Fraser Forum

Government policies deterring investment in Canada

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Kinder Morgan’s announcement that it will halt “all non-essential activities and related spending on the Trans Mountain Expansion Project” could prove disastrous to Canada for many reasons.

If the $7.4 billion Edmonton-Burnaby pipeline is ultimately suspended, it will prevent Canadian companies from getting a higher value for their natural resources. It will also subject Canadians and our environment to less safe transportation methods for crude oil—pipelines are safer than rail—unless we’re willing to simply leave our resources (and their economic benefits) in the ground.

But more broadly, Kinder Morgan’s announcement is the most recent example of government policy decision deterring investment. In this case, the latest major policy impediment is the regulatory uncertainty caused by the British Columbia government’s opposition to pipeline expansion.

Specifically, the B.C. government has launched several legal challenges against the project including an attempt to control the shipment of oil through the province and a challenge to the federal government's approval of the project. According to Kinder Morgan, these legal challenges, and the uncertainty they've created led the company to conclude that it can't risk the billions of dollars in resources needed to complete the project until the uncertainty about the pipeline's future is resolved.

Put simply, the B.C. government is undermining the rule of law by effectively dismissing the federal government’s authority and its regulatory agencies, which have already approved the pipeline, adding to the many government policy choices that signal to domestic and foreign investors and entrepreneurs that Canada is not hospitable to investment.

Indeed, anti-investment policies are in vogue across the country. Ottawa and several provinces have raised tax rates on personal income, corporate income and payroll; introduced new regulations on carbon, resource projects and labour; and generally increased the cost of doing business through higher minimum wages and energy costs.

The cumulative effect of such policies, along with Ottawa’s strong anti-business rhetoric, has struck a harsh blow to Canada’s investment climate. Adding salt to Canada’s self-inflicted wounds is sweeping tax reform in the United States that has wiped out Canada’s nearly two-decade business tax advantage over the U.S. and also made the U.S. personal tax system even more attractive for skilled workers.

It’s no wonder investors are turning their backs on Canada. As the Royal Bank of Canada’s CEO recently put it, “in real time, we’re seeing capital flow out of the country.”

But Canada’s investment problem is not simply anecdotal. The overall data paint a concerning picture. Business investment (excluding residential structures) is down nearly 20 per cent since the third quarter of 2014. Statistics Canada’s latest survey on investment intentions for 2018 found that private-sector investment is slated to fall again this year—the fourth consecutive annual decline. Meanwhile, foreign direct investment (FDI) in Canada has plummeted since 2013. And for the first time since data has been collected, in 2017 foreigners sold more Canadian assets than they bought.

Declining business investment, coupled with the fact that Canada now has the second lowest level of business investment as a share of GDP among a group of 17 industrialized countries, should be of great concern to Canadians given the positive effect investment has on economic growth and overall living standards. If investment in Canada keeps falling, Canadians will be economically worse off in the future.

Although Kinder Morgan’s Trans Mountain pipeline is just one project (albeit a large one), its termination would symbolize a broader investment problem in Canada—one that is exacerbated by harmful government policies.

 

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