Canada is doing ok. But we could be doing much better. Here’s why
Finance Minister Bill Morneau recently commented that his “number one priority” is enhancing Canada’s business competitiveness, particularly in the context of a recent overhaul of tax policy south of the border.
The timing of these comments is interesting, coming as they did just weeks after a federal budget that was roundly criticized for ignoring the elephant in the room of Canada’s dwindling competitive position in a fluid international economic policy landscape.
Morneau stresses he wants the time and the analysis to get it right, so let’s give him the benefit of the doubt. But for now, Canada is looking more and more like a nice place where big investments just don’t happen. We’re rolling the dice on some massive economic policy files. Let us all hope we don’t turn up snake eyes.
Start with taxes. Our average corporate rate is now around 27 per cent — higher than the average in advanced economies by around three points, and higher than the new U.S. average rate by a little less than that.
This is not a catastrophic position to be in, and certainly tax rates are not the only thing firms consider when making investments. But it is undeniable that the significant tax advantage we recently enjoyed over U.S. firms has evaporated with the American reform that passed last year.
This can only hurt our relative position vis-à-vis our most important trading partner, already a more attractive magnet for talent and investment than us in many other ways.
Second, trade. Renegotiations of NAFTA are ongoing (and could, with luck, be over by the time you read this!). But as of this writing, a positive outcome was far from a certainty.
The government does deserve credit on this file, negotiating as they are with rank protectionists and U.S. leadership with a suspicious view of the outside world and a zero-sum approach to trade.
But what’s the plan if NAFTA collapses? Trade diversification is to be applauded, but we can’t get a pipeline built to salt water to market Alberta oil to Asia, and we will always be bound by geography and culture to America.
For the most part the government is playing a challenging hand very well on NAFTA, but a catastrophic outcome is still very much a possibility, despite recent noises that talks are moving in the right direction.
This will further strain public finances, as most governments have not managed to balance their books even in the relatively good times of the past couple of years.
Even in the absence of a full-scale collapse, the very possibility of it and the uncertainty caused by ongoing talks are already having a negative impact.
How about economic growth? After a bumper year from around mid-2016 to the middle of last year with growth in excess of three per cent, the Bank of Canada is forecasting growth to come back down below two per cent this year and next.
This will further strain public finances, as most governments have not managed to balance their books even in the relatively good times of the past couple of years.
What happens when the next recession comes, as it inevitably will? We are almost a decade removed from the last serious downturn and history shows that we are very likely closer to the next recession than the last one. Are we prepared for it?
Investment is another area of concern. Non-residential business investment was a decent $205 billion last year, up a little from 2016 but still well below the record $236-billion companies spent in 2014. Canada’s foreign direct investment also dropped last year to its lowest level since 2010.
The new Infrastructure Bank, announced with great fanfare in the 2017 federal budget, still does not have a permanent CEO and may not spend any money until next year.
The Prime Minister so far has generated more sock-related headlines than signed cheques with his frequent elbow-rubbing with the international billionaire glitterati set. Canada is no doubt respected around the world for many reasons. But most of the deep pockets are putting their money elsewhere, for now.
Of course, it’s not all doom and gloom. We still live in one of the richest countries ever to exist, and our politics have avoided the terrifying turn to populism and poisonous tribalism we see all around us. These are no small things.
Seeing an opportunity in a wall-building, travel-banning America, we are opening our country ever-more to the kinds of highly skilled immigrants we will need in the decades to come to finance the demographic tsunami we are facing.
So Canada’s ok. But we could be better. Let’s keep trying.
