Canadian competitiveness has a lot of catching up to do

We learned recently that Ottawa decided to backtrack on the limits imposed on certain large greenhouse-gas (GHG) emitting companies, allowing them to emit more before having to pay the carbon tax. This is surely a step in the right direction, as this tax represents a steep cost for those Canadian companies that are exposed to strong international competition from regions that don’t impose a price on carbon. It’s increasingly clear that the danger of production and jobs fleeing to these less-taxed havens is all too real.

This new sensitivity to economic realities must be applauded, but it’s also a good opportunity to recall that Canada is stagnating, and even losing ground to its biggest competitors. The reason: low Canadian productivity, and slow productivity growth, related to our fiscal and regulatory environment.

In short, the perception of Canada as a safe and profitable haven has been eroded. Costly governmental green initiatives (like the carbon tax), the near impossibility of building energy infrastructure, and the increasing regulatory burden in Canada send the wrong message to investors. In the meantime, the United States, our biggest competitor, is moving in the other direction: massive corporate income tax cut, a lighter regulatory burden, and the shelving of a possible national carbon tax. Add to this the uncertainty surrounding the renegotiation of the North American free-trade agreement and you get a picture that is not very attractive for private risk takers, who are leaving Canada for other, more auspicious jurisdictions. The situation is particularly disastrous in the resource sector, traditionally an area in which Canada has undeniable comparative advantages.

This observation has important repercussions for all Canadians. According to Statistics Canada, between the first quarter of 2008 (and so before the 2008-09 recession) and the first quarter of 2018, companies’ real private investment increased by just 2.6 per cent, despite a real 18.6-per-cent increase in GDP. And things have gotten worse since 2014, a period of prosperity. Foreign direct investment in Canada (the sums invested by foreigners in real productive assets in Canada) recently plummeted to its lowest level in eight years, while Canadians are increasingly investing abroad.

One example among others: In 2017 alone, several energy projects, valued at $84-billion, were abandoned in Canada. And this figure doesn’t include the abandonment and subsequent nationalization of the Kinder Morgan pipeline.

One of the results of this pitiful investment performance? Canada’s productivity growth is anemic. It increased by only 48 per cent between 1981 and 2015, versus 67 per cent in the United States, 75 per cent in Sweden, 64 per cent in Belgium, and 108 per cent in Japan. Quebec was even worse than Canada as a whole, with growth of just 39 per cent. This comparatively poor performance undermines our economic growth, our government revenues, and ultimately Canadians’ salaries and incomes.

If we want to stop losing ground, we have to take the bull by the horns and review from top to bottom the public policies that impact investment in Canada. We absolutely must review business taxes and regulations, in order to simplify them and reduce their cost for companies. One particularly effective reform option would be to adopt a proportional tax rate of 10 per cent for all businesses, instead of this rate being reserved for SMEs and a higher rate of 15 per cent applying to larger companies, as is the case at present.

In addition, the federal and provincial governments should agree on maximum time frames within which a project would receive all necessary authorizations, so as to avoid ridiculous delays. And consultations should be limited to the communities directly affected, not open to all organized groups that wish to insinuate themselves into the debate. The national carbon tax, another cost for companies, must also be reconsidered, so long as our biggest trading partner chooses not to follow this path.

Our prosperity depends, now and in the future, on our ability to attract investors. We need to start by admitting that when it comes to competitiveness, Canada has quite a bit of catching up to do.

Germain Belzile is a Senior Associate Researcher at the MEI. The views reflected in this op-ed are his own.

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