By Jason Clemens
and Niels Veldhuis
The Fraser Institute
Canada’s anemic economic growth should be of the upmost concern to Canadian policymakers – but it’s not.
In 2016, the economy had one of its most difficult years, with growth at a mere 1.3 per cent. Looking forward, it doesn’t get much better. The federal Department of Finance predicts economic growth will average just 1.6 per cent out to 2030.
Why then is Finance Minister Bill Morneau so detached from the state of the economy?
Consider a recent interview on CBC’s Power and Politics. With respect to economic growth, the minister claimed: “Our plan is working. We’ve seen real improvements.”
In reality, however, growth expectations from private-sector economists have consistently declined since this government came to power. The Liberal’s 2015 economic update forecast average economic growth of 2.1 per cent over the next five years (2016-2020). Budget 2016, the first full budget for the new government, lowered expectations for future growth to 1.9 per cent. Expectations were further downgraded to 1.7 per cent in the 2016 economic update and 1.6 per cent in Budget 2017.
The minister is also mistaken about Canada’s competitiveness and policies that are critical to ensuring a positive economic environment for investment and entrepreneurship.
For instance, he claimed: “we have a very competitive tax situation right now from a corporate standpoint.”
Morneau seemed to be talking about statutory or listed corporate income tax rates. Among the 35 industrialized countries that make up the Organization for Economic Co-operation and Development (OECD), Canada’s federal corporate income tax rate (15 per cent) is tied for the third lowest.
However, this ignores sub-national corporate income tax rates that must be combined with the federal rate to properly measure national competitiveness. Canada’s 26.8 per cent combined (average) federal and provincial corporate income tax rate ranks 23rd in the OECD. It’s hard to see how 23rd out of 35 countries positions Canada as “very” competitive.
The minister also boasted about raising taxes on higher income earners, which seems to indicate he’s unaware how such increases affect potential investment from Canadian and international investors, businesses and entrepreneurs. The tax hike on upper-income earners has worsened Canada’s competitive disadvantage on personal income taxes.
The minister would also not state clearly that the government won’t raise capital gains taxes or taxes on stock options, both critical to entrepreneurs and business startups.
On tax fairness, the minister stated: “I want to know that two people living side by side, one earning the same as the next, actually have the same rate of tax.” Here, the minister seems oblivious to the fact that his own actions in Budget 2016 worsened tax fairness for households by ending the limited income-splitting for couples with young children.
For example, in 2016, two households both with two parents and two children and the same income, say $120,000, would have had markedly different tax bills depending on the split of the income between the spouses. The household with two working parents each making $60,000 would have paid $21,187 in personal income and payroll taxes (both provincial and federal). The other house, where only one parent worked outside of the home, would have paid $30,409 in taxes.
Lastly, the minister’s comments about the importance of dealing with “middle-class anxiety” seem detached from his government’s policies. He clearly doesn’t think large budget deficits, with no plan to return to a balanced budget, causes anxiety for Canadians. This stands in direct conflict with recent polling data that shows Canadians are increasingly concerned about deficits. Indeed, in one poll released just after the budget, Canadians ranked deficits as the third most important economic issue facing the government.
It also ignores the uncertainty such deficits and mounting debt introduce into Canada’s economic environment. Such deficits mean a higher likelihood of increasing taxes in the future since deficits are simply taxes deferred.
In response to uncertainty, people take a wait-and-see approach to investment and entrepreneurship or, worse, decide to take their business outside of Canada.
Anemic economic growth and lack of private investment in Canada make it all the more important to improve Canada’s investment climate. Not only has the federal government done the opposite, the minister of finance seems worryingly detached from the policies of his ministry, their effect and the state of the economy.
Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.