Economists eye election plans as Canada's economy falters

Commodities crunch weighs heavily on fiscal policy plans

Stephen Harper, Thomas Mulcair and Justin Trudeau have different prescriptions for Canada's ailing economy 

Canada’s ailing economy is casting a long shadow over federal election campaign 2015, and all three parties in contention to form a government say they have the answer. 

From further tax cuts to an ambitious government-funded infrastructure plan to a childcare program that could boost women’s participation in the workforce, voters are being offered an array of different options. 

Business in Vancouver asked four B.C. economists to assess the health of the Canadian economy and the parties’ prescriptions.

The economy is key

Since it came to power in 2006, cutting taxes for business and individuals and keeping a lid on government spending have been a winning combination for Stephen Harper’s Conservative Party.

But Harper has seen his normally strong reputation for steady economic leadership falter following the oil price slide that started in late 2013 and has led to economic contraction across Canada in 2015’s first six months. 

The oil shock has put a spotlight on what some critics say has been the Harper government’s narrow focus on resource extraction.

Canada is not in a recession, say economists, but it’s in a “weak patch,” one that will likely continue as long as oil and other commodity prices remain low. 

“Bloomberg’s commodity price index is all the way back to 2002 [levels],” said Jock Finlayson, chief policy officer at the Business Council of British Columbia.

“It’s not just oil; it’s natural gas, precious metals, base metals, potash, uranium, forestry ... and some agri-foods. Canada is a commodity producer, so how are we going to deal with a world where commodity demand has weakened?”

Read: Commodity prices sink to 10-year low

It’s not just the resource sector that has been affected, said Kevin Milligan, an economics professor at the University of British Columbia (UBC). Milligan has advised the federal Liberal Party on economic policy.

“If you look at manufacturing over the last year, it’s also down. When people are saying it’s only the energy sector it’s not exactly true.”

With two rate cuts in 2015, the Bank of Canada has exhausted the ability of monetary policy to prop up the economy with cheap money, said Werner Antweiler, a professor at UBC’s Sauder School of Business.

“If the bank goes even further, it might create a bigger wedge between interest rates in the U.S. and Canada and even more downward pressure on the loonie. 

“The only thing that’s left is fiscal policy, and the parties have offered different perspectives on where they want to go, what they want to do and what they want to focus on.”

Taxing times

The Conservatives, NDP and Liberals are all offering small business a tax cut; the NDP also wants to raise the corporate tax rate to 17% from 15%. But the economists BIV spoke to were not keen on either plan, and especially not a combination of the two.

“We’re still lower than the U.S., but it does take us away from the other OECD [Organization for Economic Co-operation and Development] countries that we’re competing with,” University of Victoria professor of economics Lindsay Tedds said of the NDP’s planned 2% corporate tax increase. 

“There is going to be some negative effect [from] it.”

Based on previous studies, that will likely include job losses, Antweiler said, not because businesses lay off people immediately but because they might be less likely to invest and expand. 

While the NDP’s proposed corporate tax increase is modest, he said introducing it when the economy is weak would be the opposite of an economic stimulus.

Meanwhile, Finlayson said lowering taxes for small business will encourage businesses to stay under the $500,000 income threshold when what Canada really needs is more large companies.  Tedds added that simplifying regulations and making it easier to start a business would be better ways to help small businesses.

Assistance with export development would also be useful, Finlayson said.

The Liberals want to raisetaxes on the wealthiest 1% of Canadians, a strategy – like the NDP’s targeting of corporations – that’s more politically palatable than raising the taxes of ordinary workers. Tedds warned that both strategies could bring in less revenue than the parties have calculated because wealthy individuals and large corporations have become adept at shielding taxes from the Canada Revenue Agency.

Raising taxes might never be popular, but Antweiler said tax cuts have eroded government revenue. Increased spending for social programs could be generated through the GST, which was cut from 7% to 6%, then to 5%, in 2008.

“This is one type of tax that has very few distortions overall,” Antweiler said, “and the fact that it has been lowered has been contributing to the structural deficit.”

Balance and stimulus

An emphasis on balancing budgets and avoiding deficits has loomed large in Canadians’ minds since the 1990s, when the Liberals cut government services to pay down the large government debt.

Canada’s current 31% debt-to-GDP ratio is relatively low compared with the 67% debt as a percentage of GDP the country had in the mid-1990s.

“The size matters, and why we are accruing them matters,” Tedds said. “Right now the deficit and surplus any of the parties [are proposing] are not big enough to matter.”

The NDP has targeted the political centre by promising balanced budgets; the Conservatives have promised the same. Canada’s economy doesn’t need a full-on, recession-busting stimulus right now, Milligan said, but insisting on balancing the budget would be the opposite of stimulus.

“The best thing right now is to take the hit with government finances that happened with Year 1 of the oil shock, then move toward budget balance over the medium term.”

All three parties are promising to invest more in infrastructure, although the Liberals have made it a centrepiece of their platform. With trillions of dollars in aging infrastructure needing to be replaced and borrowing costs low, that kind of investment is long overdue, Finlayson said.

It’s also an investment that will have a direct long-term benefit to businesses, which depend on transportation systems to get goods to market.

The economists agreed that the politically popular practice of allocating “boutique” tax credits to volunteer firefighters, parents of children enrolled in sports programs and other special-interest groups should be stopped. 

“When you test them in terms of achieving policy objectives,” Antweiler said, “they’re not money well spent.”