Thumbs Down: Bud­get Fails to Ad­dress Long-Term Growth Is­sues

Policy - - In This Issue - Jack Mintz

The 2018 bud­get is ti­tled “Equal­ity and Growth”. But econ­o­mist Jack Mintz says a fail­ure to ad­e­quately boost Cana­dian com­pet­i­tive­ness could ham­per long-term growth. “The gov­ern­ment seems to be­lieve that only way to grow Canada is through busi­ness sub­si­dies and pub­lic in­vest­ment,” Mintz writes. “Busi­ness sub­si­dies have their un­fail­ingly poor record as gov­ern­ments have dif­fi­culty pick­ing win­ners from losers but losers are pretty good at pick­ing gov­ern­ments.”

In the 2018 bud­get, a rea­son­able list of five fac­tors is pre­sented as to why “it is time to look at Canada”. To para­phrase, the list in­cludes a highly skilled work­force, world-class in­no­va­tion, rich nat­u­ral re­sources, strong reg­u­la­tory frame­works and pre­dictable pub­lic in­sti­tu­tions. It is a good list to at­tract any busi­ness and skilled worker look­ing for new op­por­tu­ni­ties.

Yet, as Statis­tics Canada re­ported the day af­ter the bud­get, busi­ness in­vest­ment is not flow­ing to Canada, de­spite these seem­ingly at­trac­tive propo­si­tions. In fact, pri­vate in­vest­ment has de­clined by 18 per cent since 2015. Canada has one of the low­est pri­vate sec­tor in­vest­ment rates as share of GDP among ma­jor OECD coun­tries es­pe­cially in ser­vices, only bet­ter than Greece.

And to add in­sult to in­jury, Statis­tics Canada re­ported on March 1 that for­eign di­rect in­vest­ment in Canada was a pal­try $33.8 bil­lion for all of 2017 (only 1.5 per cent of GDP), the low­est level since 2010. Imag­ine if this in­for­ma­tion came out the day be­fore the bud­get was pre­sented. Pity the poor fi­nance min­is­ter.

So, if Canada has all the at­tributes claimed in the 2018 bud­get, why is the in­vest­ment com­mu­nity vot­ing a re­sound­ing “no”? Are we just fool­ing our­selves, like a typ­i­cal seller think­ing their home is a lot bet­ter than the mar­ket’s per­cep­tion? A bit of pol­icy his­tory would be use­ful here. From 1987 on­wards, fed­eral and pro­vin­cial gov­ern­ments of all po­lit­i­cal stripes strove to get Canada’s fis­cal house in order, re­move tax and reg­u­la­tory ob­sta­cles to growth and de­velop ac­cess to the U.S. mar­ket.

Canada suc­ceeded in achiev­ing decade of balanced bud­gets af­ter 1995. Ac­cess to the North Amer­i­can mar­ket was en­abled by a free trade agree­ment with United States and Mex­ico. Busi­ness in­vest­ment im­proved af­ter 2000 with the adop­tion of a value-added tax and a com­pet­i­tive cor­po­rate tax regime. A more at­trac­tive ed­u­ca­tion and per­sonal in­come tax struc­ture was de­signed to en­cour­age skilled labour to re­main or move to Canada. Pri­va­ti­za­tion and reg­u­la­tory re­forms were im­ple­mented, lead­ing to a sta­ble fi­nan­cial sec­tor and more com­pet­i­tive in­dus­trial struc­ture.

Pri­vate in­vest­ment has de­clined by 18 per cent since 2015. Canada has one of the low­est pri­vate sec­tor in­vest­ment rates as share of GDP among ma­jor OECD coun­tries es­pe­cially in ser­vices, only bet­ter than Greece.

Some of these achieve­ments re­main to­day. We have a good ed­u­ca­tion sys­tem. We are de­vel­op­ing a bet­ter in­no­va­tion cli­mate such as in the Toronto-Water­loo cor­ri­dor, al­though our re­search and de­vel­op­ment ex­pen­di­tures con­tinue to be one of the low­est amongst OECD coun­tries. We are rich with nat­u­ral re­sources and we have a strong fi­nan­cial sec­tor. And this bud­get, at least, main­tains fis­cal pru­dence with a lower debt bur­den even if the bud­get will never be balanced in the fore­see­able fu­ture.

The process to im­prove com­pet­i­tive­ness, nonethe­less, has stalled in other re­spects. This bud­get con­tin­ues this trend.

