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OTTAWA – Canada on Wednesday unveiled billions of economic measures aimed at boosting poor corporate spending and countering the risk of investment losses for the United States as a result of the Trump administration's tax reform.
The initiatives, contained in the Liberal government's economic update in the fall, are an effort to respond to repeated warnings from Canadian corporate executives that US corporate tax rate cuts and related incentives put in place last January threaten to place Canada at a significant competitive disadvantage. to attract investment from domestic and foreign companies.
The government acknowledged these risks on Wednesday.
"The US federal tax reform has significantly reduced the overall tax advantage that Canada has acquired over the years, posing significant challenges that, if left unresolved, could have significant impact on the investment, jobs and economic opportunities of middle-class Canadians, "said the Minister. Finance Department says in the accompanying documents.
In response, Canada stated that it would allow companies to immediately and fully depreciate the cost of machinery and equipment used for the production of goods. The current policy allows to amortize a quarter of the value. It tries to match a similar American measure and, like the United States, it has five years left before Ottawa begins phasing it out.
Canada will also allow all businesses to further deduct the purchase of certain capital goods, including computers, software, trucks and bulldozers.
There have been no other reductions in corporate tax rates.
These measures – which come into effect immediately – have an estimated price of C $ 14.04 billion (US $ 10.58 billion) over the next five years, estimates the Department of Finance. Finance Minister Bill Morneau said the government has taken steps to address business concerns about long-term investments.
"We have looked very carefully at how to ensure the competitiveness of our tax system," he told reporters, adding that he was convinced that these changes would stimulate business activity. "That's what we proposed in these measures."
The cost of the measures will lead to a slight increase in budget deficits in the coming years, compared to the initial forecasts of the government. Nevertheless, the estimated Canadian federal budget deficit for fiscal years 2020 and 2021 represents 0.8% of Canada's gross domestic product and its debt is expected to decline gradually, from almost 31% of GDP to 28.5% by 2024 .
The Canadian economy continues to grow, but at a slower pace than in 2017. Inaction on trade policy – the United States, Canada and Mexico renegotiated the North American Free Trade Agreement – and the impact of US tax changes are among the few barriers to growth.
The Bank of Canada estimated that US tax reform and last month's nafta uncertainty would reduce the level of business investment by 0.7% by the end of 2020 and by 0.6%. exports in the same time.
The need to revive business investment emerges at a crucial time for the economy. Consumer spending has slowed due to a combination of tighter mortgage financing rules and higher interest rates. The high debt levels of Canadian households mean that every increase in borrowing costs "is far more powerful than it would have been just ten years ago," said Royce. Mendes, an economist at CIBC World Markets.
The Bank of Canada has argued that these factors force the economy to rely less on consumer spending and more on business investment to drive growth. To date, business investment has been weak, with growth slowing in the second quarter to 1.5% annualized, the slowest pace since the end of 2016. Expenditures in 2017 by companies Canadian machinery and equipment totaled $ 296.67 billion, a decrease of almost 7% from 2014 expenditures, or the year before the world commodity price, Canada's economy dependent on resources.
The changes to US tax legislation were intended to stimulate business investment, and these expenditures have increased over the past year. However, a decrease in orders for such equipment in recent months raises the question of whether this stimulus was temporary, especially given the uncertainty surrounding tariffs and trade disputes with China.
Write to Paul Vieira at [email protected]
