Pressure mounts on Morneau to boost deduction for capital investments

Wayne Easter answered the phone in the middle of a quick lunch. The chair of the Commons finance committee was in Winnipeg yesterday with other committee members, listening to submissions on what should be in the next federal budget.

Wherever they stop, Easter said, the message heard by committee members is pretty much the same: Canada needs to do something quickly to encourage more corporate investment in this country after President Donald Trump slashed corporate taxes in the U.S., and allowed companies to write off 100 per cent of their capital investments.

"The rapid depreciation the U.S. allows for new technologies is drawing capital away," the Liberal MP said. "We have heard that absolutely everywhere."

The tone of these calls is urgent enough that the committee is planning to send a letter to Finance Minister Bill Morneau calling on him to increase the existing 50 per cent deduction for capital investments before the end of the year.

Making a direct appeal to the minister is an unusual step for the committee to take, but with Morneau now preparing the annual fall economic update (expected to be delivered within a month), time is of the essence.

"We're certainly not focusing a year out," Easter said when asked if increasing the maximum deduction isn't the kind of measure that typically would be saved for an election year budget. "We're looking at what we need to do now to encourage productivity and competitiveness of Canadian industry."

The Department of Finance is grappling with the issue already, weighing options and trying to answer some key questions. How much should the write-off be worth? How much would increasing the write-off cost the federal government? Should it apply across the board, or only to specific types of investment?

Business groups, including the Canadian Manufacturers and Exporters, already have called on Morneau to act.  The minister also has spent months consulting business leaders on the issue of Canadian competitiveness.

Still, there are reasons to think that Morneau can afford to proceed cautiously. Economic growth in Canada's second quarter rose to 2.9 per cent from 1.9 per cent in the previous quarter. Exports are up. Unemployment is down. And Morneau has consistently downplayed the need to respond to Trump's corporate tax cuts with his own.

Conservatives have their own set of numbers, taken from industry groups, which point to declining investment in Canada as Canadian companies increase their investment in the U.S.

"Why are the Liberals giving so much help to Donald Trump?" asked MP Gerard Deltell during question period a few weeks back.

The Liberals' position is that investment is going up here as well — by eight per cent over the last six quarters. It's one of the reasons Morneau downplays the importance of matching Trump's corporate tax cuts.

And when compared to the Americans' $1 trillion federal deficit projection in a year of strong economic growth (fuelled in part by the tax cuts), Canada's deficit financing — particularly when viewed as a percentage of the overall economy — looks modest.

But that's not the only source of pressure the finance minister is feeling in the lead-up to the fall update. Liberal MPs are looking for clarity on the government's plan to impose a national price on carbon in those provinces refusing to act on their own. Others want to see a signal that the deficit for 2018 is on a downward track from the $19.4 billion forecast last spring.

A number of Liberal MPs say caucus is still being consulted on the rollout of the carbon price, which includes the promise that families in the non-participating provinces — Saskatchewan, Ontario, Manitoba and possibly New Brunswick — will receive a rebate cheque directly from the federal government.

Morneau also is grappling with the impact of the continuing U.S. tariffs on steel and aluminum. While many companies on both sides of the border stockpiled metals, those supplies are running out and the added cost will start cutting into the bottom line soon.

Foreign Affairs Minister Chrystia Freeland, who led the trade talks with the U.S. and Mexico, acknowledges those tariffs — and the retaliatory duties imposed by Canada on a broad range of U.S.-made products totalling $16.7 billion — are bad for the economies of both countries.

"I think what makes the most sense for both countries is to lift the tariffs on both sides and we're ready to do it as soon as the U.S. is ready," she said.

There's some support for a quick resolution to the tariff standoff from an unlikely source south of the border. Senate Majority Leader Mitch McConnell — a Republican — suggested Trump's trade disputes are threatening to undercut economic growth.

"The tariffs are beginning to have an impact in a negative ways so I hope that we make some progress quickly on some of these other fronts, in particular with China," he said in an interview with the Reuters news agency on Wednesday.

With a provisional North American trade deal now in place, trade uncertainty may be less of a factor as Morneau prepares his fall fiscal update. But the ability of Canadian businesses to compete with their American rivals is still something he has to worry about.

Easter said the questions that need answering are simple, even if the answers are anything but.

"How do we attract and hold investment in Canada? That's the question. What is the cost of doing that versus the cost of doing nothing?"

Canadians will find out the answer in just a few weeks.