Canadian firms come under fire

OTTAWA — The timid and cautious nature of Canadian business — not government policies or high taxes — is likely to blame for the country’s woeful productivity record, analysts say.

OTTAWA — The timid and cautious nature of Canadian business — not government policies or high taxes — is likely to blame for the country’s woeful productivity record, analysts say.

And critics add that the time has come for businesses to step up to the plate in creating the kind of competitive economy Canada will need to sustain better living standards in the future.

The issue emerged again Tuesday after the federal government called a news conference to trumpet its decision to eliminate all tariffs on imported manufacturing machinery and equipment, a $300-million boon to firms that take advantage.

But economists say the measure, which was unveiled in last week’s budget, may not be any more successful than previous carrots offered by Ottawa to get businesses to invest for the future.

And if that keeps happening, Canadians will not only see their real incomes fall relative to other more competitive countries, but governments may have even more difficulty eliminating deficits.

“I think what it boils down to is we don’t have the same culture of risk-taking and entrepreneurship as you find in the U.S.,” said Fred Lazar, a professor with the Schulich School of Business at York University.

TD Bank chief economist Don Drummond agreed, noting that the Canadian economic union began as a protectionist zone and that efforts to open the economy are a relatively recent occurrence. Many sectors, including banking, telecommunications and broadcasting, remain virtual closed shops.

Still, Drummond says governments of all stripes, both federal and provincial, have made great strides the past decade to make Canadian business more competitive.

Since 2000, the combined corporate tax rate has fallen from over 40 per cent to what will soon be 25 per cent. As well, Ottawa has eliminated taxes on capital, offered a write-off on new manufacturing investment, boosted credits for research and development, and now instituted a “tax-free zone” on manufactured equipment.

In July, Ontario and B.C. will eliminate sales tax on business inputs when they move to a harmonized sales tax.

“There’s been a revolution in the way we tax our corporations. We have gone from one of the heaviest taxes on capital in the world to one of the lowest, so what are (businesses) waiting for?” Drummond asks.

Both in good times and bad, Canadian business have failed to take advantage and invest in innovation and new equipment and machinery that would make them world-beaters, analysts say.

During much of the decade when profits were booming, investment was basically flat when price decreases are taken into account. During the recession last year, capital investment crashed 21 per cent.

Analysts say that short-sighted approach gets the most blame for Canada’s woeful productivity growth, which has been worse than all but two of the 30 countries in the Organization for Economic Co-operation and Development since 1980.

CIBC chief economist Avery Shenfeld appeared equally frustrated in his note to clients, pointing out that the corporate sector has got pretty much everything it has asked for.

“It’s time (for businesses) to ante up,” he said.

Productivity is among the least appreciated economic concepts — in essence it means output per hour — but it is also one of the most critical. Without it, wages fall and economic growth stalls, making balancing government budgets without tax increases difficult.

The most effective way to increase productivity is to give workers better equipment to work with, said Drummond.

Lazar believes some tough love by government is needed to get Canadian firms investing in what is essentially their future and by extension that of all Canadians.

He said Ottawa should eliminate all foreign ownership restrictions. In the throne speech, the government said it would look at easing restrictions in a few industries, specifically the satellite and telecommunication sectors and uranium mining, but offered few details.

“Allow outsiders to come in and try to kick-start some degree of entrepreneurship,” Lazar said, adding that Ottawa should also target incentives to encourage new start-ups.

Jayson Myers of the industry body Canadian Manufacturers and Exporters rejected the criticism, saying that businesses did what was most lucrative before the recession — including making many investments outside the country, rather than inside. The appreciation of the dollar was one reason.

During the recession, he said, businesses had no money to make major investments.

But he agreed that government incentives need to be more targeted than they are currently to get firms to do what Ottawa wants.

“I don’t think there’s anything wrong with a tax system that encourages investment in productive assets, and frankly that’s something a lot of other governments get,” he said.