Morneau’s deregulation pledge is so bold it might be unCanadian
Review to look at how oppressive system is hurting firms, writes.
Bill Morneau sure is stubborn.
The finance minister again passed on an opportunity to announce an overhaul of the tax code, despite overwhelming pressure from academics and business lobbyists to do so. The levy on corporate income? Unchanged. And he apparently could care less about balancing the budget, even though Canada’s economy is long past needing fiscal stimulus.
The budget update he tabled in the House of Commons Wednesday shows that the fiscal shortfall was on track to narrow to $9 billion within five years from $19 billion this year. The feds decided to use stronger revenue to keep spending: various tax cuts and investments will keep the deficit in double digits through at least 2023, which will be the 30th anniversary of the election of the government of Jean Chrétien and Paul Martin, the former Liberal leaders who ended a generation of fiscal profligacy.
“We could have ignored the concerns of business leaders, decided not to make the investments and the changes that are part of the Fall Economic Statement, and we would have had a lower deficit as a result,” Morneau said in prepared remarks for the Commons. “To do so would be neither a rational response, nor a responsible one.”
So still plenty to grumble about when it comes to Prime Minister Justin Trudeau’s handling of the economy. Still, much of the complaining will be done by the opposition politicians, academics, economists and lobbyists who attach a high value to balanced budgets and low income taxes.
But actual wealth creators — the entrepreneurs and executives who hire and invest in pursuit of profit — will be blown away by Morneau’s update, which includes a promise so audacious that it might be unCanadian: a top-to-bottom review of the country’s oppressive approach to regulation.
The autumn budget update had been framed as the Trudeau government’s response to U.S. President Donald Trump’s tax cuts, which erased a comparative advantage that Canada had long enjoyed over its much larger rival. The two countries now tax corporate profits at roughly the same rate, meaning a company that does business in North America probably is better off setting up in the country with the most consumers.
Morneau said he would tweak the way Canada taxes new capital investments, including intangibles such as patents, which could offset some of the Trump effect. But the Canada Revenue Agency’s treatment of profits will remain unchanged, mostly because the federal government can’t afford to forgo the revenue, according to the finance minister. “Some have lobbied us to match those measures,” Morneau said the U.S. tax cuts. “If we were to do that, it would add tens of billions in new debt.”
The U.S. has re-established itself as the world’s economic engine over the past year, aided by those tax cuts, which jolted profits and hiring and excited equity investors, at least until recently. Less discussed is the effect of Trump’s commitment to deregulation, which might be having a bigger effect on animal spirits than the tax cuts, according to anecdotal evidence and some close observers of the North American economy. If that’s true, it’s easy to imagine the attraction for a finance minister who already is living beyond his means: free stimulus.
We won’t call it deregulation, of course. Morneau’s update stresses that the government will “continue to ensure Canada’s regulatory system protects first and foremost the health and safety of Canadians.”
But deregulation is what the government has on its mind. Public servants will be ordered to consider the economic impact of the rule books they manage, and the Trudeau government said it will introduce legislation that would require annual reviews of federal regulations. The finance minister also pledged an advisory committee to keep the government current on how regulations might be hurting Canadian companies and about $11 million to create an agency that will ensure regulators and the regulated talk to each other.
Tax cuts might jolt investment, although they would need to be big to restore the advantage Canada once had. Instead, Morneau offered a few new tax breaks on investment that Finance said ensure Canada remains one of the best places to deploy capital. That could be enough, as it was unclear whether the Trump effect was causing serious harm.
While some of Canada’s bankers have talked of “capital flight,” Louis Vachon, the head of National Bank, told me in an interview earlier this month that he wasn’t seeing it. The debate about Canadian competitiveness needed more “balance,” he said, noting that the “non-permit economy” — technology companies, service providers, etc. — was “doing very well,” while the “permit economy” was struggling because of delays and regulatory uncertainty. “These issues need to be discussed,” he said.
Remarkably, the federal government appears willing to discuss them. The Opposition will go after Morneau over the deficit and taxes. If it wants to help Canadian companies, it will ensure that Trudeau and his finance minister make good on deregulation. Execution isn’t a strength of this government. Let’s hope they get this one right.