The federal Liberals’ Fall Economic Statement will be issued on November 21. We can only hope Finance Minister Bill Morneau is taking the time until then to draft an urgent plan to deal with Canada’s deteriorating competitiveness because it is seriously undermining our standard of living.
The World Economic Forum’s Competitiveness Index ranked Canada 12th overall, after the U.S. (first) and below a number of smaller countries, demonstrating that being small in size need not be an impediment to being competitive. Canada came in a dismal 34th place in the adoption of information and communication technology, a depressing 53rd in regulatory burden and a scary 96th in tariff complexity.
Since 76 per cent of our trade is with the U.S., representing a fifth of our economy, how Canada fares relative to its neighbour is crucial. Unfortunately, we are at a distinct disadvantage on personal and corporate tax rates, resource development, labour productivity, regulatory burdens, internal trade barriers, access to capital, size of market, incentives to invest and encouragement of entrepreneurship. Some of these disadvantages are unavoidable, but most result from dysfunctional policies.
Since lower taxes stimulate investment, savings and consumption, when Canada had a tax advantage we generated superior growth to the other G7 countries for eight years running. But that advantage disappeared in a flash when the Americans significantly reduced corporate taxes and dramatically accelerated depreciation for capital expenditures this year. Furthermore, our punishing personal tax rates discourage foreign skilled workers from immigrating and incentivize highly productive Canadians to move to less confiscatory jurisdictions.
Canada is bleeding capital, with a record net outflow of direct foreign investment last year: $70 billion more in investment left Canada than came in. Merchandise export volumes increased by less than one per cent annually during the past three years, which is particularly disappointing during a period of global recovery. We have a trade deficit in vehicles and auto parts of $25 billion (from Mexico, Korea, China and the EU) and a current account deficit of $60 billion or three per cent of GDP.
Our economic underperformance impacts painfully on Canadians’ everyday lives
Canadian workers generate 25-per-cent less GDP than their American counterparts, because our companies invest less in facilities, equipment and innovation. Economic history demonstrates that lower taxes are more effective than a tax-and-spend approach in countering slower long-term growth, which Canada is confronting due to an aging population and relatively fewer workers.
Nevertheless, the federal Liberal government is determined to impose a controversial carbon tax, forcing one on any province that won’t tax carbon themselves. Cutting through the rhetoric, the prevailing rationale seems to be that we have to do something, anything, to address an existential threat of climate change to humanity. Unfortunately, the chosen something accomplishes nothing as far as countering the threat, since any impact it has on reducing emissions will be so negligible. Moreover, the tax exacerbates our lack of competitiveness and therefore damages Canadian jobs and growth, since very little of the money the feds claim they will rebate to taxpayers will go back to those businesses paying carbon taxes.
Furthermore, U.S. President Donald Trump is aggressively cutting back on regulations. In contrast, Canadian resource development is increasingly mired in court actions and red tape, the latest instance being Bill C-69. The new Impact Assessment Act creates so much risk, delay and cost that no private sector investor will sponsor a major new pipeline project here without a government guarantee.
Canada has been losing $15 to $20 billion annually, or up to one per cent of GDP, because pipeline constraints caused a steep discount to international prices for oil and gas sold to the U.S. The recent record discount represents an annualized loss of almost $47 billion to the Canadian economy and $14 billion to Canadian governments, money that could be used to help those citizens who need it. It is a national disgrace.
Canada obviously needs to diversify its markets, but the domestic situation is at least as bad. Interprovincial trade barriers cost our economy a crushing $50 to $130 billion annually, representing an average $2,700 in a additional income for each Canadian. The Supreme Court’s Comeau decision earlier this year validated provincial tariffs, but that does not prevent the provinces from eliminating them.
People rarely connect the dots between vast missed opportunities and wait lines in emergency, crowded classrooms, inadequate social services and decaying infrastructure. Nor do inefficiency, uncompetitiveness and poor productivity arouse passions among progressives like micro-aggressions, safe spaces for cloistered university students and the rights of returning ISIL fighters. Yet economic underperformance can impact painfully on the everyday lives of too many Canadians.
The Fall Economic Statement urgently needs to announce meaningful tax cuts, aggressive support for resource development and transportation and intense pressure on the provinces to eliminate interprovincial trade barriers. That would indicate the government understands Canada’s competitiveness problem and intends to do something about it.
Joe Oliver is the former federal minister of finance.