From the Fraser Institute

By Tegan Hill and Jake Fuss

From 2014 to 2022, inflation-adjusted total business investment (in plants, machinery, equipment and new technologies but excluding residential construction) in Canada declined by C$34 billion. During the same period, after adjusting for inflation, business investment declined by a total of $3,748 per worker

According to the recent federal budget, the Trudeau government plans to increase the inclusion rate from 50 per cent to 66.7 per cent on capital gains over $250,000 for individuals and on all capital gains realized by corporations and trusts. Unfortunately, this tax hike will be the final nail in the coffin for business investment in Canada, which likely means even harder economic times ahead.

Canada already faces a business investment crisis. From 2014 to 2022, inflation-adjusted total business investment (in plants, machinery, equipment and new technologies but excluding residential construction) in Canada declined by C$34 billion. During the same period, after adjusting for inflation, business investment declined by a total of $3,748 per worker—from $20,264 per worker in 2014 to $16,515 per worker in 2022.

While business investment has declined in Canada since 2014, in other countries, including the United States, it’s continued to grow. This isn’t a post-COVID problem—this is a Canada problem.

And Canadians should be worried. Businesses investment is key for strong economic growth and higher living standards because when businesses invest in physical and intellectual capital they equip workers with the tools and technology (e.g. machinery, computer programs, artificial intelligence) to produce more and provide higher quality goods and services, which fuels innovation and higher productivity. And as firms become more efficient and increase profits, they’re able to pay higher wages, which is why business investment remains a key factor for higher incomes and living standards.

The Trudeau government’s policies—increased regulation, particularly in the energy and mining sectors (which makes Canada a relatively unattractive place to do business), higher and uncompetitive taxes, and massive federal deficits (which imply future tax increases)—have damaged business investment.

Unsurprisingly, weak business investment has correlated with a weak economy. In the fourth quarter of 2023, real economic growth per person ($58,111) officially fell below 2014 levels ($58,162). In other words, Canadian living standards have completely stagnated. In fact, over the last decade economic growth per person has been the weakest on record since the 1930s.

Instead of helping fix the problem, the Trudeau government’s capital gains tax hike will further damage Canada’s economy by reducing the return on investment and encouraging an exodus of capital from the country. Indeed, capital gains taxes are among the most economically-damaging forms of taxation because they reduce the incentive to invest.

Once again, the Trudeau government has enacted a policy that will deter business investment, which Canada desperately needs for strong economic growth. The key takeaway for Canadians? Barring a change in policy, you can expect harder times ahead.

From the Fraser Institute

By Matthew Lau

From the third quarter of 2015 to the fourth quarter of 2023, growth in real GDP per-person (a common indicator of living standards) was less than 1 per cent cumulatively versus more than 15 per cent in the United States. This despite—or more accurately, because of—massive government spending including on corporate subsidies

Reading the federal budget, which the Trudeau government tabled last week, is not an activity likely to improve the equanimity of Canadians suffering from over-taxation and anxious about stagnating living standards. The fact is, the budget sets Canadians even further behind with increased costs and higher taxes, which are sure to reduce productivity and investment further.

In terms of taxes, the main headline is the increase to the capital gains tax to a two-thirds inclusion rate for amounts over $250,000 per year. With Canada’s business investment numbers already dismal, the capital gains tax hike makes things worse by discouraging entrepreneurship and distorting economic decisions to favour present day consumption instead of saving and investment. Indeed, because people know the money they earned today will be taxed more heavily when they invest it tomorrow, the capital gains tax hike reduces incentives to work and earn today.

When it comes to costs, the “total expenses” line in the fiscal tables is most instructive. In last year’s budget, the Trudeau government said it would spend $496.9 billion in 2023-24 and $513.5 billion in 2024-25, rising to $556.9 billion by 2027-28 for a total of $2.6 trillion over five years. But according to this year’s budget, its $505.1 billion for 2023-24, $537.6 billion in 2024-25 and $588.2 billion by 2027-28, for a total of $2.8 trillion over the same five-year period, with both higher program spending and greater borrowing costs contributing to the increase.

In other words, the Trudeau government overspent its budget last year by an estimated $8.2 billion, has increased its spending for this year by $24.1 billion, and will now overspend last year’s fiscal plan by a total of $120.8 billion over five years. And that’s assuming the Liberals stick to the spending plan they just tabled. The Trudeau government has a track record of blowing past its original spending targets, often by astonishing margins, a trend continued in its latest budget. So taxpayers might reasonably expect even the significantly increased costs presented in this latest budget are an understatement.

Canadians might find the exorbitant costs of federal spending easier to accept if they saw some benefits commensurate to the spending, but they have not. From the third quarter of 2015 to the fourth quarter of 2023, growth in real GDP per-person (a common indicator of living standards) was less than 1 per cent cumulatively versus more than 15 per cent in the United States. This despite—or more accurately, because of—massive government spending including on corporate subsidies and other initiatives the government claimed would boost economic growth. Clearly, such growth has not materialized.

The latest budget increased spending for the national child-care program, but the thing has been a disaster  from coast to coast, with families unable to find spots, daycare operators in dire straits, and costs to taxpayers ballooning. Similarly, while health-care spending has risen over the years, access to medical care has gone down. Spending and regulation related to climate change have exploded under the Trudeau government, but the environmental benefits of initiatives such as electric vehicle consumer subsidies and plastic bans, if there are any environmental benefits at all, are nowhere near high enough to offset the burden to taxpayers and consumers.

Clearly, the Trudeau government’s ramp-up in spending and increased taxation, as the GDP and investment figures show, have produced severely negative outcomes for eight years. By ramping spending and taxation up yet higher, it will help continue these negative outcomes.