P rime Minister Justin Trudeau was still working on a post-selection victory round when he came to Davos Switzerland in early 2016 to sell Canada to the world's business and political intelligentsia.
"There has never been a better time to look at Canada," he told those who had met at the World Economic Forum.
With his talented workforce and low-carbon economy, mr. Trudeau that the country would be a magnet for "new businesses, new growth and new prosperity."
That was, of course, before Donald Trump conquered the White House, bringing the United States on a path of more protectionism and deep tax cuts aimed at bringing business investment back to the United States. Two years later Canada is not the tempting beacon of the economic greatness of the New Age that Trudeau had in mind in Davos . Instead, the country is in the grip of a potentially destructive investment-dependent cooling, while business decision-makers weigh the impact of a lost tax benefit, the possible collapse of the North American free trade agreement, new US rates on steel and aluminum, as regulatory paralysis that large seize energy projects.
Minister of Finance Bill Morneau acknowledges the growing fear of business because he drew up the budget of the federal government this week. But until now, he has offered nothing concrete to address the crumbling competitive landscape, in addition to a promise to study the impact of the American tax reform.
"We are not saying that we do not have to think about these competitive challenges," Mr. Morneau said Thursday in Toronto. "We say: let's start with our fortress here at home."
Unfortunately, the fort exhibits stress fractures. Foreign direct investment in Canada fell by 26 percent for the third consecutive year in 2017, Statistics Canada reported this week. The ratio of non-residential business investments to the total economy has also decreased since 2015.
In the United States the ratio has increased since the beginning of 2017.
and the prospects for this year are obscure. A Statscan survey of companies released this week predicted that corporate investment will fall by 1.1 percent in 2018, led by a fourth consecutive annual drop in oil and gas investment. The last quarterly Business Outlook Survey of the Bank of Canada showed a more optimistic picture, with more companies claiming that they want to stimulate investments in machines and equipment this year. And yet many of these same companies say that their plans are increasingly being clouded by the uncertainty of NAFTA, tax policy and regulatory obstacles.
Even these figures can not compensate for the broader drop-out of investments: deferred factory openings, the suspended purchases of new equipment or the quiet movement of activities from the country. Business decisions are now being made that could damage this country for a decade or more.
"People will not wait until the federal government makes a decision", warns tax expert Jack Mintz from the School of Public Policy at the University of Calgary. "We could end up with a serious productivity problem in this country when the money flows south."
There is a lot that Ottawa and the provinces can and should do. The options range from reconsidering the incentives built into the corporate tax system to providing more predictability for the approval of major infrastructure projects.
Here are six options for Canada in light of this uncertain economic future:
Canada could choose to do nothing at all, hoping that Mr. Trump will soon stop or be removed from office in 2020 Canada's relatively sound budgetary position and generous social programs would help to muddle the country. This may be part of the Plan B of the Trudeau government, especially when dealing with trade threats.
In this scenario, the NAFTA negotiations would go beyond the American midterm elections this year, but the US government would probably withdraw the more hardline requirements are defended by Mr. Trump. Meanwhile, other US protectionist measures, including threatening American tariffs on steel and aluminum, would eventually be reversed, either by lawsuits or by Congress.
Overcoming the consequences of recent American tax changes could be much more difficult. Here too, Ottawa can wait, expecting the huge tax cuts to bring the United States into an unsustainable spiral of deficits and debts. Eventually, Congress and the next administration would be forced to reverse the huge tax reduction.
In the end it is unlikely that Canada will approach anywhere Canada. Global investors seem willing to continue providing loans to the United States, no matter how fiscally irresponsible it is. By the way, the main elements of the reform in the US enjoy dual support and are unlikely to be settled, says economist William Robson, president of the Toronto-based C.D. Howe Institute.
"This new competition challenge from the United States will be with us for as far as we can see," says Robson. "It can be a little less strict, there can be some changes here and there … But this is something we will have to deal with."
This is exactly what many business groups are asking for now. The Business Council of Canada, representing many of the largest companies in the country, urged [Mr Moghou] Morneau to lower the federal corporate tax rate and to make a long-term commitment to pay these rates under the average of other developed countries. Nothing in the budget, council chairman John Manley, becomes impatient.
"If you want to go to Silicon Valley or India and encourage investment in Canada, you will have to tackle our broader competitiveness challenge, especially compared to the United States", emphasizes Mr. Manley, who is also chairman of the Canadian Imperial Bank of Commerce.
The most important part of the American tax reform is a reduction of the US corporate tax rate to 21 percent of 35 percent. But experts say that the number that really matters is the broader marginal effective tax rate that incorporates an average of federal and state taxes on income and capital. What it comes down to is that the US tax reform has moved Canada from a clear tax benefit to a deficit of around two percentage points, according to Mr. M. Mintz of the University of Calgary. He says the all-in rate is now 18.9 percent in the United States, compared with 20.9 percent in Canada.
