Morneau analyzing big U.S. tax cuts, rules out ‘impulsive’ Canadian response

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Ottawa will consider tax changes in response to the deep cuts approved in the United States, Finance Minister Bill Morneau says, but he signalled that companies should not expect a corporate tax reduction when he delivers his February budget.

The minister also confirmed that his 2018 budget will include further changes to tax rules for small businesses that had been previously announced, in spite of widespread calls from business leaders to abandon the controversial proposals.

Mr. Morneau made the comments on Friday after meeting with private sector economists ahead of the release of his Feb. 27 budget.

Canadian CEOs urged the minister this week to include an immediate corporate tax cut in the budget in response to U.S. tax and regulatory reforms that largely erased Canada's corporate tax advantage. Mr. Morneau said Canada's competitiveness with the United States was a major topic of his closed-door discussion with economists, but appeared to rule out any immediate action.

"With respect to risks like changing [U.S.] tax rates, we need to get it right," he said. "We are doing our analysis to make sure that we understand the impact of any changes. That requires us to carefully do that analysis and make sure we get it right and not to act in an impulsive way."

The main focus of the economists' meeting, which federal finance ministers hold a few weeks before each budget, is to revisit the private-sector economic projections that the government, by long-standing convention, uses as the basis for its budget calculations. Economists said their outlook is little changed from December, when they last provided the finance department with their formal forecasts; they still see the economy moderating this year and next after a surprising growth spurt last year in which the economy expanded by about 3 per cent. Recent private-sector forecasts are for real gross domestic product growth of 2.2 per cent in 2018 and 1.7 per cent in 2019, little changed from their projections in the government's fall update last October.

Still, economists have grown increasingly concerned in the intervening months about the uncertainty surrounding the renegotiation of the North American free-trade agreement, as a collapse of the deal would almost certainly deliver a serious blow to the Canadian economy. There are also nagging worries about a slowing housing market because of new, tighter mortgage regulations and rising interest rates, as well as uncertainty about how minimum-wage increases in several provinces, most notably Ontario, will affect economic activity.

But the key issue economists raised at the meeting was the recent sweeping U.S. tax-cut package – which, several argued, looms as a potential long-term threat to Canada's competitiveness as a business and investment destination.

"If you were to rank the risks, NAFTA is right up there, but I think the U.S. tax reforms are a bigger concern for the Canadian business community," said Bank of Nova Scotia chief economist Jean-Francois Perrault, one of the nine economists at the meeting.

"The double whammy of NAFTA uncertainty and the recent tax cuts have shifted the competitive landscape," said Toronto-Dominion Bank deputy chief economist Derek Burleton, another participant.

However, several economists cautioned Ottawa against the idea of fighting U.S. tax cuts with a knee-jerk slashing of its own rates. They said the Canadian economy is already approaching full employment and such a move would provide stimulus that is not needed. And it would come at the expense of efforts to balance the federal budget, which is nearly $20-billion in the red despite the revenue lift from last year's strong economic growth.