Enabling Canadians to Compete and Win Globally: Priorities for the next Federal Budget

October 18, 2006

Thank you for the opportunity once again to appear before this Committee to discuss priorities for the next federal budget. Canada is now enjoying its 15th consecutive year of economic growth. Unemployment is at three-decade lows. Inflation and interest rates remain modest. Incomes are rising. And governments are raking in surpluses.

But our country faces serious challenges. The economy of the United States, our biggest market, is weakening. New economic powers such as China and India are transforming the competitive landscape. Manufacturers are struggling with high energy prices and a high dollar.

This is why the Canadian Council of Chief Executives has focused over the past year on the need for a strategic approach to the question of how and where Canada can compete in the years ahead.  We therefore strongly support the commitment in the 2006 budget to develop a comprehensive, results-focused agenda for improving Canada’s productivity and competitiveness. To this end, we also support the government’s fiscal prudence, including its commitment of a $13.2 billion surplus to debt reduction and its willingness to make tough choices in the review and reallocation of existing spending.

Earlier this year, we laid out a broad framework for competitiveness in a paper titled From Bronze to Gold: A Blueprint for Canadian Leadership in a Transforming World. We recently expanded on this framework in a memorandum for Prime Minister Stephen Harper, a copy of which has been shared with this Committee.

Many factors matter to Canada’s ability to compete for people, ideas and money within the global economy. To compete for people, we need safe streets, clean air and access to high quality education and training. To compete for ideas, we need public investment in research, better ways to commercialize new discoveries and sound treatment of intellectual property. To compete for investment, we need efficient regulatory processes, modern infrastructure and assured access to markets.

On all three fronts – people, ideas and money – the most effective tool that governments can use is that of tax policy. To build a more productive and innovative economy, the next budget therefore should include further cuts to both personal and corporate tax rates.

In particular, our personal tax system must do more to reward people for investing in themselves and in the growth of our economy. Increasing the basic personal exemption would encourage people to get into the workforce. Reducing punitive clawback rates on income-tested benefits would encourage people with modest incomes to aim for better jobs.  Expanding the education and tuition tax credits would encourage more Canadians to invest in lifelong learning.

There should be higher contribution limits and more opportunities for tax-sheltered savings. The dividend tax credit should be made refundable to pension plans and RRSPs. And people should have some ability to defer paying capital gains tax when they roll the proceeds of one investment into another.

Canadians want the best return they can get on the savings they set aside from their hard-earned wages. So do investors everywhere else. The result is that corporate tax rates have a huge impact on where money flows around the world.
Canada has made real progress in reducing corporate income tax rates in recent years, and the result has been more rather than less money for governments. But this country is not alone in using corporate tax policy to attract investment, and Canada must go further.

As next steps, the government should eliminate the capital tax on financial institutions, accelerate the reduction in the corporate income tax rate to 19 percent and commit to a further reduction in the corporate tax rate to 15 percent after 2010. It should ensure that capital cost allowance rates reflect the actual useful life of assets, consider a temporary acceleration of write-off rates to help manufacturers cope with their current competitive crunch and eliminate withholding tax on interest payments under the Canada-United States tax treaty.

Tax policy is not an issue for the federal government alone. It is time for more provinces to step up to the plate and do their share. Our Council is prepared to support bold action to help provincial governments meet growing needs within their jurisdiction. But we believe that it is equally fair for the federal government to ask provincial governments to work together in the national interest. 

The Minister of Finance has put on the table the need to complete the conversion of provincial sales taxes to a value-added base and to form a single regulator for securities markets.  We suggest that action by provinces on these fronts should be a condition of the next federal-provincial agreement on fiscal arrangements.

Let me close by repeating that many factors matter to competitiveness. Anything that moves Canada in the right direction will be welcome. But no competitiveness strategy will be complete without further tax cuts.