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GiveLife.ca

    

PRINT EDITION
5 big economic challenges facing Canada's next government
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From real estate to trade to taxes, taking stock of the promises made this campaign
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By MATT LUNDY
  
  

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Saturday, October 19, 2019 – Page B1

In a few days' time, the real work begins.

After a bruising 40-day election campaign, where all parties dangled promises big and small to woo key voting blocs, Canada's next government will take the keys of a $2-trillion economy that faces a litany of headwinds.

Global growth is expected to slow, and that's liable to wash up on Canadian shores. International trade tensions aren't helping, nor is that fact that North America's new trade deal has yet to be ratified. Some issues have stymied policy makers across the industrialized world: weak productivity growth, subpar wage gains. Others seem more particular to Canada.

Who should pay higher taxes?

Who shouldn't? The front-runners have made a direct pitch to Canadian wallets.

The Conservatives have proposed a "universal tax cut," a gradual lowering of the rate on taxable income below $47,630, from 15 per cent to 13.75 per cent.

This would cost in excess of $6-billion by 2024-25, the first fiscal year of a second Conservative mandate.

Meanwhile, the Liberals have proposed raising the basic personal amount - or, what you can earn without paying taxes - to $15,000 by 2023, from the current $12,069. That would cost nearly $6-billion by the final year of a second Liberal term.

Broad-based measures such as these are preferable to "targeted incentives that just add more complexity to the [tax] system," says Jack Mintz, president's fellow at the University of Calgary's School of Public Policy.

Still, niche offerings are found in spades. The Conservatives would reinstate fitness and arts credits for kids, along with those for public transit passes.

The Liberals would boost their Canada Child Benefit for children under the age of 1. The NDP would double the home buyer's tax credit to $1,500. And the Greens would increase the tax credit for volunteer firefighters and create one for renovating heritage buildings.

And that's just the shortlist. All told, new tax cuts and credits will cost the next government billions in revenue, while new programs will add billions more in new spending. That means deficits for some time to come.

Each party, though, is counting on new revenue streams to make an impact.

Notably, parties to the Tories' left have embraced various taxes targeting highincome Canadians and corporations. The NDP, for instance, would impose a 1-percent annual tax on wealth above $20million. It would also raise the portion of capital gains subject to tax, to 75 per cent from 50 per cent. The Greens would go a step further, taxing all capital gains. The Liberals would impose a luxury tax of 10 per cent on purchases of cars, boats and personal aircraft above $100,000.

Where does that leave Corporate Canada? For years, it enjoyed a relative tax advantage over the U.S., but that was wiped out by President Donald Trump.

The NDP and Greens would deliver another blow, with a hike on corporate tax rates. It's not a plan the Liberals and Conservatives would match.

However, the Conservative platform includes an olive branch to small-business owners, who vocally opposed tax changes brought in by the Liberals. For one, the Tories would restore access to the small-business tax rate for those companies with more than $50,000 in passive investment income in a given year. Further, spouses over the age of 25 would be exempt from restrictions on income splitting.

There is, however, one area of broad consensus: cracking down on Silicon Valley.

"It makes no sense that if I get streaming services from Bell and Rogers, I pay HST or GST, but if I buy Netflix streaming services, I don't," says Mr. Mintz, noting a digital-services tax is a "slam dunk" move.

The Liberals would go a step further, imposing a 3-per-cent tax on the revenue of companies that sell digital advertising and user data, such as Google parent Alphabet Inc., and Facebook Inc. The Tories would match that rate, targeting the "largest companies" that offer socialmedia platforms, search engines and online marketplaces in Canada. They project it would raise $2.5-billion over five years.

Should Canada levy what amounts to a corporate tax on U.S. tech firms, "I think we're going to be dealing with potentially a very angry U.S. government," Mr. Mintz says. "It could invite tariffs." How do we support Alberta without bludgeoning the environment? No doubt, Alberta is suffering.

Five years after the oil-price collapse, the province's economy has yet to fully recover, and its resource sector is a leaner version of what it was. As such, there's a vocal contingent of Albertans who feel isolated - even abandoned - at the federal level, and would like a little help from pro-pipeline politicians.

