Bottom line? Canada’s potential growth rate remains in decline

TORONTO—You almost had the feeling when he read his fall economic statement speech to the House of Commons last Wednesday that Finance Minister Bill Morneau was on the verge of declaring, “Canadians, you’ve never had it so good.” He was smart enough not to say it, even if it was a subliminal message. But his speech nonetheless was too much a boastful bromide better suited for a partisan political rally than a sober and frank accounting of the core economic challenges facing the country and the risks they pose to future well-being. There was no discussion of our poor productivity performance and how this will affect our future ability to fund health care, education, and the other things we value, nor of our inability to pay our way in the world as reflected in what is becoming a chronic current account deficit, nor of the decline in the employment rate since 2007 with fewer Canadians of working age 25 and older actually working today, compared to just over a decade ago. In the meantime, in the outside world, the stock market has been in a nosedive and our dollar has weakened, and inequality and wage stagnation remain major issues, despite some offsetting measure by government. Canadians deserve better from their finance minister—less boastful partisanship that “Canada’s economy is strong and growing,” and that “the government’s plan is working” and more serious discussion of the big issues we face. To be sure, Morneau acknowledged that there were challenges—“challenges that range from uncertainty about the global economy to concerns about lingering trade disputes, to the challenges facing the oil and gas sector,” but the biggest challenge is productivity, which depends on our own innovation. As expected, Morneau did respond to business pressures for help in the face of a major corporate tax cut in the U.S. that threatened the competitiveness of Canadian companies and the ability of Canada to attract future investment. Rather than simply cutting the corporate tax rate, which could simply have meant more money for corporations to buy back shares or use the money to invest elsewhere, Morneau increased the incentives for business investment by slashing depreciation rates (making investments cheaper) so that the only businesses that benefit will be these that invest in Canada. But there was no indication of what results Morneau expects from just over $14-billion in these projected tax benefits to business between now and 2027—what will they add to total business investment and economic growth, to productivity and exports? But by making the tax incentives time-limited, a future finance minister by 2027 can decide whether or not they have worked, and hence whether there is a case for continuing them or letting them lapse. Missing from the fiscal outlook statement was an expected announcement of a major review of the overall tax system, something that is sorely needed though the benefits of such a review would depend on the kind of people appointed to carry it out. The biggest tax review in Canadian history was probably the 1962 Royal Commission on Taxation, chaired by Kenneth Carter. The commission found the tax system unfair because different types of income were taxed differently. “A buck is a buck," the commission declared and all forms of income should be taxed the same way. One result was the introduction of a capital gains tax. The fiscal outlook also reaffirmed the government’s goal of trade diversification, with various forms of funding for export support services and a reiteration of a 2025 goal of doubling Canada’s exports to emerging economies by 2025. There was, however, no indication of how this goal might be best accomplished or what it would take. A major challenge for Canada is to expand the number of companies with the scale and scope to engage in international trade. Right now there is much focus on expanding the Trans Mountain pipeline to enable oil exports to China and elsewhere. But it will take more than that to double exports to emerging economies. The fiscal outlook did also include an increase of $800-million over five years to the Strategic Innovation Fund. The fund had been unveiled in the 2017 budget with $1.26-billion—but almost all of that came from repackaging existing funds with only $100-million of new money. Of the $800-million of new money, $100-million is earmarked for the forestry industry and $250-million is earmarked for the steel and aluminum industries, in both cases offsetting the damage from U.S. protectionist measures—leaving $450-million of new money for the rest of the economy spread over five years. The fiscal outlook also promises to aid competitiveness by taking a much more aggressive attitude towards regulations affecting business, though it shies away from actually calling this deregulation. All of these various measures—rich tax incentives, support for trade diversification, more money to support new technology companies and deregulation—will no doubt help some companies, along with the perennial promise to reduce inter provincial trade barriers. But the bottom line remains that Canada’s potential growth rate is in decline, with growth moving below two per cent a year—and this is not sufficient to sustain our way of life, particularly since our population is aging. Much will depend on our ability to raise our productivity performance by innovation and scaling up our best new companies and we still haven’t figured out how to do this. It’s not clear how much of a difference the fiscal outlook measures, despite about $15-billion in tax measures and new spending, will make and Morneau doesn’t tell us what he expects. Despite all the optimism in the fiscal outlook on how well Canada is supposed to be doing, there are good reasons to have serious concerns about the future. David Crane can be reached at crane@interlog.com. The Hill Times