Morneau’s dereg­u­la­tion pledge is so bold it might be unCana­dian

Re­view to look at how op­pres­sive sys­tem is hurt­ing firms, writes.

Calgary Herald - - FP CALGARY - Kevin Carmichael

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.


While those who highly value bal­anced bud­gets and low in­come taxes will be com­plain­ing, en­trepreneurs and ex­ec­u­tives will be blown away by Fi­nance Min­is­ter Bill Morneau’s bud­get up­date on Wed­nes­day, which promises dereg­u­la­tion, says Kevin Carmichael.


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