Canadian Club, Toronto, September 20, 2016
Thanks for that kind introduction. I want to thank everyone for your interest in the Conservative Party of Canada leadership race. It has been described as a “big yawn fest” by some media pundits. I hope everyone is well caffeinated!
As professionals, I’m sure you are, like me, troubled by all the current talk about advanced economies, like Canada, being stuck in so-called “secular stagnation.” Many people believe we are in a situation where economic growth is going to be chronically slow, around 1% instead of the 4% we were used to until not so long ago.
According to the private sector economists, economic growth in Canada this year will only be 1.3%. That means: no new jobs and no salary increase for Canadians.
Our societies are aging fast. Great technological innovations are said to have come to an end. Business investment is down, presumably because of a lack of profitable opportunities. Productivity growth is extremely slow.
Over the past fifteen years, multifactor productivity growth in Canada has stood above 2% only one year—in 2000. It was below 1%, often negative, in ten of those fifteen years.
There is no way we can improve our standard of living without growth in productivity. Not when the number of seniors is fast increasing while the proportion of working age Canadians is shrinking. Those who are working have to become more productive if we are to sustain our prosperity.
Another major problem is that our economies seem to be trapped in a perverse monetary situation. We have had interest rates at close to zero percent for several years but this had no effect on growth. However, it’s creating more and more distortions in the economy.
Artificially low interest rates are encouraging people to borrow. We learned last week that the level of debt carried by Canadian households has reached a record level, at 168% of disposable income. If interest rates were to increase now, hundreds of thousands would suddenly have trouble paying their mortgage.
Artificially low interest rates are also hurting savers. They are causing trouble for banks and insurance companies, which are forced to invest in riskier assets. They are creating bubbles in various sectors, which is exactly the reason why there was a crash in 2007.
Everybody is now aware that this monetary situation is unsustainable. Central banks have been saying for years now that they will eventually raise interest rates, but they are afraid that doing so will provoke another major recession.
So, how are we supposed to get out of this situation of economic stagnation? The current Liberal government believes it has found the remedy: Borrow, borrow, borrow. Spend, spend, spend. In short, the old Keynesian solution.
According to this view, if consumers don’t spend enough, and businesses don’t invest enough, then the government should do it for them.
The head of the International Monetary Fund, Christine Lagarde, recently came to Canada to praise the Liberal policy. The Bank of Canada has also encouraged the government to bring more fiscal stimulus, saying there is little else it can do with monetary policy.
I don’t buy this solution of more borrowing and spending. There is just one word to accurately describe Keynesianism: Nonsense.
The key question you have to ask yourself is this: “Where does the money the government spends come from?” A government cannot inject resources into the economy unless it has first extracted them from citizens through taxes, or put us further into debt by borrowing the money.
Every time the government takes an additional dollar in taxes out of someone’s pocket, or borrows it from someone, that’s a dollar that this person won’t be able to spend or invest. Government borrowing and spending goes up, private borrowing and spending goes down. There is no net wealth creation.
It’s like taking a bucket of water in the deep end of a swimming pool and emptying it in the shallow end.
I don’t believe our economy has slowed down because governments are not spending enough taxpayers’ money, or getting us enough into debt. More government borrowing and spending are not the answer to our economic challenges.
To understand why investment is down, we also have to look at the incentives businesses have to invest. Or rather, the lack of in centives.
Despite interest rates being exceptionally low, businesses are afraid to invest because of the uncertain economic future that they face. They see all the debt and distortions created by successive monetary and fiscal stimulus in Europe, Japan, and the U.S. since the Great Recession. They see governments increasing regulation and intervening more and more in the economy.
More spending on the scale offered by the Liberal government is not going to stimulate the economy and bring us prosperity. It will act as a sedative for the economy.
Prosperity does not come from government spending but rather from entrepreneurs investing. What we need is the exact opposite of more government spending. We need to encourage private investment in order to increase the economy’s productive capacity.
I have already made a series of announcements that would bring more competition in the telecommunications sector, the air transportation sector, and in agriculture, as well as to cut red tape by eliminating interprovincial trade barriers. The more open our economy, and the more competition there is, the more businesses are inclined to invest to stay competitive.
Today, I offer an ambitious tax plan to unleash Canada’s productive forces, boost private investment and bring higher sustainable long-term growth. Economic growth that will allow us to lower personal taxes, better fund the government services Canadians expect and pay down the debt.
First, I propose to abolish the capital gains tax.
The capital gains tax is a tax on investment. Everybody understands the logic: The more you tax something, the less of it you will get.
