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