Figuring out what was the most important part of Finance Minister Bill Morneau’s third federal budget, delivered at the end of February, started out as a multiple-choice test without an obvious right answer.
Was it the new parental benefit, designed to nudge dads to become more involved in taking care of babies, and thus encourage new moms to return to the workforce? Maybe the Canada Workers Benefit, which is worth a no-doubt welcome extra $500 a year to someone scraping by on just $15,000? Or the billions in new funding for First Nations health care and child services?
Those were the sorts of signature progressive measures that Morneau and Prime Minister Justin Trudeau touted when they were selling Budget 2018.
But for hard-headed business lobbyists and bank economists fretting about where Canada stands after President Donald Trump slashed U.S. taxes, the most interesting line in Morneau’s 367-page plan turned out to be tucked away in Annex 1 on page 296. “Over the coming months,” patient readers discovered there, “the Department of Finance Canada will conduct detailed analysis of the U.S. federal tax reforms to assess any potential impacts on Canada.”
As the budget’s upbeat, activist elements faded into the background over the weeks after Morneau tabled it, a sense of urgency grew around that initially overshadowed promise to take a hard look at implications of dramatically lowered U.S. taxes. After all, the U.S. Congress had erased a key Canadian advantage by passing a tax-cut package late last year. According to economists at the University of Calgary, the crucial “marginal effective tax rate” on new business investment in the U.S. plunged to 18.8 per cent from 28.4 per cent, a significant notch below the 20.3 per cent Canadian rate that had previously looked so attractive.
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Well before Morneau tabled his budget, business groups and private-sector economists were clamouring above all else for a response to the U.S. tax cut. They didn’t get it. Instead, the budget emphasized goals like gender equity and funding science—worthy themes, no doubt, but not exactly a direct response to spreading anxiety (largely Trump-generated) about Canada’s future prosperity. And polls show it’s not just experts but also ordinary voters who are increasingly uneasy.
In an interview with Maclean’s, though, Morneau argued that the underlying strength of the Canadian economy means there was no need to rush to react. “The tax changes in the United States present a different environment,” he allowed, but added, “and the frame, as we think about Canadian jobs, is that we’re in a good position.”
In fact, that’s no empty brag. Few economists would dispute that Canada’s economy has been on a nice roll. Not surprisingly, Morneau points in particular to strong job-creation data. Canada’s unemployment rate fell to 5.7 per cent by the end of 2017, its lowest level since 1976, when another Trudeau was prime minister. A net 423,000 jobs were added last year, and, even better, those were nearly all full-time positions. Incomes rose more than four per cent overall, sufficient, TD Economics notes, for gains in wages and salaries to outpace borrowing costs for Canadian households, which tend to carry a lot of debt.
Yet the Trudeau government doesn’t seem to be reaping much credit for presiding over demonstrably good times. In the weeks after Morneau released his fiscal plan on Feb. 27, poll after poll tracked the previously high-flying federal Liberals slipping behind the rival Conservatives. Late last month, for instance, Ipsos pegged Tory support at 38 per cent, the Liberals at 31 per cent and the NDP at 23 per cent.
Digging deeper into those numbers, Trudeau has lost ground, according to the polling firm, among solidly middle-class voters, with the Tories garnering 41 per cent support among Canadians earning $60,000 to $100,000, far ahead of the Liberals, who were tied at 26 per cent in that income bracket with the NDP. Ipsos’s poll of 1,003 Canadian adults, conducted online March 21-23, also found that only 61 per cent thought the economy is in good shape, down ﬁve points in roughly the month after Morneau unveiled his budget.
Even with the fall 2019 election still a long way off, those have to be troubling numbers for a party that cruised to power in 2015 on a platform pointedly entitled A New Plan for a Strong Middle Class. Of course, there’s more to middle-class political sentiment than misgivings about how the economy is faring. Trudeau’s unfortunate trip to India in February—complete with his over-the-top outfits and news that a convicted former terrorist was invited (then uninvited) to an official Canadian reception—did its damage. Last fall’s noisy, messy Parliament Hill battle over Morneau’s tightening of tax rules on small businesses also seemed to dent the Liberal brand in some quarters.
But veteran pollster Darrell Bricker, CEO of Ipsos Global Affairs, says the Liberals are also failing at the essential task of selling Morneau’s plausible case that the economy is purring. He notes that a lot of their messaging has stressed inequality and injustice, like women still not being fairly paid compared to men, the rich raking in more than their share and the perennial, profound grievances of Indigenous communities.
