Companies Lukewarm on Budget
Canadian firms are sounding off against the federal government’s failure to introduce policies in its budget to narrow the “competitiveness gap” with the U.S., saying Canada is increasingly at risk of losing investment dollars to its southern neighbour.
“There is nothing happening to make Canada more competitive — nothing that we’ve seen in this budget,” said Kevin Neveu, president and CEO of Calgary-based Precision Drilling Corp.
Business associations and some economists had been calling on Finance Minister Bill Morneau in recent weeks to soften the federal government’s corporate tax regime as part of its annual budget, tabled Tuesday.
Many observers did not expect Morneau to heed those calls, but had suggested Canada should make some efforts to address the erosion of Canada’s competitiveness in light of sweeping tax changes brought in by U.S. President Donald Trump, who has slashed corporate tax rates from 35 per cent down to 21 per cent and considerably accelerated the pace at which companies can write off capital expenses.
Precision is the largest drilling company in Canada and has operations in the U.S., Mexico and the United Arab Emirates. Neveu said Wednesday the company will not increase capital spending in Canada this year, and will instead boost investments elsewhere.
“Either you’re helping make Canada more competitive or you’re ambivalent to negative. In our opinion, ambivalent or negative is not helpful,” Neveu said, adding that both federal and state-level policies in the U.S. have been more encouraging for new investment.
In a speech to the Economic Club of Canada in Ottawa on Wednesday, Morneau countered that the federal government will focus on more immediate worries like NAFTA and lower U.S. corporate taxes and at the same time takes steps to address longer-term domestic risks, such as the aging workforce.
Morneau said Canada needs to play both a long game and a short game — and that the brightening economy enables the government to do just that.
Canadian businesses have been particularly concerned about changes under Trump’s tax regime that allow companies to immediately expense purchases on big capital costs such as equipment and machinery. In the past, those expenses would have to be written off over long periods of times stretching up to decades, similar to Canada’s tax policy. The budget did include extensions for capital cost allowances to some clean energy purchases.
The Canadian Manufacturers & Exporters (CME) association said Wednesday that Canada has been at risk of losing investment dollars to the U.S. in recent years, and that Trump’s tax cuts now underscore that threat.
The changes could recalibrate how Canadian manufacturers think about new investments, said Winston Woo, chair of the CME Ontario Finance Committee.
“You would be looking at the U.S. very, very differently,” he said.
He cautioned, however, that the Trump tax changes only recently took effect, and most companies are still waiting and watching the market.
New foreign direct investment in greenfield manufacturing developments in Canada has shrunk by 40 per cent over the last 10 years, according to the CME.
Meanwhile, U.S. manufacturers are ramping up investment. Last month, the U.S. Commerce Department said spending on business equipment leaped 11.4 per cent in the fourth quarter of 2017, the largest increase in three years. U.S. spending on machinery and equipment tends to outpace that of Canadian firms by a ratio of eight to one, according to the CME.
In contrast, the growth-focused policy changes in Ottawa’s budget were “disappointingly thin,” according to John Manley, president and CEO of the Business Council of Canada. The group had called on Morneau to immediately reduce federal corporate tax rates, and accelerate the pace at which firms can write off capital expenses.