Talk About Adverse “Trudeau Effect” Appears as Gloomy Predictions for Canada’s Economy Mount

Justin Trudeau, Prime Minister of Canada, addresses the plenary session during the opening day of the 48th Annual Meeting of the World Economic Forum in Davos, Switzerland, on January 23, 2018. Laurent Gillieron/Keystone via AP and bnn.ca

Yuri Bilinsky, New Pathway – Ukrainian News.

Some contradictory information related to economic growth in Canada has come out of the Department of Finance lately. At the World Economic Forum in Davos, Switzerland, Minister Bill Morneau promised to keep Canada competitive in face of U.S. corporate tax cuts and specified that, after the reduction of taxes in the U.S., the Canadian and U.S. corporate tax rates will be about the same. But, according to CBC, a recent internal memo ordered by Morneau said that the Canadian economy will be slowing down in the next several years, starting this year.

Heads of top Canadian business associations, among them, John Manley (Business Council of Canada) and Perrin Beatty (Canadian Chamber of Commerce) echo that latter sentiment. Manley said that the tax changes in the U.S. could do more damage to Canada than even the possible termination of the North American Free Trade Agreement (NAFTA). The Bank of Canada estimated that NAFTA uncertainty and the U.S. tax reforms will divert business investments from Canada to the U.S.

Furthermore, George Athanassakos, a professor of finance at the Ivey Business School at Western University, wrote a piece for the National Post on February 2 blaming the “Trudeau Effect” for the underperformance of the Canadian large-cap stock market that started increasing in early 2016, months after the Liberal Party formed the government. He said that Prime Minister Justin Trudeau’s statements at the forum in Davos that Canada will not be cutting taxes and regulations to compete with the U.S. will not encourage investment in Canada. Athanassakos believes that these policies hurt productivity and undermine the competitiveness of the Canadian economy.

While productivity is among the most important factors of a country’s prosperity, Canada is seriously lagging behind on this metric. According to the Conference Board of Canada, the country’s labour productivity as a share of the U.S. level declined from 89% in 1981 to 77% in 2015. The Board notes that low productivity levels present “an enormous challenge” for the future economic prosperity of most provinces.

In turn, a major key to higher productivity, business investment, has been lacklustre in Canada. According to the Statistics Canada information, after a long period of decline, investment in structures and machinery grew by just 0.1% in the first three quarters of 2017 over the previous year.

The growth of business investment has been slowing down for decades. Economist Livio Di Matteo (the Fraser Institute) calculated that the growth of investment dropped from 7% on average annually in 1960s to less than 2% since 2010. He thinks that the minimum wage hikes, NAFTA uncertainty and tax cuts in the U.S. could lead to “huge” further decreases in the Canadian business investment.

Source: https://www.fraserinstitute.org/blogs/canada-must-increase-business-investment

There have been many discussions as to how to boost the Canadian economy. According to the CBC, the internal memo for Finance Minister Morneau did not contain any policy options but listed increasing the eligibility age for private and public pension plans as a possible economic measure going forward.

It could be argued that Canada’s economy is held back by the lack of competition and presence of oligopolies in several sectors. Livio Di Matteo thinks that one way to increase competition is to open up the Canadian market to more foreign competition in areas like agriculture (for example, dairy and eggs), airline travel and telecom providers. “There is pressure to do this from the United States and it is possible the NAFTA negotiations may highlight these areas more. However, politically these changes may be difficult to sell in Canada given the strength of some of these lobbies”, said Di Matteo in his comment for the NP-UN.

To increase Canada’s productivity is also a difficult task. As the memo for Minister Morneau said, “There is no silver bullet solution to raising Canada’s productivity growth.” Livio Di Matteo noted that Canada’s low productivity is rooted in the country’s historic development as a set of small sparsely populated regions strung out over a large east-west geographic expanse: “The only solution in the absence of a domestic economy with 100 million Canadians is enhanced and more numerous trade agreements with the world’s largest economies to boost market size. But the current world environment is making freer trade a tough sell.”

Still, you have to start somewhere, said Di Matteo: “Lowering personal and corporate taxes is one way to jump start the economy. Increasing immigration is another way… If you are going to run large deficits at the federal level, doing so for policies that expand the size of the Canadian market make more long-term economic development sense than boosting current consumption via transfers.”

But infrastructure investment to expand the domestic market is not a solution per se, stressed Di Matteo: “More government infrastructure investment is not useful if the population density to support it is not there… There needs to be a strategy to attract population to all regions of the country.”

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