Analysis: A Canadian Economic Statement, Inspired by a US President

Donald Trump helped write the Trudeau Government’s Fall Economic Update, but instead of copying the American President’s low tax economic prescription, Ottawa instead is giving tax breaks to businesses in specific industries, providing those businesses invest in the economy first.

Finance Minister Bill Morneau is giving Canada’s manufacturers and clean energy industries immediate tax write offs for new machinery and equipment, and offering an accelerated capital cost write off to businesses in all other sectors of the economy.

Morneau announced the tax changes in his fall fiscal update, as he rejected calls from business and the Conservative opposition to match dramatic, across the board corporate tax cuts, enacted in the United States at the end of last year.

The Minister said the most important economic development in the past year was the successful renegotiation of the trade agreement with the United States and Mexico, formally known as NAFTA and now as the USMCA.

“We have preserved access to our most important market, and provided certainty for the millions of Canadians who’s jobs depend on it,” he said, referring to the $2 billion dollars worth of trade that crosses the Canada-US border each day.

“But just because we share a trade agreement with the United States doesn’t mean we will always agree with their approach.”

According to Mr. Morneau, matching the American tax cuts would add billions to the deficit and debt, worsen income equality, and make government services that millions of Canadians depend on less affordable.

“That’s not what we want for Canada, and it is not what Canadians want for themselves,”

And that is what Morneau and the Liberals are hoping. Instead of across the board tax cuts that would starve the government of revenue, they are saying that businesses that spend money and invest in Canada will benefit at tax time, but to benefit on your taxes you have to invest in the economy.  Ultimately, that investment will create jobs, economic activity and tax revenue.  An across the board corporate tax cut might do the same. But it could also go to increasing dividends with no accompanying job creation, and much fewer economic benefits to the economy as a whole.

The green energy equipment write off is another way the Liberals want to differentiate themselves from the Conservatives.  The Government wants to illustrate that it has more than just the tax on carbon as its environmental program to cut green house emissions. The Conservatives have made this a line in the political sand both federally and provincially, refusing to co-operate with Ottawa and impose a carbon tax in the provinces where Tories are in office. Morneau again repeated the Liberal pledge to impose a federal tax in provinces that don’t have one – and then turn the money collected directly to the residents in those provinces to help pay for higher prices the tax will create.

And while Morneau said mirroring the Trump administration’s tax cuts would have a devastating effect on government deficits and debt, the tax breaks he is offering are not without cost.

According to Finance Department figures released with the update, in the next fiscal year which begins next April 1st, the federal deficit will climb to $19.6 billion from the estimated deficit of $18.1 billion in the current fiscal year. According to the projections, after next year the deficit starts trending down again, to $11.4 billion in fiscal year 2023-2024.

Even though the new deficit projection increase the federal debt from $687.7 billion in the current fiscal year to $764.7 billion in fiscal 23-24, Morneau says economic growth will mean that the way the government measures the impact of the debt, through the ratio of the debt to the total Gross Domestic Product, will actually improve, from 30.5 per cent next fiscal year to 28.5 per cent five years from now.

Of course all of those figures are just projections.  Economic growth could slow and the deficit and the debt would grow, or the economy could continue strong growth, interest rates could stay low and the debt-to-GDP ratio could shrink.

And then there is the unknown that helped shape the update today. What will Donald Trump do to, and with, the American economy? Will his trade war with China plunge the United States into a recession, and if that happens south of the border can the same fate be avoided here?

Longer term, Ottawa wants to minimize that exposure to the U.S. economy by using both the Free Trade agreement with the European Union and the new Trans-Pacific Partnership to diversify our economy. The economic update even set a target for doing that:  Fifty per cent more trade with the countries in those agreements by 2025.

But that is for the future. The economic update was for the here and now. The next election is on October 21, 2019.

Don Newman is Senior Counsel at Ensight and Navigator Limited, a Member of the Order of Canada, Chairman of Canada 2020 and a lifetime member of the Canadian Parliamentary Press Gallery.