It would be a welcome change to have something positive to write about the Canadian economy these days, but unfortunately the pickings are slim, and the news is relentlessly bad. A recent study by the National Bank of Canada just adds to the misery as it focusses on the decline of the Canadian manufacturing sector.
The study found that on some variables, Canadian manufacturing has some advantages as compared to other OECD countries for things such as affordable energy. Although energy prices have risen in Canada significantly because of the forced promotion of costly so-called “green” energy sources by governments, Canada is still blessed with major amounts of hydroelectricity in various parts of the country and a wealth of fossil fuel resources as compared with European countries. The study found that despite these potential advantages, the layering on of excessive regulation and red tape has basically nullified any benefits Canadian manufacturers might otherwise have had.
The National Bank notes that Statistics Canada data indicate regulatory requirements on manufacturers have soared by 42 per cent since 2005. This is unprecedented in the industrial world. One result of this massive government overreach is that Canada’s manufacturing sector is now smaller than Ireland’s, a country with one-eighth of Canada’s population. Another result is that Canada now records the largest manufacturing trade deficits in its history.
The Ireland comparison is an appropriate one, as that country boldly went ahead with a substantial reduction in their corporate income tax rate and foreign investment and their economy took off. Starting in 1999, the Irish government reduced the corporate tax rate from 32 per cent to 12.5 per cent over a several year period, ending in 2003. Critics said they were crazy, but the results speak for themselves. The policy of sharply reducing corporate tax was dubbed “The Irish Miracle” as the economy grew strongly for several years. The European head offices of many large corporations, including Microsoft, Google, Apple, IBM, Pfizer and Amazon were established in Ireland since the corporate tax reduction, boosting its economy and high-value employment.
Since those early heady days, Ireland has had some tougher times. The 2008 recession hit the country hard. More recently, pressure from the European Union compelled Ireland to increase its corporate tax rate on large businesses to 15 per cent, but the rate of 12.5 per cent still applied to most businesses which were below the large business threshold. Nevertheless, as the National Bank study shows, the Irish economy has still overtaken that of Canada in terms of value added in its manufacturing sector.
It is well known that Canada has a serious productivity issue, which directly translates to a reduced standard of living for Canadians. The manufacturing sector is one of the biggest contributors to economic productivity of all economic sectors, so the decline in manufacturing over the past couple of decades is one of Canada’s major economic problems. The fact that labour market data show the public sector growing while the productive private sector shrinks bolsters the view that Canada is absolutely on the wrong track.
The Irish experience shows that corporate tax cuts work, and significant tax cuts work very well. Left-leaning governments in Canada have denied this reality, claiming that corporate tax reductions merely help corporations pad their bottom line at the expense of average Canadians. The reality is that any taxes imposed on business always find their way down to the consumer, boosting prices and inflation. The recent removal of the consumer carbon tax on Canadians was a welcome development that Conservatives had been promoting for years, but Prime Minister Mark Carney’s stated commitment to replacing revenues raised by the consumer carbon tax by increasing the industrial carbon tax on businesses will just land in consumers’ laps in a less transparent way as the tax will be hidden. It will also further disadvantage Canadian business competitiveness internationally as most of our trade competitors do not impose such a tax.
We have yet to see what a Carney government will do with our tax system, and how it will treat Canadian manufacturers. The National Bank study is, however, a shot across the bow. Further taxes on Canadian businesses, and even more red tape, will disadvantage Canadian manufacturers at a time when they are already suffering under tax and regulatory burdens. All Canadians should support measures that will increase our economic productivity, and major tax and regulatory reforms for our manufacturers is a very good place to start.
She has published numerous articles in journals, magazines & other media on issues such as free trade, finance, entrepreneurship & women business owners. Ms. Swift is a past President of the Empire Club of Canada, a former Director of the CD Howe Institute, the Canadian Youth Business Foundation, SOS Children’s Villages, past President of the International Small Business Congress and current Director of the Fraser Institute. She was cited in 2003 & 2012 as one of the most powerful women in Canada by the Women’s Executive Network & is a recipient of the Queen’s Silver & Gold Jubilee medals.