At the same time, climate change has never been a bigger issue with the wider electorate. When asked by Nanos Research in September what issue would most influence their vote, Canadians mentioned the environment most often.

The result is widely divergent energy policies, each playing to a party's base, and each likely to create its own problems.

At one end, the Conservatives would scrap carbon pricing, remove GST from home energy bills and repeal Bill C-69, the review process for resource projects under federal jurisdiction. In place of a carbon tax, there would be "emissions standards" for major industries, although details are limited. The Tories have also proposed tax credits for homeowners undertaking energy-saving renovations.

Ultimately, the Tories say their policies would lead to fewer emissions - a claim that's raised some eyebrows.

"Every single policy [Mr. Scheer has] proposed is reducing the incentives to reduce emissions," says Andrew Leach, an energy economist at the University of Alberta.

At the other end is the Green Party: Ban all fracking.

Shut down Alberta's oil sands over the next 10 to 15 years.

End fossil-fuel subsidies. And cancel the Trans Mountain pipeline expansion.

"You need a policy that's going to drive changes in Alberta, but you also need to have a policy that doesn't impose disproportionate costs," Mr. Leach says.

For its part, the Liberals have set deeper climate commitments, pledging to hit net-zero emissions by 2050. They will invest every dollar earned from the Trans Mountain expansion into clean-energy projects and plant two billion trees. The Liberals will also keep their carbon price in place - all but ensuring that federal-provincial relations remain frosty. Further, the Liberals are in danger of missing their 2030 targets, government figures suggest.

Like the Greens, the NDP would cancel the Trans Mountain expansion and end fossil fuel subsidies. Its emissions targets are more aggressive than the Liberals', and it aims for net carbon-free electricity in just more than a decade.

"I think both [the Greens and NDP] haven't accounted for what the federal government can and can't do," says Mr.

Leach, pointing to B.C. as one jurisdiction that could push back.

"The idea that we can eliminate hydraulic fracturing within 10 years and [have] no LNG facilities - ban, ban, ban - I don't even think you're going to get Premier [John] Horgan to sign off on that."

Canadian exporters desperately need to diversify.

In 2018, 70.5 per cent of Canadian exporters sent their goods to a single foreign market, the highest share in Statistics Canada data going back to 2010. For the most part, that single market was the United States - and that, too, is a problem.

"For one, such a large exposure to one trade partner (i.e. the U.S.)

makes Canadian exporters more vulnerable to U.S. economic cycles," Krishen Rangasamy, senior economist at National Bank of Canada, said in a May research note.

"More importantly, as we've seen with [the United States-MexicoCanada Agreement], the lack of diversification reduces leverage for Canadian trade negotiators as they attempt to assuage an increasingly belligerent trade partner."

Even then, Canada emerged from the North American trade negotiations relatively unscathed - a win of sorts for the Liberals.

They also pushed a trade deal with the European Union into fruition, and managed to get the U.S. to lift crushing tariffs on its steel and aluminum exporters.

With so much turbulence in the rear view, trade talk is somewhat scant in the Liberal platform.

Not so for the Tories. According to their platform, they "will sign" trade deals with Britain and some South American and Southeast Asian countries. They would also create an "accelerator" program to help Canadian exporters find customers in markets covered by newer trade deals.

Help appears needed. Earlier this year, a survey commissioned by Global Affairs Canada found that 7 per cent of small- and mediumsized exporters were familiar with details of Canada's trade deal with the European Union. Most had not heard of it.

The NDP platform is heavy on the party's trade principles, but lighter on concrete proposals. The Greens serve up a variety of bold moves, such as a "revamp" of trade policies to bring them in line with climate-change plans. This would include reducing the distance food can be shipped.

Within our borders, the business community would likely applaud some upheaval.

Both the Liberals and Tories have pledged to break down barriers in interprovincial trade. That may prove easier said than done: The current version of the federal-provincial agreement is rife with exceptions and opt-out measures, and they continue to cost our economy billions by the year.

Should Ottawa really try to make housing more affordable? In recent months, Canadian real estate activity has come back to life.

The flip side is that, in many markets, prices are on the rise and increasingly out of reach for would-be buyers looking to build their wealth through home ownership.

