Liberals Improve Business Competitiveness at Expense of More Deficits

November 21, 2018 Updated: November 21, 2018

OTTAWA—The federal Liberals have come up with a $16 billion answer to Canada’s competitiveness concerns.

Ottawa’s long-awaited plan to help Canada compete with the United States for investment dollars is the centrepiece of its latest fall economic statement, which forecasts slightly deeper annual deficits over the coming years.

Finance Minister Bill Morneau had faced pressure from the business community to take the big step of lowering the corporate tax rate across the board as his response to major tax and regulatory reforms in the United States.

In the Nov. 21 economic update, Morneau chose a cheaper approach—but one that will still use billions worth of extra federal fiscal space to offer tax incentives for businesses that invest in Canada.

Speaking with reporters, Morneau said Canada is benefiting from “a very good situation” when it comes to the health of the economy and the labour market. After hearing from companies, however, the government decided to do more to encourage investors to open their wallets north of the border.

By far, the biggest-ticket items among the proposed tax measures are changes that would enable businesses to immediately write off the full cost of some types of machinery and equipment, and allow companies of all sizes and in all sectors to expense a larger share of newly acquired assets.

The new writeoffs alone are expected to lower federal revenues by about $14 billion over the next half-decade.

Spending the Windfall

A stronger economy has given the government about $22 billion in extra fiscal room over the coming years, compared to what federal forecasters projected in last February’s budget. But the new initiatives will also contribute to slightly larger-than-expected annual shortfalls, beginning next year.

The government is now projecting deficits of $18.1 billion in 2018–19, $19.6 billion in 2019–20, and $18.1 billion in 2020–21. After 2020–21, the annual shortfalls are expected to shrink each year to $11.4 billion in 2023–24.

The fiscal update contains no timetable to eliminate the Liberals’ deficits. The government has drawn almost daily criticism from the opposition Conservatives and some economists for failing to provide a timeline back to balance, especially with the economy running close to full strength.

Following the 2015 election, the Liberal government abandoned pledges to run annual deficits of no more than $10 billion and to balance the books by 2019. Instead, it has focused on reducing the net debt-to-GDP ratio each year.

The debt-to-GDP ratio is now projected to gradually fall from 30.9 percent in 2018–19 to 28.5 percent in 2023–24.

Morneau insisted the government is on the right path by investing in the economy to help create jobs and to promote growth, while at the same time lowering the debt burden. Morneau warned that some critics appear to be advocating an “austerity” approach.

“For Canadians to be optimistic about their future, they need to see the prospect of jobs for them, for their children,” he said. “That’s what is going to keep our economy going.”

Many industry stakeholders welcomed the government’s business tax changes.

One expert said the new accelerated investment writeoffs will provide a boost to business, even though he thinks Canada’s corporate tax regime was still competitive even before the Nov. 21 announcement.

“But I think there was a lot of pressure on them to do something in order to regain the relative advantage compared to the U.S.,” said Randall Bartlett, chief economist with the University of Ottawa’s Institute for Fiscal Studies and Democracy.