Why Canadian businesses are losing their edge

BCBC summit tackles reasons why business investment is so low in Canada

From left: Jock Finlayson (BCBC), Bill Robson (C.D. Howe), Kevin Milligan (UBC) and Susan Yurkovich (COFI). | Nelson Bennett

Despite a host of positive economic indicators that suggest Canada is well-positioned to weather whatever economic downturn is coming, businessmen and women in Canada appear to be worried.

Their angst is reflected in low business investment figures that suggest Canadian businesses are lacking confidence in their own country.

Canada has fallen far behind their counterparts in the U.S., and other OECD countries, when it comes to per worker investments, according to economists speaking at a panel session Wednesday November 20 at the Business Council of BC (BCBC) annual summit.

BCBC economist Jock Finlayson pointed to the World Economic Forum’s Global Competitiveness Report, which shows Canada has fallen a couple of notches overall.

While it ranked well in some areas, it ranked 35th in terms of its regulatory regime – almost last among the industrialized economies, Finlayson said.

Bill Robson, CEO of the C.D. Howe Institute, said Canada does very well when it comes to things like educational achievement and importing talent through immigration.

He added one thing that doesn’t get talked about much, though, is a brain drain. Canada’s relatively high immigration numbers are offset by a loss of 60,000 to 70,000 per year, and many of these Canadians are “high-earning, well-educated” Canadians, mostly moving to the U.S., Robson said.

Canada scores poorly on per worker investment on things like new plants, equipment, and intellectual property, he said. Whereas the per worker investment in Canada is $15,000, the average in OECD countries is $21,000 and $26,000 in the U.S.

Taxes and regulatory burdens are largely to blame for that lack of investment confidence.

Finlayson said the Chartered Professional Accountants of Canada have been pushing for a modernization of Canada’s “increasingly creaky and outdated income tax system.”

One tax that doesn’t get enough attention, but which has a tremendous impact on prosperity, is property taxes, Robson said.

“Property taxes are wealth taxes,” he said. “In many places, including Vancouver, property taxes are actually the single biggest tax that’s negatively affecting investment.

“If I could do something to rejig the overall tax mix, that’s one of the ones I’d go after because property taxes are too high and they’re very destructive.”

Given his druthers, Kevin Milligan, an economics professor at the University of BC’s Vancouver School of Economics, said he’d bring back a harmonized sales tax, which was introduced in B.C. and then had to be repealed, following a citizen’s referendum spearheaded by former B.C. premier Bill Vander Zalm.

“If you talk to people in business, if you talk to economists who are good at spreadsheets, they’ll all tell you the same thing – that this is the biggest barrier to improving B.C.’s investment climate,” Milligan said of B.C.’s current sales tax regime.

He admitted an HST would be a tough sell, and said his second preferred way to address taxation levels would be to simplify the whole income tax system.

The more complex a system gets – i.e. the more exemptions, incentives and credits it has – the more opportunities there are for smart accountants to game the system.

But tax changes or cuts can be a tough sell for politicians, especially of they are seen to benefit business. Robson said that reducing regulatory burdens can be like a de facto tax cut.

“You can give yourself the equivalent of a tax advantage if you can clear that up,” Robson said. “You can get away with higher tax rates, if your regulatory processes are better.”

Susan Yurkovich, CEO of the Council of Forest Industries (COFI), said, that for resource industries in particular, regulatory burdens are definitely a curb on investment in B.C.

Yurkovich said forestry companies already made some significant investments in their mills and equipment in B.C. to make them more efficient. But now they are facing a serious timber supply crunch, which accounts for 60% of the business inputs for forestry companies.

Reducing red tape is one thing governments could do to give Canadian resource industries a bit more of a competitive edge without it costing them anything.

“We need to streamline our permitting and our regulatory processes, because that is a place where we can find some savings and help us get back to a more competitive position,” Yurkovich said.

Finlayson cited one example of a company, which he did not name, that had planned a $2 billion expansion to an existing facility. He said it is now expected to take nine to 10 years, from start to finish, to get the project through the regulatory process, which will add about $1 billion to the expansion’s capital cost.

“I think it’s very symptomatic of regulatory systems in Canada that just are not working effectively,” Finlayson said.

“And it’s not about lowering standards – it’s designing processes that people can get through and understand what the steps are before they have to retire from their organization or withdraw their projects.”

nbennett@biv.com

@nbennett_biv