1. Budget for business?
fDi Editor | 12/04/2005 12:00 am | Commenton this article
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Will Canada’s latestbudgetkeep up the country’s momentum for FDI? David Clarke reports on reaction to the new
government’s firstcrack of the fiscal whip.
The first budgetof the Canadian prime minister Paul Martin’s Liberal governmentfeatures a hostof bold future
spending commitments and,to appease the other parties,something for basicallyeveryone in the interim.But how
much it offers foreign investors is open to debate and some members ofCanada’s business communityare worried
that the proposed budgetdoes notgo far enough to keep the country competitive.
“The Canadian governmentdoes notunderstand thatwe mustcompete in a globallycompetitive environment;our tax
incentive circumstance is a big negative for our future economic prosperity,” says Bill Lawson,an associate professor
at the Eric Sprott School of Business atOttawa’s Carleton University. “We will fall further and further behind,far
below our country’s potential.”
The Canadian Manufacturers & Exporters Association (CME) did not appear impressed with the budget. “After
building up expectations that the federal governmentwould address the challenges facing Canadian industry,the few
measures introduced in this year’s budgetfall far shortof what is necessaryto boostinvestment,production,jobs or
export performance,” says Jayson Myers, CME’s senior vice-presidentand chiefeconomist.
The budgethad a stormy reception in parliamentbuthas gone to the third reading and is expected to pass.
The governmenthas a lot going for it. As a resultof Canada’s seven consecutive surpluses,the country has moved
from having the second worstdebt-to-GDP ratio in the G7 to having the best.And a 2004 KPMG study of
international business costs in 11 countries showed Canada’s costs were the lowest.
Canada has continued to attract more than its fair share of global greenfield FDI.In the past10 years, it has attracted
about6% of the global total, far more than its share in the world economy, which is less than 2%.
The government’s strong fiscal position and lower debtburden have meantmore resources are available to spend on
pressing problems like healthcare,defence and Kyoto commitments,while maintaining the country’s corporate tax
advantage relative to the US. Once the measures in the 2005 budgetare fully in place in 2008,the corporate surtax –
originallyintroduced to help fight the federal deficit – will be eliminated and the general corporate income taxrate will
be reduced to 19% from 21%.
Spending growth
The reaction from the business communitywas generallyfavourable.“The biggestconcern for business leaders is
the overall rate of spending growth,” says David Stewart-Patterson,executive vice-presidentofthe Canadian Council
of Chief Executives (CCCE), which represents the heads ofabout150 leading domestic companies.“Much of the
new spending is going to meetvery importantpriorities,from improving healthcare to strengthening our armed forces.
But overall programme spending is up by 12% this year and has grown 44% over the pastfive years.”
However, questions remain aboutwhether the governmentwill able to afford everything that it has promised.Some
business leaders are fretting over the sustainabilityof its stated commitments to spending on social programmes.
And, ironically,the strength of the Canadian dollar presents risks to the country’s economic health.
“I’ve said very clearly that the value of the dollar is one of the budget’s downside risks,” Canada’s finance minister,
Ralph Goodale,has stated.
The CCCE, though,is slightlyconsoled by the finance minister’s “continued bedrock commitmentto balanced
budgets,prudence in fiscal forecasting and the dedication ofunused contingencyfunds to debt reduction”,says Mr
Stewart-Patterson.
Competitive position
But the key question,at leastin terms of FDI, is whether the budgetgoes far enough to maintain Canada’s global
competitiveness.

2. Mr Stewart-Patterson says he is glad that the governmentseems to have recognised the importance ofa competitive
tax regime,and in particular of keeping Canadian corporate income taxrates significantlybelow those in the US in
order to attract more investmentand jobs.But he tempers this byadding:“These improvements,however,offer little
comfortin the shortterm to Canadian exporters thatare trying to cope with the rapid rise of the Canadian dollar over
the pasttwo years and which need to make major investments now to stay competitive and continue growing from a
Canadian base.”
According to the CME, the government’s competitiveness agenda is taking too long to implement.“Bottom line:this is
an election budget.There are a lot of back-end measures thatwill not take effect for years,” says Mr Myers.
“As a business association,we were advocating a five-year tax strategy, but that does notmean that the government
has to wait five years for the measures to take effect.”
