By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
Finance Minister Bill Morneau’s 2018 federal budget does nothing to address serious concerns over Canada’s economic prospects or the challenges emerging from the United States.
In some respects, the budget makes matters worse by continuing the government’s self-destructive policies of chronic deficit-financed spending and new taxes on entrepreneurs.
What challenges does the Morneau budget ignore?
For starters, the document makes clear that the relatively strong economic growth of 3.0 percent in 2017 was a blip, and that Canada’s growth is expected to fall to 2.2 percent in 2018 and 1.6 percent in 2019. The Department of Finance forecasts economic growth will average just 1.8 percent for the next four decades – compared to average growth of 2.7 percent over the previous four decades.
Meanwhile, other industrialized countries are expected to enjoy stronger economic growth, making Canada a laggard. For instance, the Organization for Economic Co-operation and Development (OECD) projects U.S. growth at 2.5 percent in 2018.
Declining business investment remains a critical concern for Canada. It’s a signal that entrepreneurs, investors and business owners don’t see Canada as a hospitable place to do business. From the end of 2014 to the latest quarter with data, the level of (non-residential) business investment in Canada declined by 19 percent, after accounting for inflation. Among a group of 17 industrialized countries, Canada now has the second lowest level of business investment as a share of gross domestic product (GDP).
This decline in private-sector investment coincides with a marked deterioration in Canada’s investment attractiveness. A recent survey of business leaders found 64 percent thought Canada’s investment climate had worsened in the last five years, owing partly to the growth in the tax and regulatory burden.
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 the federal government’s strong anti-business rhetoric, has struck a harsh blow to Canada’s investment climate.
Of course, not all the wounds are self-inflected. Sweeping tax reform in the U.S. has wiped out Canada’s nearly two-decade business tax advantage over the U.S. It has also made the U.S. personal tax system even more competitive for skilled workers.
Additionally, Canada’s vital access to U.S. markets is in doubt given uncertainty over North American Free Trade Agreement (NAFTA) renegotiations.
The budget was an opportunity to convince investors that Canada remains a desirable place to invest. But rather than deal with our deteriorating investment climate, it turns a blind eye and advances policies focused on platitudes about gender equality, failed industrial policy and more income redistribution.
And it gets worse. While investors were looking for the government to improve the business tax regime, the budget’s most notable tax measure clarifies new rules on passive investments in private corporations. The result is higher taxes on entrepreneurs and yet another signal that Canada is inhospitable to investment.
Finally, the budget undermines investor confidence by refusing to establish a plan to return to a balanced budget. The deficit for 2018-19 is pegged at $18.1 billion, with cumulative deficits of $72.8 billion over the government’s first mandate. Recall that Justin Trudeau campaigned in 2015 on a promise of three years of modest deficits with a balanced budget by 2019-20 and cumulative deficits of $24.1 billion. Now, the Finance Department expects deficits to persist well past 2040.
Persistent deficits are essentially deferred taxes. So this budget leaves Canadians wondering how much in taxes they will pay this year and in the future, further impeding investment and entrepreneurship.
Midway through its first mandate, the government had an opportunity to shift gears and focus on the critical economic challenges facing our country. Instead, with this budget, it chose to turn a blind eye.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is senior policy analyst at the Fraser Institute.
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