Our top per­sonal rate on in­comes has in­creased by al­most a fifth since 2015 to one of the high­est in the OECD, mak­ing it harder to keep or at­tract young skilled work­ers. Our de­pre­ci­at­ing dol­lar does not help ei­ther, since Cana­dian salary lev­els are drop­ping

well be­low the U.S. once again as they did in the 1990s.

Our in­no­va­tive en­vi­ron­ment has shown lit­tle ev­i­dence of im­prove­ment in­clud­ing a low adop­tion rate of new tech­nolo­gies through pri­vate in­vest­ment. In part, this has been a re­sult of in­creas­ing tax and reg­u­la­tory bur­dens that is en­cour­ag­ing com­pa­nies to look abroad for op­por­tu­ni­ties.

Af­ter all, Ot­tawa and the prov­inces have in­creased taxes on busi­nesses in­vest­ment by al­most a tenth since 2012. Reg­u­la­tions have slowed down in­vest­ment, not just in the re­source sec­tor but also in build­ing in­fra­struc­ture in­clud­ing ur­ban de­vel­op­ments (Canada takes far too long com­pared to most coun­tries to grant build­ing per­mits and sign con­tracts, as pointed out by the World Bank).

The U.S. tax re­form has brought in new pro­vi­sions that pro­vide lit­tle in­cen­tive for Amer­i­can com­pa­nies to lo­cate R&D and sales forces in Canada—and lit­tle in­cen­tive for Cana­dian com­pa­nies to keep these jobs here.

And gov­ern­ments seem ready to squan­der our re­source wealth by throt­tling the en­ergy in­dus­try with reg­u­la­tory pro­cesses lead­ing to bil­lions of dol­lars in losses. Pipe­lines can’t get built. Nei­ther can LNG plants. Un­like Canada, which con­tin­ues to see fall­ing in­vest­ment in min­ing and en­ergy, in­vest­ment is leap­ing in other coun­tries es­pe­cially in the United States. With the elec­tion of Don­ald Trump in Novem­ber 2016, the U.S. has adopted sev­eral poli­cies mak­ing it very at­trac­tive for busi­nesses to in­vest in the econ­omy. The sharp de­cline in cor­po­rate taxes has brought the tax bur­den on in­vest­ment be­low Canada’s, elim­i­nat­ing our two-decade ef­fort to build a sub­stan­tial busi­ness tax ad­van­tage. The U.S. tax re­form has brought in new pro­vi­sions that pro­vide lit­tle in­cen­tive for Amer­i­can com­pa­nies to lo­cate R&D and sales forces in Canada—and lit­tle in­cen­tive for Cana­dian com­pa­nies to keep these jobs here.

With Trump’s predilec­tion to im­pose im­port du­ties— the lat­est be­ing tar­iffs on steel and alu­minum that hurt Canada—and pos­si­bly pull the rug out from un­der NAFTA, we can see that our ac­cess to the U.S. mar­ket, a fifth of world GDP, be­comes more pre­car­i­ous. Any busi­ness with a choice be­tween a mar­ket of 350 mil­lion and 35 mil­lion peo­ple will clearly choose the for­mer for their in­vest­ments.

So, what did the fed­eral gov­ern­ment do to al­le­vi­ate these com­pet­i­tive threats in the bud­get? Noth­ing. In fact, it did not even rec­og­nize them.

It main­tained its past pos­ture of hik­ing taxes on mo­bile labour and cap­i­tal to fund a sprin­kling of rev­enues over the Cana­dian land­scape. No plan to counter Canada’s sink­ing com­pet­i­tive­ness.

The gov­ern­ment seems to be­lieve that only way to grow Canada is through busi­ness sub­si­dies and pub­lic in­vest­ment. Busi­ness sub­si­dies have their un­fail­ingly poor record as gov­ern­ments have dif­fi­culty pick­ing win­ners from losers but losers are pretty good at pick­ing gov­ern­ments. Pub­lic in­vest­ment is a good idea but to pay for it, one needs tax dol­lars gen­er­ated by the pri­vate sec­tor.

With a surg­ing U.S. econ­omy—that will at least help Canada with some ex­port growth—and dif­fi­cult-toman­age trade re­la­tions with the United States, it is no sur­prise that the busi­ness sec­tor gives thumbs down to this bud­get. But so should all Cana­di­ans. We all like a good stan­dard of liv­ing and se­cure jobs— this bud­get puts the Cana­dian dream at peril but fail­ing to ad­dress prospects for long term growth.

Adam Scotti photo

Fi­nance Min­is­ter Bill Morneau and PM Justin Trudeau’s third bud­get failed to ad­dress the com­pet­i­tive chal­langes of US cor­po­rate tax cuts, writes Jack Mintz.

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