Renters are getting dinged, too. In places such as Toronto and Vancouver, the combination of inadequate purpose-built construction and strong demand has led to a surge in monthly rates.

Canada's major parties have unveiled a variety of ways to tackle home affordability - except that some measures could serve to further inflate prices, experts say.

The Liberal Party has proposed an expansion to its First Time Home Buyer Incentive, which allows buyers to get an interest-free loan from the government. The program currently allows a maximum purchase price of roughly $565,000 - a meagre amount in some markets. The expansion would bring the maximum qualifying amount to nearly $800,000 in the Toronto, Vancouver and Victoria areas.

In its current iteration, the program "doesn't do anything to improve your buying power," says Robert McLister, founder of RateSpy.com. The expansion, however, "will see some uptake" in those markets, he added.

The Conservatives have proposed to extend the maximum amortization period on insured mortgages for first-time buyers to 30 years from 25. (So, too, has the NDP.) It's a move aimed at reducing monthly mortgage payments - which in turn, would allow families to buy pricier homes.

"I don't think that was a well thought-out plan," Mr. McLister says. "When you ease credit, it makes it easier for people to get into the market and pay more for a home. And that is not a long-term affordability solution."

Mr. McLister was encouraged by two Conservative plans: removing the stress test on mortgage renewals, and freeing up surplus federal land to increase supply.

By comparison, the NDP and Green platforms place considerably more focus on rental housing, including affordable units. The NDP has vowed to build 500,000 units of affordable housing over the next decade, and to entice developers, it would waive the federal portion of GST/HST on the construction of affordable units.

The Greens would restore tax incentives to spur purpose-built rental construction. (Canada built considerably more rental units in the 1960s and '70s, owing in large part to favourable tax incentives.)

It would also pivot the Canada Mortgage and Housing Corp. to focus on supporting "non-market" housing.

"We have to face the reality that being a renter is going to be the reality for more and more people," said Robert Hogue, senior economist at Royal Bank of Canada.

How do we get the right people in the right jobs? It's a time-worn issue, resulting in a "skills gap" that costs the Canadian economy billions every year. More than one-quarter of companies report a labour shortage that affects their ability to meet demand, according to the Bank of Canada's most recent Business Outlook Survey. You wouldn't know it by looking at monthly job figures.

The Canadian labour market is a pocket of strength, with a torrid pace of hiring sending the jobless rate to near four-decade lows.

But while hiring happens, it's not always the right fit. About 13 per cent of workers have skills mismatched to their jobs, according to a recent C.D. Howe Institute study.

"You're facing an aging population, the labour market is changing and because of technological changes, skills demand is changing," says Parisa Mahboubi, senior policy analyst at C.D. Howe, and the study's author. "So the problem may become severe."

As always, party platforms are filled with plans to better prepare Canadian workers. The Liberals say they will "move forward" with their Canada Training Benefit, introduced in the last federal budget, that included a refundable tax credit for training, up to a lifetime limit of $5,000. They're also proposing "guaranteed training" for apprentices in the Red Seal Program, which sets nationwide standards for skilled tradespeople.

The Conservatives would cancel the Liberals' training credit, saying it has "no standards for relevant courses." The party would expand the Red Seal Program to "harmonize apprenticeship training and trade certification" between the provinces and territories. Moreover, the Tories would "rework" the Temporary Foreign Workers Program to fill vacancies Canadians won't.

The NDP platform includes a raft of proposals, including a change to Employment Insurance rules allowing those who quit jobs for school to receive benefits. It would also "require" employers to spend at least 1 per cent of their payroll every year on training for employees. To mesh with bold climate policies, the Greens have proposed a "just transition framework" for workers in fossil-fuel sectors. Its platform says this would include "income protection, jobs guarantees, retraining and resettlement." No cost is provided for the plan.

Still, there is one overarching problem with wiping out skills gaps: data. "What we're missing is the details on the characteristics on the jobs that are vacant," Queen's University economist Don Drummond told The Globe earlier this year. "We're very much behind virtually every other developed country in attaching the characteristics that go along with different jobs - the skill sets, both hard and soft."

Thus, governments of all stripes may be throwing money at a problem they don't truly understand.


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