Competitiveness of Canadian economy matters a lot for our future

TORONTO—As we approach the 2019 budget and the next federal election, much of the economic data flowing out of Statistics Canada is not encouraging. This is not good news for the governing Liberals, though the Conservatives or NDP have had little, if anything, to offer so far in credible new ideas for a more successful economy. Andrew Scheer’s latest idea is to eliminate GST on home-heating bills. We had a big trade deficit last year while productivity growth was flat. The fourth-quarter economic growth was disappointing and growth this year will slow (to just 1.5 per cent, the OECD forecasts). Even though business capital spending will rise, the increase is modest. The Bank of Canada’s decision to hold off on an interest rate hike was based on concerns the economy is too vulnerable to boost rates right now. And our dollar is on a downward path. The potential growth rate of the economy is too low to generate the wealth needed to support education, health care and other public goods going forward. So what to do? One thing we can be sure of—there will be more calls for tax cuts despite a lack of evidence that business and personal tax cuts would mean a more innovative and competitive economy. “Taxes and regulation are stifling growth,” Canada’s Big Business lobby—the Business Council of Canada—claims in releasing a competitiveness scoreboard, a set of eight key economic factors chosen by the consultancy Deloitte as critical markers of competitiveness. U.S. corporate taxes are lower in the U.S. than Canada, as are personal income taxes for top income earners, and this puts us at a disadvantage, Deloitte claims. But it is U.S. taxes that are too low, not that Canadian taxes are too high, as the U.S. fiscal mess shows. According to the latest U.S. Treasury figures, the U.S. federal deficit for the first four months of the 2019 fiscal year was an astounding 77 per cent higher than for the same period in fiscal 2018, a result of big tax cuts and major spending increases. The U.S. federal budget deficit is projected to approach US$1-trillion this year while, with rising interest rates, the government is expected to pay US$383-billion in interest payments this year, rising to US$580-billion in 2020. The independent Congressional Budget Office forecasts that publicly held U.S. public debt will reach US$16.6-trillion at the end of 2019, almost 80 per cent of GDP, rising to nearly US$30-trillion, or 93 per cent of GDP, by 2029. It forecasts that the federal deficit will rise from 4.2 per cent of U.S. GDP this year to 4.7 per cent in 2029. Moreover, as Deloitte study acknowledges, Canada is in a much stronger fiscal position overall. General government (all levels) net debt in the U.S. amounted to about 80 per cent of GDP in 2017; in Canada it amounted to a much lower 30 per cent. Clearly, Canada is pursuing a better tax-and-spend policy mix than the U.S. In fact, as the Deloitte study admits, Canada has the fourth lowest debt-to-GDP ratio compared to 12 “peer countries” that include the U.S., Britain, Germany, France, Sweden, Japan and South Korea, Australia, and the Netherlands. While the federal U.S. debt-to-GDP ratio is rising, in Canada it is declining. To be sure, the Canadian tax system could be made to work better, balancing economic efficiency and fairness. But the argument that our corporate tax rate puts Canada at a big disadvantage is not true. If taxes play such a large role, why is it that for all the years we have had a much lower corporate tax rate than the U.S. we still lagged behind the U.S. in business investment in productivity-enhancing machinery and equipment, research, and development spending and innovation? As the Deloitte report admits, “for many years, Canada enjoyed an advantage over its largest trading partner from a corporate tax perspective.” Until the recent U.S,. corporate tax cut, our corporate tax rate was 26.7 per cent while that of the U.S. was 39.8 per cent; now, the U.S. tax rate, at 25.8 per cent, is one percentage point lower than the Canadian corporate tax rate. It is hard to believe that this difference will now send investment rushing from Canada to the U.S.—especially since the quality of our talent, our education system, and our infrastructure are all higher and in a knowledge economy, driven by intellectual property and investment in intangibles, this matters a lot. In addition, as a result of recent tax changes in Canada, the tax rate on new business investment, as Deloitte acknowledges, is just 13.8 per cent in Canada, compared to 18.7 per cent in the U.S., 25.1 per cent in Germany, 26.6 per cent in Britain and 31.4 per cent in Japan. Likewise, the tax credit for research and development is more generous in Canada than in the U.S. But U.S. business invests a much greater share of GDP in R&D than does Canadian business. So it is about more than taxes. The competitiveness of the Canadian economy—but especially of Canadian business—matters a lot for our future. So in that sense, the decision of the Business Council of Canada to spend time and effort looking at what could be done to improve competitiveness could be an important contribution if it can look beyond clamouring for more tax cuts and across-the-board deregulation. We need major structural changes, and cultural changes, in our economy to accelerate its transition to a knowledge economy based on investments in intangibles such as R&D, software, branding, employee training, and organizational innovation. In the 2019 budget, federal Finance Minister Bill Morneau should resist calls for more tax cuts for businesses and top executives. While there is room for improvement in lour tax system and regulatory regimes, these are not the central issues. Innovation and productivity, along with radically changing skill needs are, and that’s where the focus should be. David Crane can be reached at crane@interlog.com. The Hill Times

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Competitiveness of Canadian economy matters a lot for our future

We need major structural changes, and cultural changes, in our economy to accelerate its transition to a knowledge economy based on investments in intangibles such as R&D, software, branding, employee training, and organizational innovation.

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