The CME believes that, in addition to the tax breaks,some very limited tax and spending measures will be ofbenefit
to industry. “But the government’s failure to accelerate depreciation allowances for manufacturing equipmentis a
major disappointment,” Mr Myers says.“It is clear from this budgetthat, while the governmentis willing to spend
heavily on one hand,and use the tax system for environmental policypurposes on the other, it justdoesn’tgetit
when it comes to building a competitive investmentenvironmentin Canada.”
Defence argument
The DepartmentofFinance, not surprisingly,defends the budget.“The governmenthas taken significantaction in
recent years to reduce taxes for Canadian families and businesses,” says a DepartmentofFinance spokesperson in
response to Mr Myers’ critique.“Tax reductions have been part of a balanced approach thatincludes reducing debt
and investing in key programmes for the benefitof Canadians.Therefore,tax reductions have to be sustainable and
fiscallyresponsible.”
The $100bn Five-Year Tax Reduction Plan introduced in 2000 reduced federal personal income taxes by 21% on
average, and by 27% for families with children.It also reduced the general corporate tax rate to 21% from 28% which,
the DepartmentofFinance says, levelled the playing field for Canada’s service sector and created a tax advantage
for investmentin Canada.
“Budget2005 builds on the government’s strong record ofsustainable,responsible taxreductions with further
personal and business tax reductions,” the spokesperson insists.
Pensions boost
In a surprise move,Canada has abolished limits on how Canadians investtheir retirementsavings,opening a whole
new ballpark for many pension funds to contribute to Canada’s stock ofoutwards investment.
The federal budget’s scrapping ofthe 30% limiton foreign content – for pension funds and individuals alike – is “a
victory that, quite frankly, we were not expecting”, says John Murray, vice-presidentofregulation and corporate
affairs for the InvestmentFunds Institute of Canada,a Toronto-based industryassociation.“We had hoped the
governmentmightreduce the restrictions incrementally.We are very pleased with the results,” he says.
According to the budget,the rationale for the government’s move is:“As Canadian markets have grown and matured
since the early 1990s and become more integrated with global capital markets,access to capital for Canadian
companies has improved substantially.”
The limit,setat 10% in 1971,rose to 20% in the 1990s,then to 30% in 2001.Investors who exceeded those limits
were penalised with a 1% per-month penalty tax.
The clear winners are Canada’s pension funds,which until now have been crimped by the relatively small domestic
marketin which they had to operate. The Canadian stock marketaccounts for only 3% of world stock market
capitalisation.
The Conservative party has come out swinging over the budget,even threatening to trigger a snap election in the
spring.With the Liberal governmentin a minority,a vote againstthe budgetby the Conservatives would countas a
vote of no confidence,which would require another election to be held.Opposition leader Stephen Harper later
backed down from this position.Whatever the fate of the budget,the government’s business competitiveness agenda
and tax regime are unlikelyto see any large-scale changes anytime soon.
Some members ofthe business communitythink that is a shame.Carleton University’s Professor Lawson has some
unambiguous advice for the government:“The message is notgetting through:lower taxes to stimulate the private
sector’s wealth,creating capacity, resulting ultimatelyin more tax revenue. Stop with the short-term politicking and
adoptpolicies for the long term.”

3. R&D INITIATIVES
Canada’s proposed budgetprovides $810m in strategic investments in ideas and enabling technologies over the next
five years. These include:
r five years for the three federal granting councils:the Canadian Institutes ofHealth Research,the Natural Scienc es and Engineering
Council ofCanada,and the Social Sciences and Humanities Research Council ofCanada.
funding to universities and research hospitals for the indirectcosts offederally sponsored research,bringing th e total to $260m a year
m starting in 2005-2006.
r five years for world-leading particle physics research atthe Tri-University Meson Facility (TRIUMF) science facility in British
he Canadian Academies ofScience to provide independentexpert assessments ofthe science underlying keyissues.
Genome Canada in supportof breakthrough genomics research.
recarn,which specialises in advanced robotics and artificial intelligence.
These initiatives build on the $11bn added by the governmentof Canada for university-based research since 1998.
This article is sourced fromfDiMagazine