Now it’s up to Canadian business to invest in the future

By Medicine Hat News Opinon on November 23, 2018.

So now it’s up to Canadian business. For months corporations and the organizations that speak for them have been leaning on Ottawa, making the case that Canada had to match the Trump tax cuts or see investment drain away to the south.

Finance Minister Bill Morneau came through for them big-time on Wednesday, outlining tax breaks that will cost the federal treasury some $14.4 billion over the next five years.

Wisely, Morneau resisted calls for Canada to match the deep American reductions in corporate tax rates. That would have meant joining a race to the bottom that Canada would never be able to win, and isn’t even sustainable for the U.S. given the vast deficits now being run in Washington.

Instead, he chose to go the route of offering tax breaks that will allow companies in manufacturing and clean energy to write off the full cost of new machinery and equipment right away, and let other corporations write off more of their capital spending at a faster pace.

These are called accelerated capital cost allowances, and they are aimed both at encouraging more investment by Canadian companies and making sure that companies that do business on both sides of the border have no tax reason to spend their cash in the U.S. This is important for, among others, the Canadian auto industry; we want to see the big firms invest in their Ontario plants rather than going elsewhere because they can get a bigger tax break there.

But that’s all theoretical until Canadian businesses actually make the investments that will qualify them for the accelerated tax breaks. The ones that sit on their cash rather then spending on new computer systems or trucks won’t benefit from Morneau’s plan.

The recent past shows there’s no guarantee. For many years Canada had significantly lower corporate tax rates than the U.S., and there was no boom in investment. Too many corporations preferred simply to enjoy their higher profits; shareholders and executives prospered but business investment remained sluggish. The result has been widespread concern that Canada’s competitive edge has eroded badly.

Much better, then, to focus on measures that link business tax breaks directly to investment that has a reasonable chance of actually creating jobs and prosperity beyond those who are already doing just fine in this economy.

Morneau’s “fiscal update” amounts to both the Trudeau government’s response to the Trump challenge, and a course correction for next fall’s federal election.

The finance minister had no choice but to hold his fire in last spring’s budget, when the U.S. corporate tax cuts were still up in the air and NAFTA negotiations were in their early stages.

Things are now a lot clearer on both fronts. Morneau has chosen his path on taxes, and there’s an agreement on trade — although its ultimate fate now that Democrats have more influence in Congress is far from clear.

The Liberals have also chosen to mend fences with business in advance of the next election. A year ago Morneau was fighting with small business over proposed tax changes, but that’s all in the rear-view mirror now. Corporate Canada has reason to be a lot happier with the Trudeau government.

At the same time, the Liberals are sticking with their upbeat view of the Canadian economy and confidently projecting robust growth for the foreseeable future.

There’s a cost to all that in the form of continued deficits — $18.1 billion this year alone, with no date set for when the federal budget might be returned to balance. As long as the economy continues to expand and interest rates remain relatively low (both big ifs), that’s sustainable. But the risks grow the longer we stay on that path.

For now, though, it’s up to Canadian business to seize the opportunities it is being handed and invest in the future.