Young entrepreneurs and innovative small businesses often have difficulty finding financial backing for their projects. Abolishing the capital gains tax will
encourage everybody to save more and invest more. It will increase the supply and lower the cost of capital for these new firms.
The capital gains tax also discourages investors from selling old assets and investing in more productive new ones because that sale triggers the tax. Getting rid of it will not only bring more capital, it will increase the overall efficiency of capital.
This may sound like a radical proposal, but it’s not. There was no capital gains tax in Canada until 1972. The Fraser Institute determined in a 2014 study that Canada’s top personal capital gains tax rate is the 14th highest among the 34 OECD countries. But 11 of these countries impose no capital gains tax at all, including Switzerland, Belgium, South Korea and the Netherlands.
Today Ottawa collects only about 3 billion dollars from capital gains taxes every year, or about 1% of its total revenues. The benefits to our economy would vastly exceed this loss of revenues.
My second proposal is to make Accelerated Capital Cost Allowance a permanent feature of the Canadian tax system and extend it to all sectors.
In 2007, as part of measures adopted to deal with the financial crisis, our Conservative government introduced accelerated capital cost allowance rates for investment in machinery and equipment used in manufacturing or processing. It was extended to clean energy equipment in 2010. The program was supposed to come to an end in 2015 but was extended for ten years in our government’s last budget.
Capital expenditures are a key driver of productivity. When they invest in new machinery and equipment, manufacturers can produce more output per hour, improve quality, and increase efficiency at all levels. Workers become more productive, which is the key factor leading to higher wages.
It also contributes to a greener economy. We can use less energy and resources to produce more. Investing in productive capacity is the best way to help both our environment and our economy.
Accelerated Capital Cost Allowance has the effect of boosting investment by allowing for a faster write-off and cost recovery. For example, instead of writing off an investment over a period of 15 years, a company can deduct it from its income in only 3 years. This directly affects the company’s cash flow. The government loses corporate tax revenues in the short term, but the increased productivity and profitability brings more revenue in the longer term.
I see no reason to restrict this measure to manufacturing and clean energy equipment. To avoid distortions, there should be a level playing field. Investment should be encouraged in all sectors of our economy, and the measure should be made permanent.
It would also apply to investment in telecommunications, in oil and gas, fisheries, agriculture or any other sector that provides value-adding jobs to Canadians.
My final tax measure to boost investment in Canada is to further reduce the corporate income tax. This will increase the after-tax rate of return on investment, and thus encourage businesses to invest more.
One of our government’s major fiscal achievements was to reduce the corporate income tax from 22% in 2007 to 15% in 2012. We can do better. Canada’s combined federal-provincial corporate income tax rate is the 15th highest among 34 OECD countries. I propose to bring down the federal rate to 10%.
Reducing corporate income tax doesn’t necessarily mean that government revenues go down. A lower tax rate attracts more foreign companies and leads to the creation of more companies in Canada. More companies will become more profitable, invest more, employ more people and pay more taxes.
Still, these three measures do imply that government revenues will go down at least temporarily. I’m against deficits. I’m against increasing personal taxes. There is one ideal way to recoup the revenue loss: Put business subsidies on the chopping block!
The federal government is spending billions of dollars every year to help businesses. It directly puts money in new investments, bails out failing companies, and offers dozens of different incentives, tax credit and tax deductions for all kinds of reasons. A recent study by the School of Public Policy at the University of Calgary found $16 billion in various types of direct and indirect subsidies to businesses in 2013.
Several of these measures may be worth keeping. But many others are just inefficient ways for the government to choose winners, bail out unprofitable ventures, promote some bureaucratic fad, or buy political support with taxpayers’ money.
They also create unfair distortions in the economy, by favouring some sectors at the expense of others. Abolishing them will force companies to compete for funds in the capital market instead of wasting resources filling in questionnaires and lobbying the government.
I think axing inefficient subsidy programs is not just good for the economy; it is also crucial to demonstrate to Canadians that pro-growth measures such as tax cuts are not the same as pro-business measures. The ultimate aim of pro- growth measures is to benefit Canadian consumers and workers; not businesses. By putting an end to crony capitalism and corporate welfare, I believe it will actually be easier to convince Canadians to accept our pro- growth policies.
It’s time to stop taking billions of dollars out of the private sector, just to redistribute them through subsidies. A rational economic policy will instead lower taxes for all businesses.
This is an ambitious plan. It will end corporate welfare and bring a real and sustainable stimulus to our economy. It will turn Canada into a haven for investors and entrepreneurs. It will lead to more job creation, higher wages, and overall economic activity. And it will achieve this in a responsible way, without burdening future generations.