The Bank of Canada, the International Monetary Fund, and the Organization for Economic Co-operation and Development all say the Canadian economy is less competitive than it could be.
That’s been true for years, but only recently has the problem become acute. The uncertain future of the North American Free Trade Agreement (NAFTA) has exposed how little Canada has done to find markets outside the United States.
And President Donald Trump’s business-tax cuts eliminated one of Canada’s most important comparative advantages, leaving it with nothing to offset worries over excessive electricity prices, relatively higher wages, and chronically weak productivity rates.
Observers have tended to exaggerate the depths of the pit into which our economy has sunk. That wouldn’t matter, except that Prime Minister Justin Trudeau and his advisers get defensive when those they view as less progressive as themselves try to tell them what to do. Consider Finance Minister Bill Morneau’s last budget. The document was all but silent on the question of competitiveness, even though every business lobbyist and economic think-tank in the country was screaming for a response to "Trumponomics".
Canada has lots of mojo, according to technology entrepreneurs. Toronto, for example, added 29,000 tech-related jobs in 2017, the most in North America by a wide margin, according to a survey by CBRE Group Inc., the Los-Angeles based property manager.
Conservative Leader Andrew Scheer and various business lobbies undermine their own credibility by trying to make a strong economy look weak. And that’s too bad, because they are right: Canada does have a competitiveness problem. The country’s share of international flows of foreign direct investment have fallen to about 2% from about 4% in 2014, and both Australia and Mexico now do better.
Taxes are part of the story, but it’s unclear whether they are as important as advocates such as the Canadian Manufacturers and Exporters (CME) would have us believe. In June, the CME called on governments to immediately reduce the combined federal and provincial levy on corporate profits to 20% from 28%. Once that’s done, it wants Trudeau to appoint a Royal Commission to review the tax system.
An independent review is an excellent idea. Both the International Monetary Fund and the Organization for Economic Co-operation and Development have called on the Trudeau government to take a hard look at the tax code because it is overly complex, and because it contains too many examples of policies that reward idleness instead of ambition.
