“Assuming the U.S. does go ahead, from Canada’s standpoint, it will be very difficult not to do something. I think we would have to go quite a long way to reduce our own corporate taxes, especially on big companies,” said Sargent. Over three decades in government Sargent was also a senior official in other departments including trade and the prime minster's advisory branch.
Congress may hesitate backing major tax cuts with a deficit around 7% of GDP, but Trump's threat of across-the-board tariffs makes it more urgent that Canada gives companies reason to invest, Sargent said. Investor confidence would also benefit from Canada making tough choices to juggle tax cuts with a plan to balance the budget following an election due next year, he said.
GAUGING PACE OF CUTS
Long-term interest rates could stabilize around 3% or a bit higher in a world of rising government debt and aging populations, Sargent said. U.S. political shifts like tariffs and polls suggesting Canada's government will change hands to Pierre Poilievre's Conservatives also blur the case for rapid central bank rate cuts, he suggested.
“There’s a lot going on politically for the Bank that will have macroeconomic consequences," Sargent said. "And so if I were the Bank I think a couple more rate cuts and then you will be wanting to be paying close attention to where the North American macroeconomy is going.”
Bank of Canada Governor Tiff Macklem quickened the pace of rate cuts last month with a half-point move to 3.75%. Sargent said that while Canada's growth and inflation are weaker than the U.S. the risks aren't enough to keep going at that pace. Investors are split on whether the next decision on Dec. 11 will be a quarter or a half point. (See: MNI INTERVIEW: BOC Has Room To Keep Cutting By 50BPS: Senator)
Drags on growth from expected Conservative fiscal restraint and Canada's immigration freeze will develop slowly enough to avoid the need for rapid monetary relief, Sargent suggested. The Liberal minority government will probably last into next spring and “if the government had a target to balance the budget within three or four years, that would really force a lot of fiscal discipline,” he said.
There are some opportunities even if they may be politically uncomfortable: pressure to get in line with Trump's demand to meet the 2% NATO defense spending target and to favor oil drilling that could boost Alberta's heavy crude deposits.
Danger to Canada's economy demands a move away from its current drivers outside of investment that "are not sustainable in my view," Sargent said. “That’s going to take a significant policy change.” (See: Canada Making Fiscal And Climate Policy Mistakes: Biz Council)