Governments must focus on competitiveness this coming budget season

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Appeared in the Financial Post, January 30, 2018
Governments must focus on competitiveness this coming budget season

It’s hard not to recognize that Canada has become a less appealing place to do business over the last number of years. Higher taxes, new regulations, and uncertainty over access to foreign markets—that is, the ability to trade—have reduced Canada’s attractiveness to entrepreneurs and businesses. Indeed, Prime Minister Trudeau in a recent speech at Davos said his government would not respond to Canada’s sudden lack of business tax competitiveness due to the Trump tax cuts. As we approach budget season, governments across Canada must start paying attention to competitiveness.

The list of made-in-Canada policies that have reduced our competitiveness is long and substantial. Most provinces and the federal government, for instance, have increased personal income tax rates on professionals, entrepreneurs and business owners. Now, the top personal income tax rate exceeds 50 per cent in seven provinces with the remaining three provinces within a hair of 50 per cent.

In addition, large deficits in Ottawa and in many provinces have created uncertainty about additional future tax increases. Indeed, the federal government has not ruled out additional tax hikes on capital gains, stock options and personal income.

And despite the United States rejecting a national carbon tax, Canada continues to charge forward with its plan for national carbon pricing, which will place several Canadian industries at a distinct disadvantage compared to our competitors.

Ontario’s push for green energy alternatives, which is now being replicated in other provinces, has dramatically increased electricity prices—the primary cost for many businesses, particularly manufacturers—hurt Ontario’s economy, and reduced competitiveness.

Beyond these damaging policy changes (and many others not listed due to space constraints), there’s also the strong anti-business rhetoric from Ottawa and many provincial capitals. Federal Finance Minister Bill Morneau, for instance, has used extraordinarily confrontational language to describe the government’s intent to “go after” certain “professionals and wealthy people.” We should not underestimate the negative effects of such language towards businesses and entrepreneurs.

Add to the domestic policy follies and anti-business rhetoric two significant headwinds from the United States.

First, the chances of a positive completion of NAFTA renegotiations look increasingly doubtful. Insiders have expressed frustration and in some cases outright dismay at Canada’s approach to NAFTA and our negotiations with China.

Second, the U.S. passed sweeping tax reform in December, which means for the first time in more than two decades, our southern neighbour will have lower business tax rates.

In response, Canadian governments, particularly the federal government, have done nothing to signal to investors, entrepreneurs and businesses that they have a plan to return the country to competitiveness. Instead, Prime Minister Trudeau has stated he will not take positive actions to re-establish Canadian tax competitiveness.

Governments across the country have reverted to repeating political talking points that reforms are working to improve the economy, and employed a “head in the sand” approach to both trade and tax competitiveness.

While Canada enjoyed a slight bump in economic growth at the end of 2016 and beginning of 2017, the general economic data isn’t all that strong. For example, employment growth since 2014 has totalled 3.5 per cent. However, almost one-in-three of those jobs were created in the public sector, which grew 4.8 per cent compared to just 3.2 per cent for the private sector.

The main reason for the weak private-sector job creation is the dismal state of business investment. Since peaking in the fourth quarter of 2014, every category of business investment has declined except for residential housing. Total business investment excluding residential structures (adjusted for inflation) is down almost 20 per cent. Investment in machinery and equipment has declined in six of the 12 quarters since the end of 2014, resulting in a total decline of almost 10 per cent. A recent analysis by the former chief analyst at Statistics Canada determined that Canada ranked second last amongst 17 industrialized countries for business investment.

Given the weakness in the private sector, it shouldn’t be surprising to learn that the federal Department of Finance forecasts economic growth to average just 1.8 per cent to 2055. The expectation for future growth pales in comparison to the average historical rate of 2.4 per cent rate of growth recorded between 1980 and 2016.

Ignoring external threats and continuing to implement policies that discourage rather than encourage entrepreneurs, investors and businesses will not solve Canada’s immediate and future economic challenges. Indeed, this is approach is making things worse. Competitiveness must take centre stage as the provinces and federal government present their economic and financial plans starting next month.