; and an interprovincial “free trade” agreement that included 167 pages of exceptions.
You can load a great deal onto an economy’s back in good times, but when the bad times come, as they inevitably will — we have not had a recession in nine years, or a serious one in 25 — the bill for all this fecklessness will be horrendous.
Perhaps the executives in attendance at Davos will be reassured by the prime minister’s talk. But I imagine once they get back to their offices and have a fuller briefing, they may say to themselves: are these people serious?