Federal budget turns a blind eye, ignores Canada's economic challenges

In the midst of serious concerns over Canada’s economic prospects, and challenges emerging from the United States, Finance Minister Bill Morneau’s 2018 federal budget does nothing to address these problems. 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 Morneau’s budget ignore?

For starters, the budget document itself makes clear that the relatively strong economic growth of 3.0 per cent in 2017 was a blip, and that growth is expected to fall to 2.2 per cent in 2018 and 1.6 per cent in 2019. In fact, the Department of Finance forecasts economic growth will average just 1.8 per cent for the next four decades—compared to the much higher average growth of 2.7 per cent over the previous four decades.

Meanwhile, other industrialized countries are expected to enjoy stronger economic growth in the years ahead, making Canada a laggard. For instance, the OECD projects U.S. growth at 2.5 per cent in 2018.

Declining business investment remains a critical concern for Canada, which is 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 per cent, 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 GDP.

Tellingly, this decline in private-sector investment coincides with a marked deterioration in Canada’s investment attractiveness. Consider that a recent survey of business leaders found 64 per cent thought Canada’s investment climate had worsened in the last five years, owing partly to the growth in the tax and regulatory burden.

Indeed, 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 Ottawa’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. and 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 ongoing NAFTA renegotiations.

It’s no wonder investors are turning their backs on Canada. Morneau’s budget was an opportunity to convince them that Canada remains a desirable place to invest.

But rather than deal with our deteriorating investment climate, the budget turns a blind eye and advances policies focused on platitudes about gender equality, failed industrial policy and more income redistribution.

But 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—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 the upcoming year (2018/19) is pegged at $18.1 billion, with cumulative deficits of $72.8 billion over the government’s first mandate. Recall the Trudeau government campaigned on three years of modest deficits with a balanced budget by 2019/20 and cumulative deficits of $24.1 billion. Now, the government’s own finance department expects deficits to persist well past 2040.

With persistent deficits, which are essentially deferred taxes, Canadians are left wondering by this budget 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, the government chose to turn a blind eye.