“They’re running around talking about people being left out,” Bricker says. “If they believe happy days are here again on the economy, that’s certainly not what their policies are saying, not what their rhetoric is. If they think people are going to pick up on this intuitively, time has shown that is not a good communications strategy.”
Bricker contends that the Liberal economic narrative went badly awry last fall with Morneau’s small-business tax reforms. He targeted the ways well-off taxpayers often use private corporations to defer paying taxes on invested saving, and also to split income with spouses and adult children who don’t really work in the family business.
The problem, Bricker argues, is that resistance to Morneau’s clampdown came from farmers, small-business owners and doctors, none of whom Canadians are naturally inclined to see as “fat cats”—a label far easier to slap on Morneau, with his house in the south of France, or Trudeau, who infamously vacationed on the Aga Khan’s private Caribbean island.
All things being equal, though, Canadians aren’t necessarily averse to a federal finance minister who brings a certain upper-crust aura to managing the nation’s taxing and spending. In the Brian Mulroney era, it was Rosedale-bred former investment executive Michael Wilson; under Jean Chrétien, establishment scion and ex-shipping mogul Paul Martin. As the wealthy one-time head of Canada’s top pension-and-benefits company, Morneau seemed cut from the same bespoke cloth. But his track record so far has often looked more of a piece with Trudeau’s progressive branding than an extension of his own Bay Street pedigree.
Arguably Morneau’s strongest policy suit to date has been lending a hand to the lowest-earning Canadians. David Macdonald, senior economist at the left-leaning Canadian Centre for Policy Alternatives, estimates roughly 500,000 Canadian could be lifted out of poverty by three key Morneau moves—the Canada Child Benefit for parents, enhanced Guaranteed Income Supplement payments to low-income seniors and this year’s replacement of the old Working Income Tax Benefit with the more generous Canada Working Benefit for low-wage earners.
“I actually think it’s quite positive, and I’m a bit surprised they haven’t themselves highlighted it more,” Macdonald says of the suite of anti-poverty measures. “Maybe it isn’t ‘middle class’ enough.”
Morneau bristles, however, at the suggestion that his policies designed to lift those at the low end of the income scale could be characterized mainly as redistributing income. He argues that with Canada’s labour force aging and the economy bumping up against its maximum capacity, adding incentives for anyone to get a job is essential.
The imperative to see more potential workers enter the labour force is something he’s talked about, he says, with the likes of Janet Yellen, former chair of the U.S. Federal Reserve. “What the Canada Workers Benefit should do,” Morneau says, “is to drag people into the economy who don’t have the ability to be there if they don’t see that additional benefit.”
Packaging all sorts of socially progressive policy as smart long-term economic strategy is an ongoing Liberal storytelling challenge. But the task immediately at hand, as Morneau admits, is deciding what to do about those Trump tax cuts.
Among those urging him to act, John Manley, president and CEO of the blue-chip Business Council of Canada (BCC)—and a former Chrétien-era Liberal ﬁnance minister—might just be the most prominent. And Manley’s verdict on Morneau’s 2018 budget was withering, as he declared that it “all but ignores Canada’s serious tax-competitiveness challenges.”
Although the BCC represents the country’s top 150 companies, Manley brings a unique feel for recent political history to his role as chief Ottawa lobbyist for Canada’s corner-office dwellers. Back in the late 1990s, he was among a small coterie of Liberal MPs who pushed the party, then languishing in opposition, toward the deficit-cutting, free-trading policy mix that prevailed during the Chrétien era. As a cabinet minister—in a succession of top portfolios including Industry, Finance and Foreign Affairs—he solidified his reputation as a pillar of the Liberals’ fiscally cautious, pro-business wing.
When it comes to sizing up Trump, Manley’s starting point is mainstream Liberal apprehension. “I think most Canadians—and I’d be in that category—are uncomfortable with the Trump presidency,” he says. “But it has to be said from a business point of view that a lot of what he’s done, on issues like taxation or regulation, is welcome.” Ordinarily, Canadian exporters would stand to benefit from any upswing in U.S. private-sector action. But with the outcome of the NAFTA renegotiation insisted on by Trump far from certain, Canada’s future access to the U.S. market looks iffy, leaving investors understandably skittish.
