Home Economy A 4% tax cut is ‘doable’: What Corporate Canada wants to see in the Federal Budget — and what it might get

A 4% tax cut is ‘doable’: What Corporate Canada wants to see in the Federal Budget — and what it might get

by Naomi Powell

Finance Minister Bill Morneau will deliver his 2019 pre-election budget on March 19 amid slowing domestic and global economies, a volatile trade landscape and a political scandal that has already cost the federal government two cabinet ministers.

What a difference a year makes.

“A year ago we had rising interest rates, global momentum was strong, we were going to have pipelines and so on,” said Sebastien Lavoie, chief economist at Laurentian Bank Securities. “Now, everything has flipped. So the decisions will be different.”

Following a fall economic statement that embraced business competitiveness as a theme, Morneau has signalled a return to bread and butter middle class issues that appeal directly to Canadians.  That likely means a greater focus on seniors, prescription drug costs and helping millennials get into the housing market — and less attention for headline business issues.

“They’ve been fairly public about where their priorities are and it’s a lot of pretty traditional stuff,” said Doug Porter, chief economist for BMO Capital Markets. “Still I think it’s going to be a very interesting budget. The stakes seem a lot higher this time around for a variety of reasons, the most obvious being that we’re heading into an election.”

A tax cut would no doubt top the wish lists of many Canadian business owners, particularly after a pair of aggressive U.S. reforms took effect in January 2018: A full and immediate write off of investments in machinery and equipment and a deep reduction in corporate tax rates that undercut Canada’s long-held advantage. Morneau addressed the first reform in the fall economic statement when he introduced immediate write offs of capital investments and extended them until 2024 — two years longer than the U.S. measures.

With business investment slumping — it dropped 2.7 per cent in the fourth quarter — some think the time is right to address the tax issue.

“If the government wants to expand the economy forcefully, it will cut both corporate and personal income tax rates significantly,” said David Rosenberg, chief economist and strategist at Toronto-based Gluskin Sheff + Associates Inc.

A four per cent cut in the corporate tax rate would be “doable and at no cost” if the government backed off other “pet projects,” Rosenberg believes.

Government finances suggest there’s room for some cuts, Porter said. The deficit is running at $9 billion below the projected $18.1 billion for the current fiscal year, and though that will adjust in the coming months, it’s unlikely to blast above projected levels, he added. That in mind, tax cuts might provide just the gentle stimulus the slowing economy needs.

But that doesn’t mean it will happen.

“There’s certainly a case to be made for cuts, I just don’t think it’s on this government’s agenda,” Porter said. “I wish I were wrong because personally I think the number one priority is still to strengthen our competitiveness. But I don’t think so.”

What’s more, the Liberals are already facing criticism for abandoning a pledge to run annual shortfalls of no more than $10 billion and eliminate the deficit by 2019 in favour of lowering the net-debt-to-GDP ratio. And though the debt-to-GDP ratio has been “gently” declining, a broad-based tax cut could derail that, Lavoie said.

“To cut taxes, the government will need to show a debt to GDP ratio going through the roof and I don’t think they want to do that with the economy now going the wrong way,” Lavoie said.

Indeed, while the trade wars, falling oil prices and higher interest rates all foreshadowed some weakening in Canada’s economy, fourth quarter data painted an even gloomier picture than expected. GDP rose at an annualized rate of 0.4 per cent in the period — roughly half what economists were expecting as business investment and household spending fell. In all of 2018, Canada’s economy grew at just 1.8 per cent, down from a three per cent expansion in 2017.

“Things just aren’t great right now,” Lavoie said. “There’s rising consumer insolvency, housing markets are slumping. So this needs to be a proactive but targeted budget.”

Rather than slashing rates, one of the most significant things the government could do would be to announce a comprehensive review of the Canadian tax code, said Trevin Stratton, chief economist for the Canadian Chamber of Commerce. A Royal Commission on the tax system could identify the best way to adjust the country’s tax mix and simplify a code that has “bloated” to more than 300 pages, becoming a burden on businesses, he said.

“It’s been 50 years since we’ve done a real review of the tax system and if you look around the world there are a lot of countries that are doing just that,” Strattin said.

Skills training is another area in need of attention — specifically in the areas of lifelong learning and work-integrated learning, he added.

And with deficits of more than $18 billion in each of the last two years and shortfalls projected until 2023-2024, another budget item business owners would like to see is a plan to get the books back to balance, Strattin said.

More “trade enabling infrastructure” to get goods to market would also be welcome.

But the biggest challenges businesses face, according to the Chamber, are regulatory burdens and barriers to interprovincial trade.  A patchwork of rules across the country means it is often easier to trade goods internationally than between provinces, Strattin said.

“Businesses are looking to the federal government to take a leadership position on these issues, to redouble its efforts,” he said. “The budget is a platform for that.”

To the extent there is a big ticket item on Morneau’s spending list, it’s likely to be pharmacare. The government’s advisory council issued an interim report on March 6 recommending the creation of a new agency to manage prescription medications by negotiating prices and creating a formulary of covered drugs. Canadians are currently covered by a range of private and public plans that leave 20 per cent of them paying for their own prescriptions.

Also likely are measures to give millennials a leg up onto the housing ladder. That could mean anything from raising the first-time home buyer tax credit, expanding the current 25-year amortization period to 30 years or easing the stress test rule that requires buyers with insured mortgages to qualify at 200 basis points — or 2 per cent — above the negotiated rate. The stress test, while cooling overheated housing markets in major urban centres, has also made homebuying more difficult in rural markets and other areas.

“I’m skeptical that they can move the needle in a significant way on housing affordability,” said Porter. “And the risk is always that they push house prices up by stimulating demand and it backfires.”

• Email: npowell@nationalpost.com | Twitter: Naomi_Powell



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