Trudeau Seeks Redemption From Business Leaders in Budget Update
(Bloomberg) -- Prime Minister Justin Trudeau gets one of his last chances this week to mend frosty ties with Canada’s business community as next year’s election nears.
Trudeau’s finance chief, Bill Morneau, will unveil a fiscal update Wednesday in Ottawa that provides a shot at redemption after warnings about the country’s fading competitiveness. It will likely include incentives for capital investment but not an across-the-board reduction in corporate taxes.
The government has frustrated some business leaders with an agenda heavily focused on social issues and riled economists by running unnecessary deficits. Morneau’s last federal budget -- which punted infrastructure investments in favor of new program spending -- landed in February without a mention of U.S. tax reform despite calls to keep pace.
“What people will be looking for is a clear statement from the government that they understand how serious the challenges are that businesses face today,” Perrin Beatty, head of the Canadian Chamber of Commerce, said in an interview last week. “And that there’s a sense of urgency in addressing those issues.”
In addition to U.S. tax cuts, business leaders have warned a rising regulatory burden and other changes, such as minimum wage hikes and a carbon tax, are making the country less attractive to investment at a time when it needs new drivers of growth. Most economists believe the nation’s highly-indebted households are about to tap out and slip into a long-term slump as interest rates rise, with consumer spending projected to slow down to some of the weakest levels on record outside of recession.
What to Expect
One thing that’s certain to appear in the fiscal update is red ink, according to Craig Wright, chief economist at RBC Capital Markets. “Ottawa long ago abandoned any pretense of balancing the budget,” he wrote in a Nov. 13 research note. “Ongoing fiscal stimulus is putting added strain on capacity as well as upward pressure on interest rates.”
Morneau has already dropped hints about what the document will include. It will respond to the need to “make investments on a competitive basis,” the finance minister told reporters last week, a likely reference to being able to more quickly write off business capital expenses. However, Morneau said he would do so “in a prudent way,” signaling he won’t usher in across-the-board, immediate write-offs. He also hinted at regulatory reform, particular in the energy sector.
“We are going to look towards making sure that businesses can feel their opportunity to create investments and create jobs is positive in Canada while always ensuring that we address the importance of long-term, fiscally sustainable approaches,” Morneau said on a conference call last Monday from Beijing, where he and Trade Minister Jim Carr were holding sector-by-sector talks with their Chinese counterparts.
Business leaders have been essentially biting their tongues over the last year as Trudeau’s team dealt with U.S. trade talks. But now businesses are growing frustrated by what many say is a government that doesn’t regularly talk about economic issues. Frustration is particularly high in western Canada, where pipeline capacity and a supply glut have brought prices for heavy Alberta crude to record lows. President Donald Trump’s tax cuts are only amplifying calls for action.
“What we’re hoping for is action that responds to what has taken place,” said Goldy Hyder, president of the Business Council of Canada, which represent the chief executives of top firms. The council wants government to streamline regulations and review personal income tax brackets that make it tough to recruit top talent. It has also called for a temporary, 100 percent write-off on capital investment like machinery and equipment purchases. Mostly, though, Hyder said Trudeau and Morneau need to act quickly.
“It would be unfortunate if they want to crawl their way to the right place, because that doesn’t align with how businesses make decisions,” Hyder said in a phone interview last week.
After the fiscal update, Morneau’s last big publication before the 2019 election will be next year’s budget -- which will be a de facto platform complete with new spending pledges ahead of the vote in October. That essentially makes this week’s document his last significant chance to respond to business concerns.
Dennis Darby, president of the Canadian Manufacturers and Exporters industry group, said its members want Canada to match U.S. capital cost allowances in scope to “level the playing field” with their American competitors. “We’re very hopeful that Minister Morneau has been listening,” he said by phone.
The group also favors comprehensive tax reform and wants government to find a resolution to the tariff fight with the U.S. on steel and aluminum. Though his group is broadly supportive of the government’s social agenda, Darby acknowledged there’s growing impatience among some for the government to talk about their issues too.
”When are we going to focus on the economy?” he said. “This is your chance to say, yeah, we understand and we’re going to redouble our efforts.”
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