In political hot seat, Morneau needs to send strong signal on feds’ plan to address economic uncertainty

Time flies, and nowhere is this truer than for governments with fixed terms in office. The heady days of 2015, when Justin Trudeau and the Liberals arrived in office in an aura of sunny optimism, have given way to a struggling government that faces the possibility of a narrow minority win, or even a loss. This is why Finance Minister Bill Morneau is on the political hot seat. Superficially, the economy looks to be in great shape. But underneath there are troubling signs of economic weakness. The Liberals came into office promising to end the austerity of the Harper government and stimulate economic growth. Now, they are faced with the prospect of economic weakness and the likelihood that the economy will be a central issue in next year’s election. So Mr. Morneau’s coming fall economic statement, which will precede Budget 2019–his last budget before the election–will need to send a strong signal on how the government plans to respond to a slowing economy and specifically address growing business uncertainty and its impact on future investment and jobs. What plan does he have to make Canada a more competitive economy so that companies will want to invest and create decent jobs? The failure of the three NAFTA countries to renegotiate a deal, with the risk of outright cancellation by U.S. President Donald Trump, means that investments may be delayed or made in the U.S. instead of Canada just to be safe. This is one reason for uncertainty and investment delays. A second is the impact of the sweeping U.S. corporate tax cut, which can make investment in some cases more attractive in the U.S. than Canada (though not always–tech companies from around the world are rushing to set up research and development branch plants in Canada because of our talent despite a now-lower U.S. tax rate). Mr. Trump’s foolhardy trade war against the rest of the world is third factor that can discourage investment and pull down economic growth. In Budget 2018, Mr. Morneau promised to review the impact of U.S. tax changes to determine how best to respond. Business may be hoping for a further cut in corporate tax rates. But past cuts, which had meant our corporate tax rates were lower than the U.S., have not led to a surge in investment in Canada. There is the risk, too, that corporations could use the extra money for short-term shareholder benefits by buying back shares, or by raising dividends, with much of the dividend increase flowing out of the country, rather than investing in future growth. There is also the cost of such a tax cut to be considered at a time when the government is already under attack, including from the same business community, for its budget deficits. Rather, Mr. Morneau should reward companies that actually make productive investments, for example, by boosting an investment tax credit, restoring the cut the Harper government made in the R&D tax credit for larger corporations, allowing businesses making R&D investments to sell their unused tax credits through flow-through shares, and improving incentives in innovation policy. But the government could also do much more to speed up infrastructure investment, which has fallen well short of promised targets, and review its definition of private Canadian-controlled corporations, so they can benefit from tax measures and other programmes even if they bring in outside investors. The Trudeau government has done much boasting about the fact that we had the strongest economic growth in the G7 last year. But that was last year. It will no longer be able to make that claim this year or next. Canada did achieve a strong 3.0 per cent growth rate last year, but International Monetary Fund (IMF) projections show declining growth this year and next, to 2.1 per cent this year, 2.0 per cent in 2019, and even further, to 1.6 per cent, by 2023. Moreover, since different countries have different rates of population growth, what matters more in making international comparisons is which G7 countries had the highest per capita GDP growth. And last year both Germany and Japan had higher per capita growth than Canada.. IMF projections show per capita GDP growth in Canada falling from 1.7 per cent last year to just 0.8 per cent this year and 1.1 per cent in 2019. In 2018, Canada is projected to have the weakest per capita GDP growth in the G7 and the second lowest, after Italy, in 2019. There are other signs that should be of concern. In its recent Compendium of Productivity Indicators, the Organization for Economic Cooperation and Development found Canada’s performance disappointing. Yet productivity is a key source of economic growth and competitiveness. It reflects both efficiency and innovation in the economy– in particular by business. From 2001 to 2017 labour productivity–GDP per hour worked–was the second worst in the G7; only Italy was even worse. In the 2010-2016 period, Canada’s performance has not improved, but aside from Germany, which has done better than Canada, the other G7 countries have slipped from past performance, making us look better though in a negative way. Recently, the Global Innovation Index, ranked Canada 18th, with countries like Switzerland, the Netherlands, and Sweden pulling ahead at the top. U.S., Germany, Israel, Korea, Japan, France, and China also ranked ahead of us. Canada ranked 24th in business sophistication, 22nd in knowledge and technology outputs and 30th in creative outputs, but third in market sophistication and fifth in strength of institutions. Competitiveness, innovation, and productivity are about more than taxes. But taxes do matter, and Mr. Morneau is expected to respond. In fairness, he faces a turbulent period in which the U.S. is a major source of global instability and with a Canadian business community that is risk averse and lacks public leadership. Nonetheless, Canadians expect Mr. Morneau to do something. The looming federal election means he has to. David Crane can be reached at crane@interlog.com. The Hill Times