Companies are very sensitive to tax rates, especially when it comes to making big new investments. The tax gap can also affect government revenue. Mr. Mintz says the net effect of US reforms is that multinational corporations will try to shift their costs, including debt and interest costs, to jurisdictions where taxes are higher, including Canada. And they will transfer their profits to the United States. Many are already. Apple Inc ., For example, recently announced that it will repatriate US $ 250 billion in overseas profits and use some of the money to create 20,000 new US jobs on existing company sites and new campus that plans to open it
Lowering the tax rates for companies in Canada would be fiscally manageable because they represent a relatively small part of the federal and provincial income. But they would sell politically more difficult. "Most governments have been operating on platforms that have anticipated higher taxes on income from individuals [and] to pay for improved public services and support for the middle class," concludes a recent report from the credit rating agency DBRS Ltd.
And tax relief alone is no guarantee that companies will invest more. Canada has lowered the federal corporate tax rate earlier – nine times from 2000 to 2012. These cutbacks have almost halved interest rates by half and yet they seem to have done little to encourage companies to invest.
"There are clearly other reasons why companies decide to invest," points out David Macdonald senior economist at the Canadian Policy Alternative Center.
A more focused approach to investment is to give companies more incentives to invest. The current tax rules limit how quickly companies can make capital expenditures. For example, the test for "available for use" means that companies often have to wait years before claiming tax benefits on major projects. Canada should follow the United States and allow companies to pay most capital costs as they occur.
In Canada, only manufacturers benefit from accelerated depreciation of business investment. That makes little sense given the shift from the economy to services. Ottawa could allow all companies to immediately write off their investments in new technology and the like, whether they are a manufacturer or a service company.
Ottawa was able to phase out the higher costs of both a lower general corporate rate plus accelerated depreciation by the preferential tax rate for small businesses and to reduce the amount of capital expenditures eligible for a tax deduction at, for example, $ 200,000 per year.
This would focus on tax relief directly at companies that grow, the CD Howe Institute's. Robson says.
A new and improved version of NAFTA could go a long way towards alleviating protectionist threats faced by companies in this country. But if Canada can not get trade security from the US, it should look elsewhere soon. This means the pursuit and inking of free trade agreements with China, Japan and other fast-growing countries in the South Pacific.
Opening up new markets and selling more to the rest of the world is a critical catalyst for business investment in Canada in the longer term, Livio di Matteo a professor economics at Lakehead University in Thunder Bay. The United Sates has a huge internal market and creates natural economies of scale for companies established in the Netherlands. Canada does not, and the antidote is to create a large international market.
"In order to ultimately have capital investments that increase productivity, you need a large market", Prof. dr. di Matteo explains. "We never had that, we never developed into an economy of 50 million or 100 million or 150 million people, so trading has always been crucial."
Downpoured energy pipelines and canceled liquid natural gas export terminals are all symptomatic of a regulatory system that stifles investment. That has to change, says Mr. Manley from the Business Council of Canada.
"Massive amounts of investment have been put on hold because you simply can not be in this country", he complains. Mr. The Morneau budget indicated a broad regulatory reform. Mr. Manley hopes the government is sincere, because improving competitiveness depends on the fact that companies have more certainty when it comes to approving critical infrastructure projects.
Apart from concrete proposals for policy reforms, many experts left the budget for this week, convinced that something more fundamental that the government could do to improve the mood of companies and give them more confidence to open wallet: Ottawa has to change tone in company Canada.
They claim that the government could pay lip service to supporting companies in this country, a series of recent policy measures at both federal and county level – from the messy tax changes for small businesses to minimum wage increases to carbon taxes for stalled pipeline development – sends a signal that the government is indifferent to business interests, even in some areas "openly hostile", said economist Philip Cross, a senior fellow of Ma cdonald-Laurier Institute in Ottawa.
"I do not think you can point to a specific government policy, I think the business reacts to an overall tone," says Mr. Cross. "We have had good corporate tax rates in this country, more than competitive with the US until this year, and yet investments remained weak, because there was a whole range of things that governments did, which the business community does not like."  Mr. Robson from the CD Howe Institute says that a "change in tone" would help.
"The budget responses I heard had as a common theme – the idea that this government does not just provide competitiveness or the prosperity of the private sector," he says. "This tone leads to people having no improvement and perhaps a deterioration. to expect over time. "
Several experts believe that the budget deficit itself is part of the wrong signal that Ottawa is sending out. The budget predicted a deficit of 18 billion dollars in 2018-2019, despite an economy that has peaked the business cycle is approaching. does not have a timetable to rebalance, but instead focus on slowly lowering the country's debt ratio.
"You have to announce that you are prepared to do something about the budget balance, at least you need a plan to arrive at a balanced budget in the next four or five years," Morehead & # 39; s Prof. di Matteo says "If you do not have a recession, why are you still running big shortages? I think this is important for the private sector."
The concern is that perpetuating budget deficits limited government capacity to help Canadian companies remain competitive. finally cope with years of shortages.
"It's a big problem because you look further ahead and think about what Canada can do to be more growth-friendly," says Robson.