Thursday, January 25, 2018

The U.S. tax reform and NAFTA uncertainty threaten the Canadian economy

Canada’s Finance Minister Bill Morneau recently promised to keep Canada competitive in face of U.S. corporate tax cuts and clarified that, after the reduction of taxes south of the border, the Canadian and U.S. corporate tax rates will be about the same, 27% and 26% correspondingly.
But the leaders of the Business Council of Canada and Canadian Chamber of Commerce think exactly the opposite – that the tax changes in the U.S. will indeed hurt the Canadian economy. They think that the U.S. tax reforms will do more damage to Canada than even the possible termination of the North American Free Trade Agreement, and that business investment will be diverted from Canada to the U.S. as a result.

And Canada needs business investment badly. 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.

Over the long-term, the trend in business investment has been one of the slowing growth. Economist Livio Di Matteo (the Fraser Institute) calculated that the growth of investment slowed down from almost 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.
This expectation falls in line with the mood in the recent internal memo for the Finance Minister Morneau, as reported by the CBC, that growth in the Canadian economy will be low over the next several years. The memo says that increasing the eligibility age for private and public pension plans could help the economy. It remains to be seen whether the government will arrive at less controversial measures to boost the economy and whether any measures will be taken to increase business investment and labor productivity.

Ukrainian Credit Union Limited

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