Ottawa must act to help restore Canadian competiveness

As the fall economic update from the Trudeau government quickly approaches, there’s increasing anxiousness with respect to what, if any, measures the government will introduce to improve competitiveness, particularly with respect to the United States. Almost all of the signals thus far indicate the government will only introduce small “targeted” measures rather than tackling the broad issue of declining competitiveness.

The source of Canada’s declining competitiveness is three-fold. First, the federal government and several provincial governments have increased personal income taxes on entrepreneurs, investors, professionals and business owners to the point where these rates now exceed 50 per cent in seven provinces, with the remaining three provinces within a hair of 50 per cent.

Second, a number of countries—particularly the U.S.—have enacted business tax reform and reductions. Whereas Canada enjoyed a lower average business tax rate for more than a decade, we now have higher rates. In addition, the U.S. enacted reforms that allow businesses to write off the full cost of investments immediately rather than amortizing them over time, which markedly reduces their effective tax rates.

Third, the U.S. has implemented sweeping regulatory reforms with an aim towards making it easier to do business in the country. Canada, on the other hand, has gone in the opposite direction with a number of major regulatory changes increasing the costs of doing business in Canada.

It’s within this environment that investment in Canada has declined—in some cases even collapsed. Investment is the foundation for future prosperity and the lack of either domestic or foreign investment should be worrying. For instance, between 2013 and 2017, the latest annual data available, the amount invested outside of Canada by Canadians increased 73.7 per cent while the amount invested in Canada by foreigners declined 55.1 per cent.

One of the latest explanations for avoiding real reform vis-à-vis the U.S. is that the American approach has led to massive long-term deficits.

Despite using fairly conservative assumptions, the Congressional Budget Office (CBO), which regularly updates budget projections for the U.S. federal government, does not forecast a decline in revenues as the cause for the increasing deficit. In its August 2016 report, the last projection provided during the Obama administration, the CBO projected federal revenues would reach $5.0 trillion by 2026. The latest CBO projections (April 2018) estimated total federal revenues will reach $5.0 trillion by 2026.

The deficit in the U.S. is expected to increase from roughly $800 billion this year to $1.6 trillion by 2028. The expected increase in the deficit, however, is in line with previous projections. The main reason for the large increase in the federal deficit in the U.S. in the future is the same as in Canada—demographics. Specifically, both countries project less people working and more people receiving government retirement benefits.

Canada’s competitiveness and its ability to attract entrepreneurs, investors and professionals have materially declined over the last few years, so it’s imperative that governments take action to regain our competitiveness. The federal government could kick-start this process by enacting meaningful changes this fall to our regulatory and business tax regimes.