MNI INTERVIEW: Next Canada Govt Must Win Investment From U.S.

--Spending Per Worker Lowest Since 1990s Vs U.S.

By Greg Quinn

     OTTAWA (MNI) - Canada should lower taxes and reverse negative perceptions

of resource projects if it is to counter the lure of Donald Trump's tax cuts and

deregulation and narrow the biggest investment gap with the U.S. in decades, the

head of think tank the C.D. Howe Institute, which organizes Canada's main shadow

monetary policy council, told MNI.

     Canadian companies are spending about 60 cents per worker on new capital

for every dollar U.S. rivals spend after adjusting for exchange rates, the worst

comparison since the early 1990s, Toronto-based William Robson estimates in a

new research paper. That's a danger for Canada because it relies on the U.S. for

three-quarters of exports and faces tough competition from emerging nations like

China and Mexico.

     "Here we are trying to play gold medal hockey against the United States and

our team still has Eaton's catalogues for shin pads and no helmets," Robson

said, referring to a former Canadian retail chain. "If you have that kind of a

penalty in terms of how up to date your technology is, then it stands to reason

you are going to have a hard time competing."

     In total current dollars, Canada invests C$15,000 per worker, trailing the

U.S. total of C$26,000. Across the OECD the figure is C$21,000. Closing the gap

with the U.S. would be akin to buying every worker in Canada new laptops and

mobile phones or enrolling them in college courses.

     The relative decline in investment has come as lower oil prices led

multinational companies to quit Alberta's oil sands, and is a big reason the

Bank of Canada has kept interest rates at or near record lows over the last

decade. Prime Minister Justin Trudeau's Liberals also revamped approvals of

resource projects to balance economic growth with environmental protection.

     --OCTOBER ELECTION

     An election is now due in October, and the next government must look at

business taxes, higher electricity costs and regulations that restrict

competition in agriculture and telecommunications, said Robson, whose paper

cited the risks from the current lopsided expansion led by indebted consumers.

Strength in the rest of the economy suggests fiscal policy more than slack

demand or monetary settings are hampering investment, he said.

     "There's no reason to think that monetary policy is currently too tight,"

to generate investment, Robson said. "The Bank of Canada has been rightfully

commenting and just trying to explain the economic situation that we just aren't

getting this rotation" from consumer to business spending, he said.

     The C.D. Howe monetary policy council, which gathers financial-market and

academic economists to consider Bank of Canada monetary policy, said in July

that the key rate should be held at 1.75% for the next 12 months.

     Canada was holding the line on the investment gap with the U.S. until a few

years ago, Robson said. Past governments slashed the federal corporate tax rate

well below the U.S., an advantage now being lost. Companies have also been

holding back spending as Trump threatened a trade war with Canada.

     "We have other problems, most notably U.S. protectionism, that are much

harder to deal with, so all the more reason to bear down on the areas where you

can make a difference," Robson said.

     Polls suggest a tight electoral race between Trudeau's Liberals and

Conservatives led by Andrew Scheer, whose main pledge so far is to eliminate a

carbon tax.

     Canada's last federal budget brought in targeted corporate tax reductions

to match U.S. cuts after months of lobbying by business groups. To Robson this

suggested a lack of urgency.

     "It sort of speaks to a grudging attitude on the part of the federal

government," he said. "They are quite clearly in their rhetoric and their

overall orientation not tremendously motivated by the concerns of business."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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