Canada's Economic Growth Agenda: A Test of Mettle Against US Protectionism

Strategic Insights -

Canadian industries, built on seamless integration into continental supply chains, are fighting for survival as US protectionism takes its toll on exports and business investment. To push back, Ottawa needs to convince companies and investors to bet on Canada, even without guaranteed access to the world's largest market. Reversing a decade of underinvestment in machinery, equipment, and intellectual property is crucial to reversing the productivity "emergency."

Key Takeaways:

  • The Canadian economy is undergoing a "structural transition" that could leave economic growth on a permanently lower path, according to Bank of Canada Governor Tiff Macklem.
  • To boost investment, Ottawa needs to improve the business climate, including tackling interprovincial trade barriers, cutting red tape, and embracing the country's position as an "energy superpower."
  • The government's economic growth agenda will be revealed in the upcoming budget, which will have a significant impact on the investment climate, particularly with regards to corporate taxation, environmental regulation, and industrial policy tools.
  • Economists emphasize the importance of tax reform, including making the corporate tax system competitive with the US, and focusing on the tangle of existing tax incentives that favor well-connected incumbents over high-potential startups.
  • Building infrastructure and changing the regulatory system around natural resources are also key to attracting investment, with a focus on rethinking clean electricity regulations, the place of natural gas in the country's sustainable investing taxonomy, and scrapping the oil and gas emissions cap.
  • Ottawa's industrial policy has been mostly defensive, but a "Buy Canadian" procurement scheme and a pledge to spend 5% of GDP on defence and defence-related items present opportunities to build up Canada's industrial base.

Statistics:

  • Exports have plunged by [unspecified] percent due to US protectionism.
  • Business investment has been frozen by uncertainty over tariffs.
  • The Bank of Canada estimates that the productivity "emergency" has lasted for a decade before the current US presidency.
  • The government's fiscal path is expected to produce a deficit in the $70-billion to $100-billion range, which could be unsustainable in the long run.
  • According to Yves Giroux, former parliamentary budget officer, the important thing to watch is whether the government has a credible path for bringing the deficit down over time.

Sources:

  • "Canada can give itself more than U.S. President Donald Trump can take away," Mark Carney.
  • Bank of Canada Governor Tiff Macklem: "The Canadian economy is going through a structural transition that could leave economic growth on a permanently lower path."
  • "The budget is where you'll see the scope of the government's economic growth agenda," said Jean-François Perrault, chief economist at Bank of Nova Scotia.
  • Francis Fong, senior economist at Toronto-Dominion Bank: "The fundamental challenge of this file is that nobody wants to be the bad guy when it comes to tax."
  • Tyler Meredith, former economic policy adviser to former prime minister Justin Trudeau: "The challenge is, we can compete and even exceed the U.S. on taxes. We can streamline our regulatory processes. But it just doesn't feel like it's as aggressive as what you have in the U.S."
  • Stéfane Marion, chief economist at National Bank of Canada: "A company's not going to decide to not do a natural resource project in Northern Ontario or Northern Saskatchewan because of the tax regime. It will be something else. There's no roads. I don't have the permits."
  • Trevor Tombe, economics professor at the University of Calgary: "I'm not seeing and I haven't read any credible analysis suggesting that there is a rising risk premium being built into Canadian federal debt."