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Pre-budget letter to The Honourable William Morneau, Minister of Finance

Date: December 15, 2016

Publication Type: Letters

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Macroeconomic and Fiscal
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Publications Archives: Letters

Dear Minister Morneau,

On behalf of the men and women who lead Canada’s largest companies, I am writing to share our thoughts as you and your colleagues prepare to introduce the coming federal budget.

Fundamentally, we are optimistic about Canada’s place in the global economy. Our country stands as a beacon of openness, tolerance and opportunity in a world increasingly characterized by protectionism and inward-looking politics. In that respect, Budget 2017 comes at a time of great opportunity for Canada.

Yet for all of its strengths, our economy continues to underperform in the face of weaker-than-expected global demand and sustained low commodity prices. It is therefore essential that this budget take concrete steps to promote growth and buttress Canada’s ability to compete in the global economy.

Your government has at its disposal a number of important policy instruments and tools to reinforce investor confidence and promote business investment – both of which would strengthen economic growth and encourage the creation of new, high-value jobs.

Canada, of course, is not alone in its desire to attract new investment and talent. For that reason it is essential that all proposed budgetary measures be evaluated through a competitiveness lens. With a view to enhancing Canada’s long-term economic performance, we recommend action in the following five priority areas:

Infrastructure

Carefully targeted spending on infrastructure can bolster our country’s long-term competitiveness. Canada’s business leaders welcome your intention to increase infrastructure spending, including through the creation of the new Canada Infrastructure Bank. In our view, the emphasis should be on projects that will encourage trade and improve productivity, such as ports, railways, roads and airports.

Canada is a globally recognized leader in public/private partnerships, and our governments should leverage P3s whenever appropriate. P3s can significantly cut construction costs, reduce government risk, and allow for long-term planning to address aging infrastructure. Likewise, we support appropriate user fees for major infrastructure projects as a means of reducing pressure on the federal government and encouraging the efficient planning and use of infrastructure.
At the same time, your government can spur additional private sector investment by providing the resources required to ensure timely and efficient regulatory consultation and approval processes.

Innovation
To thrive in the 21st century global economy, Canada must be home to the world’s most creative, entrepreneurial and skilled people. The new Global Skills Strategy, which supports high-growth companies in attracting international talent, is the kind of smart public policy that will help Canadian businesses pull ahead. The next step in positioning Canada as a magnet for highly skilled workers should be a review of Canada’s personal tax rates, recent changes to which have put the country at a competitive disadvantage when it comes to attracting and retaining top talent.

At the same time, we encourage you to strategically target efforts to support the growth of innovative firms. A recent report by Andrei Sulzenko for the Institute for Research on Public Policy noted that successive federal governments have created programs. To reduce confusion, eliminate overlaps and increase efficiency, we encourage the federal government to focus on facilitating the development of large-scale industry-led clusters, coordinating, aligning, and simplifying private sector R&D support and leveraging government procurement to drive private sector R&D.

A further priority is to ensure that small but promising Canadian companies have access to the venture capital they need to scale up. In recent months a group of Canadian business leaders have been discussing the creation of a private-sector-led fund that would invest in high-potential startups and help them achieve their full potential. We endorse this proposal and encourage you and your officials to give it your support.

Tax competitiveness

In Budget 2016, your government announced a wide-ranging review of tax expenditures. We support this exercise to the extent that it makes possible a simpler, more streamlined tax system that is easier to administer and imposes less of a burden on taxpayers. At the same time, we urge you not to succumb to the temptation to use the savings generated by the elimination of inefficient tax expenditures to finance new spending. Instead, the goal of tax reform should be to broaden the tax base and lower rates – and, in so doing, to strengthen Canada’s ability to attract and retain investment and talent.

This is a key point, because our country’s tax competitiveness is slipping. While corporate tax rates in Canada at the provincial level have been creeping up, other countries – notably the United Kingdom, Japan, and France have been moving in the opposite direction. Canada’s combined federal/provincial corporate tax rate is above-average among the OECD economies. What is more, there is now growing political support in the United States for significant cuts to both personal and corporate tax rates. If and when such reforms are implemented, there is strong possibility that investment and highly skilled workers will gravitate across the border.

Trade

Canada’s prosperity depends heavily on access to international markets. Since the 1980s, our governments have pursued a range of bilateral and multilateral agreements to enhance the free movement of goods, services and capital. Trade liberalization has created countless new jobs while generating benefits for all regions of the country; globally, it has lifted hundreds of millions of people out of poverty.
Nevertheless, Canadian trade policy is at a turning point. The global financial crisis that struck in 2008-2009 has given way to a period of slow growth, and that in turn has caused a number of the world’s most advanced economies to turn inward. Protectionism is on the rise and prospects for significant new trade agreements, such as the Trans-Pacific Partnership or the Transatlantic Trade and Investment Agreement between the United States and the European Union, have declined if not disappeared.

In this new environment, we believe that Canadian trade policy should reflect three main priorities:

  1. Building on the Canada-U.S. partnership and avoiding disruptions to cross-border supply chains;
  2. Identifying and pursuing new trade opportunities where they exist;
  3.  Ensuring that the benefits of new trade deals, such as the Canada-EU Comprehensive Economic and Trade Agreement (CETA), continue to be shared across Canadian society.

Millions of jobs on both sides of the Canada-U.S. border depend on bilateral trade. Access to U.S. markets is fundamental to our long-term prosperity, and it is essential that we preserve our supply chains and investment platforms. A Canada-U.S. strategy should ensure the secure and efficient movement of goods and people through regulatory reform, border security and labour mobility cooperation.

At the same time, Canada must work actively to diversify our existing trade relationships. We recommend:

  • concluding ongoing trade negotiations with Japan and India;
  •  launching trade negotiations with China;
  •  exploring talks with the Association of Southeast Asian Nations, a group which includes four members of the Trans-Pacific Partnership plus the emerging market economies of Indonesia and the Philippines.

As part of this renewed trade strategy, the government should reform Canada’s supply management system. Restrictions on dairy and poultry imports are inconsistent with our country’s reputation as a champion of open markets. Eighty per cent of Canada’s agricultural sector operates without these restrictions, and supply management both diminishes our credibility with our trading partners and limits international opportunities for Canadian companies and workers.
All trade negotiations should include support for industries and workers who would be affected by new agreements, to equip them to compete in a changing environment. In the case of supply management, the government should fairly compensate farmers for their quota and develop transitional programs to help them compete internationally.

Fiscal stability
Minister, we urge you to keep an eye on the fiscal horizon. While we share your view that targeted investments in infrastructure and innovation create a foundation for long-term economic growth, we also know from experience that rising public deficits and debt only serve to undermine consumer and business confidence, with negative consequences for business growth and job creation.
In Budget 2016 the government committed to reducing the federal debt-to-GDP ratio over the five-year period ending in 2020-21 and returning to balanced budgets. Nevertheless, we remain concerned that the Fall 2017 economic statement neither explicitly mentioned these targets nor established a timeline for balancing the budget. We urge the government in Budget 2017 to set out in detail a fiscally sustainable path and commit itself to a specific debt-to-GDP target.

Among other benefits, such a plan would strengthen the government’s capacity to respond in the event of a significant and unexpected economic downturn. It would also help to address the long-term economic challenges of an aging population.
Minister, I trust you will find these recommendations useful. In closing, let me assure you that my colleagues and I are committed to Canada’s economic success and stand ready to help in any way possible.
Sincerely,

The Honourable John Manley