And that explains, in part, troubling trends in how foreign private-sector players see Canada now. Foreign direct investment, a key driver of growth and an indicator of how the world views Canada, fell 26 per cent in 2017, the third year in a row of declining FDI.
Meanwhile, Manley says “massive amounts” of American capital that had been invested abroad is coming home to the U.S. to take advantage of Trump’s tax cuts and regulatory reductions. “The game has changed before our eyes,” he says. “We have to not rush into something, but be very thoughtful about how we reposition ourselves.”
Manley says tax competitiveness isn’t the only issue. Canada is also increasingly seen as a tough nut to crack when it comes to gaining regulatory approval for big projects, notably oil and gas pipelines. In early February, Environment Minister Catherine McKenna tabled a new Impact Assessment Act, promising clarity and reasonable timelines for approving—or rejecting—an estimated $500 billion in planned resource projects over the next decade. The business community remains wary. “A lot of companies are not so sure,” Manley says. “There’s going to be a period of finding out how it functions in practice.”
More broadly, he sees the Trudeau government balanced uneasily between a natural inclination to spend, innovate on policy and redress injustices, and the necessity to act on growing pressures to cut taxes and show restraint. Where are Canadian voters leaning on that fundamental choice? There’s no simple answer, but Manley says he’s watching to see “how it plays out” in the campaign leading to Ontario’s June 7 election, which pits Premier Kathleen Wynne’s deficit-spending Liberal government against Doug Ford’s populist version of a constrained Conservative alternative.
Wynne’s Liberals, even more than their federal cousins, express frustration over what they see as a baffling failure of voter opinion to reflect good economic news. They’ve got a point. Ontario has posted enviable GDP growth for four years running, including a solid 2.7 per cent last year.
Maybe deeper factors are feeding unease. Benjamin Tal, deputy chief economist at CIBC World Markets, tracks the growth of precarious, lower-quality jobs—trends hidden beneath the widely cited unemployment and job-creation stats. “The fact that people are feeling vulnerable when the job market is at its peak tells you that it will feel much worse when the job market slows down,” Tal says.
That slowdown is inevitable, and Trudeau has to hope it comes after next year’s election. Morneau has to be working to forestall the downturn. Some factors could be shaping up in their favour. Morneau points out that multibillion-dollar deals with the provinces to pay for big infrastructure projects are finally completed, and his new Canada Infrastructure Bank should be financing its own deals by the end of this year. “Would I rather that we were a little bit faster? Of course,” he says on the two-pronged infrastructure strategy. “But I think we’re making really good progress, and I’m pleased with where we’re at.”
That’s the default, reassuring tone cultivated by any finance minister. But there is another element of Morneau’s post-budget positioning that’s less routine. When finance ministers talk about the economy, they’re almost always eager to lay claim to having a long-term vision, leaving short-term thinking to lesser mortals. But while Morneau says Budget 2018 was all about the long term, he’s now refocusing on short-term issues—especially those emanating from the White House. “NAFTA, we’re on it,” he declares. “We need to think about the tax changes in the United States.”
In practical terms, he says that means he’ll spend the next few months “listening to Canadians and Canadian business leaders.” From the latter group, he won’t be hearing just straightforward pleading for lower tax rates on corporate income. Dennis Darby, president of Canadian Manufacturers & Exporters, says the emphasis should be targeted tax relief that encourages companies to invest in innovation, including not only equipment but also software.
Darby points to Britain’s so-called “patent box” incentive scheme, under which high-tech firms pay lower taxes on income from innovations they commercialize in the U.K. “Canada does a heck of a good job of supporting and funding basic research,” he says, repeating a familiar critique. “What we’re not so good at is providing incentives for commercializing that research in Canada.”
Indeed, Morneau’s latest budget bets billions on basic scientific research, pouring $925 million in new funding over five years into the federal councils that finance university and hospital research. But that’s the sort of long-term strategy he now concedes must take a back seat to closer attention to short-term concerns.
Like it or not, it’s the Trump era, after all, and that disconcerting reality—in the form of the pressing question of tax competitiveness—is now plunked in the middle of Morneau’s desk. How he decides to handle it in the coming months could go a long way to shaping the Trudeau Liberals’ bid to escape their current slump and try to return to form for their fall 2019 second date with Canadian voters.
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