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| World Marketplace |
Northern Exposures
Jack M. Mintz
11/01/2004
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To steel
Canada’s markets for competition in the global economy, the government also
reduced corporate taxes. Canada’s combined federal and provincial corporate
income tax rate was 43 percent in 2000, the highest among all OECD countries. By
2003, it had been slashed to 35 percent, almost five points below the U.S.
federal and state corporate income tax rate.
In contrast to 1996, Canadians
were far more confident moving into 2004. No longer a low-growth economy, per
capita incomes moved above their 1989 peak. Unemployment declined; in fact, the
Canadian economy has consistently generated more jobs than the United States
since 2000. Even the Canadian dollar has become more muscular, rising from a
U.S. currency low of about 63 cents in early 2003 to as high as 76 cents
recently.
In Quebec, the secessionist Parti Québécois lost power in 2003 to a
provincial federalist party. Moreover, national Liberals, under Martin’s new
leadership, seemed poised to win a commanding majority in Parliament, and
perhaps rout the separatist Bloc Québécois—secessionists elected to the House of
Commons from Quebec—in the next election.
Flies in the Ointment
This past spring, however, the auditor-general of
Canada, the watchdog of government spending, accused the Liberal government of
corruption involving an advertising campaign aimed at presenting a united Canada
to Quebec secessionists. The scandal dampened the party’s power as it approached
the June 28 general election, leaving the Liberals with a minority government
and a regionally divided parliament. The Conservatives dominated in the Western
vote and picked up seats in Ontario and the secessionists won most of the
electoral districts in Quebec. The Liberals maintained most of their power base
in Ontario, the country’s most populous province, and in eastern Canada.
Canada had two minority Liberal governments in the 1960s and one in the
early 1970s; on these occasions the governing party relied heavily on the
support of the social-democratic New Democratic Party (NDP). As the price of
that support, federal spending on health, unemployment insurance, regional
development and a host of other programs soared, setting the stage for fiscal
problems in later years. The issue now facing the Liberal government is how to
design affordable policies that will enable it to attract support from a
shifting alliance of parties in the legislature, without being forced by an
NDP-led coalition to either return to deficit financing or face defeat in the
Commons.
While the political stakes for the Liberals are high, the economic
stakes for Canada are perhaps even higher. The growth rate of Canada’s standard
of living is still mediocre, despite a recent spurt in job creation. Labor
productivity has improved recently, although it is still significantly below the
rate in the United States. Underperforming private capital investment, which is
critical to the adoption of new technologies, has hampered productivity
increases. Simultaneously, Canada’s share of worldwide foreign direct investment
has declined. Only the province of Alberta has seen large capital investment,
driven by the development of its oil-sands deposits, which will feed energy
needs throughout North America. Without improvements in labor productivity,
Canadian businesses will find it difficult to pay workers higher salaries as
they face stiff competition from other countries, including NAFTA partner
Mexico.
Like other industrialized economies, Canada’s society is aging, far
less quickly than Japan’s and Europe’s, but faster than the United States’. With
a smaller working population relative to retirees, the pension, health and other
age-related entitlements will require increased funding in the future. The OECD
reports that Canadian governments, facing higher spending needs and lower tax
revenues, may have to increase taxes by 2040 to more than 9 percent of GDP to
balance budgets.
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