The finance minister said what? Part 2

Federal Finance Minister Bill Morneau (pictured above) recently appeared on BNN Bloomberg and made a number of incredibly worrying statements indicating that he (and the federal government) are either wholly misunderstanding the significance of the country’s competitiveness challenges or simply choosing to ignore them. These statements were reiterated in a column published in the National Post.

The backdrop to the interview is that yet more business leaders have come out publicly to demand action by Ottawa to deal with eroding competitiveness. In just the last week or so, the CEO of Royal Bank of Canada, David McKay, said Canada has a “critical competitiveness challenge” and recommended it be addressed with “tremendous urgency.” McKay’s comments dovetailed with statements made by the former governor of the Bank of Canada, David Dodge, who said Canada was “shooting itself in the foot” in terms of competitiveness.

Minister Morneau’s initial response started out positively:

“My job and the job of our government is to ensure Canada remains competitive. Obviously we need to start with the facts of where we’re at. People can pick and choose different statistics.”

The problem is that the minister then pivoted to a rather odd statistic to try to show how Canada remains competitive. Specifically, in response to the question about the growing “chorus” of business leaders raising concerns about competitiveness, Minister Morneau began discussing how the national unemployment rate is at a 40-year low.

Beyond the straightforward question of why the unemployment rate is a good measure of competitiveness, there’s a deeper concern. The minister is clearly unaware of rather major changes occurring in the country’s labour market.

Specifically, Canada’s population, like every other industrialized country, is aging. That means the share of the population active in the labour force—known as labour force participation—is falling. It also means that the unemployment rate may not be as good a barometer of the labour market as it used to be. For instance, the share of people employed has fallen from a peak of 63.4 per cent in 2007 and 2008 to 61.7 per cent as of March 2018 (seasonally adjusted). The longer-term trend is clear—less people are employed as a share of the overall potential labour force.

More importantly, though, BNN host Amanda Lang tried to return to the issue of competitiveness and investment and specifically asked a question regarding foreign investment in Canada. The minister’s response was that “business investment was up 8 per cent in 2017.”

There are two aspects of this response to worry about.

First, Minister Morneau seems quite unworried about the dismal state of private-sector investment in Canada. According to Statistics Canada data, since peaking in the fourth quarter of 2014, total business investment adjusted for inflation—excluding residential housing—is down almost 17.0 per cent. Private-sector investment in factories and other structures is down 23.3 per cent. And investment in intellectual property is down 13.8 per cent.

The minister is correct that there was a slight uptick in 2017 but it was only 2.6 per cent after accounting for inflation, and it’s still fairly concentrated in the housing sector. The actual 2.6 per cent increase is a far cry from the stated 8.0 per cent increase.

More importantly, the minister ignored the question on foreign investment, which has collapsed. Foreign direct investment (FDI) in Canada was $31.5 billion in 2017, down 56.0 per cent since 2013 when it totalled $71.5 billion. And the decline is even more startling if you look back to when the data series started in 2007. FDI totalled $125.5 billion in 2007, which means the decline since 2007 totals an almost unimaginable 74.9 per cent.

Simply put, foreigners do not see Canada as a competitive destination for investment. And Minister Morneau’s “head-in-the-sand” approach to competitiveness questions doesn’t improve our international reputation or the prospects for the future. Indeed, the minister’s lack of understanding and misinformation was on full display when discussing Canadian tax competitiveness.

“We are looking carefully at the U.S. tax changes to make sure that our tax system remains competitive. But we’re starting from a position of strength… But what I won’t do is accept the frame that we’re not competitive because we’ve clearly seem to be putting ourselves in a very good position over the last year and a half… Our job is to deal with that in a way that considers the facts. I will listen to people’s concerns and also listen about what they think we should be doing about moving forward. But it’s going to be fact-based. It’s going to start with the fact that our tax rates remain competitive.”

It’s just not clear where the minister is getting these “facts.” First, our business tax rate, which prior to 2018 provided Canada an advantage vis-à-vis the United States, has been completely erased. Prior to the sweeping tax reforms in the U.S., Canada’s effective tax rate on new investment compared well with the U.S.—20.9 per cent versus 34.6 per cent. The U.S. reforms have decreased their effective rate to 18.8 per cent, which means Canada has no business tax advantage.

Second, the minister’s comments could certainly not have been meant to relate to Canada’s personal income taxes. Canada has seen a steady climb in personal income tax rates applied to entrepreneurs, business owners, professionals and skilled labour to the point where seven of the 10 provinces now have rates in excess of 50.0 per cent, with the remaining three within a stone’s throw of the halfway mark.

And it’s not just that Canada has high personal income tax rates, but that the rates apply to comparatively low levels of income. Consider that Canada’s top federal income tax rate applies to taxable income over C$205,842 versus the U.S. top federal rate that applies to income over US$500,000.

The minister of finance has again displayed a profound misunderstanding of the problem or a willingness to ignore it, neither of which will result in much-needed reforms to improve the country’s competitiveness and long-term economic prospects.