{"id":254831,"date":"2025-11-01T15:44:07","date_gmt":"2025-11-01T15:44:07","guid":{"rendered":"https:\/\/www.newsbeep.com\/ca\/254831\/"},"modified":"2025-11-01T15:44:07","modified_gmt":"2025-11-01T15:44:07","slug":"carneys-budget-conundrum-how-to-unlock-business-investment-during-a-trade-war","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ca\/254831\/","title":{"rendered":"Carney\u2019s budget conundrum: How to unlock business investment during a trade war"},"content":{"rendered":"

Open this photo in gallery:<\/a><\/p>\n

Prime Minister Mark Carney and his Finance Minister Fran\u00e7ois-Philippe Champagne are set to deliver their first budget next week.Adrian Wyld\/The Canadian Press<\/p>\n

Since becoming Prime Minister earlier this year, Mark Carney<\/a> has repeated the mantra: Canada can give itself more than U.S. President Donald Trump can take away. <\/p>\n

That will be put to the test on Tuesday when Mr. Carney and Finance Minister Fran\u00e7ois-Philippe Champagne deliver their first budget.<\/p>\n

The cost of U.S. protectionism is clear. Canadian industries that were built on seamless integration into continental supply chains are fighting for survival. Exports have plunged and business investment has been frozen by uncertainty over tariffs. <\/p>\n

Last week, Bank of Canada Governor Tiff Macklem, who previously served as Mr. Carney\u2019s No. 2 at the central bank, warned that the Canadian economy is going through a \u201cstructural transition\u201d<\/a> that could leave economic growth on a permanently lower path.<\/p>\n

Man of the moment: Fran\u00e7ois-Philippe Champagne prepares for make-or-break budget<\/a><\/p>\n

If Ottawa is going to push back against this, it needs to convince companies and investors to bet on Canada, even if tariff-free access to the world\u2019s largest market is no longer guaranteed and opportunities abound south of the border.<\/p>\n

It also means reversing a decade of underinvestment by Canadian businesses in machinery, equipment and intellectual property that produced what the central bank called a productivity \u201cemergency\u201d well before Mr. Trump<\/a> returned to office and began rewriting the rules of global trade.<\/p>\n

Canadian business leaders have mostly applauded Mr. Carney\u2019s early steps to improve the country\u2019s business climate. This includes legislation to tackle interprovincial trade barriers and a new office to fast-track major infrastructure and resource projects.<\/p>\n

Likewise, his comments about cutting red tape and embracing the country\u2019s position as an \u201cenergy superpower\u201d have been well received from Bay Street to Calgary.<\/p>\n

But the full scope of the government\u2019s economic growth agenda will only become clear when the budget is released on Tuesday.<\/p>\n

The Liberals are set to unveil their new budget. Send in your questions for our experts<\/a><\/p>\n

And what Ottawa does with corporate taxation, environmental regulation and various industrial policy tools could have a bigger impact on the investment climate than anything announced to date, economists say.<\/p>\n

\u201cI think what they\u2019re doing is indicative of them understanding the scope of the challenge, the nature of the challenge and the need for some really kind of outside-the-box thinking,\u201d Jean-Fran\u00e7ois Perrault, chief economist at Bank of Nova Scotia, said in an interview.<\/p>\n

\u201cHow effective that will be is a function of their ability to catalyze private-sector finance. And even though you have the business community largely now saying good things about the direction, we haven\u2019t seen the pickup in private investment yet.\u201d<\/p>\n<\/p>\n

There is no shortage of ideas about how to make Canada investible again. For many economists, it starts with the tax system.<\/p>\n

In their spring election platform, the Liberals committed to conducting an \u201cexpert review\u201d of the corporate tax system. And last month, Mr. Carney hinted at possible changes in the coming budget. <\/p>\n

\u201cWe\u2019re well aware of what the relative tax rates are in investment, and we will make sure that they are competitive in the budget,\u201d Mr. Carney told reporters, responding to remarks from Bank of Montreal chief executive officer Darryl White that the country\u2019s corporate tax system puts Canada at a disadvantage. <\/p>\n

It\u2019s unclear whether Mr. Carney was hinting at a broad cut to the corporate tax rate, or niche tax changes aimed at encouraging certain types of business investment.<\/p>\n

That could include expanding accelerated depreciation rules \u2013 which allow companies to write off assets more quickly \u2013 to a broader range of industries beyond manufacturing, or allowing more sectors to use the flow-through share system designed to encourage investment in early-stage mining companies. <\/p>\n

With their long-awaited budget, Liberals must answer the question: What do we want Canada to be about?<\/a><\/p>\n

Francis Fong, senior economist at Toronto-Dominion Bank, said that the government needs to take a serious look at the tangle of corporate tax incentives that already exist and make sure they support high-potential companies and don\u2019t simply throw money at well-connected incumbents. <\/p>\n

\u201cThe fundamental challenge of this file is that nobody wants to be the bad guy when it comes to tax,\u201d Mr. Fong said. \u201cNobody wants to be that guy that takes away someone\u2019s benefits, regardless of whether that benefit is warranted or is supporting the productivity picture, the competitiveness picture.\u201d<\/p>\n

For Mr. Perrault of Scotiabank, tax reform is important. But more important is a push to build infrastructure and change the regulatory system around natural resources. <\/p>\n

That could include rethinking clean electricity regulations and the place of natural gas in the country\u2019s sustainable investing taxonomy, or scrapping the oil and gas emissions cap altogether. <\/p>\n

\u201cA company\u2019s not going to decide to not do a natural resource project in Northern Ontario or Northern Saskatchewan because of the tax regime. It will be something else. There\u2019s no roads. I don\u2019t have the permits,\u201d Mr. Perrault said. <\/p>\n

Ottawa is also taking a major swing at industrial policy. So far, this has been mostly defensive. <\/p>\n

Over the summer, Mr. Carney announced billions of dollars to help companies in hard-hit industries \u2013 steel, aluminum, automobiles and forest products \u2013 retool and look for new markets. And the government is developing a \u201cBuy Canadian\u201d procurement scheme to prioritize Canadian metal and lumber in defence contracts and government-backed housing projects.<\/p>\n

Open this photo in gallery:<\/a><\/p>\n

Over the summer, Mr. Carney announced billions of dollars to help companies in hard-hit industries retool and look for new markets.Justin Tang\/The Canadian Press<\/p>\n

This is more about salvaging domestic industries \u2013 saving a steel mill in Sault Ste. Marie, Ont., or lumber mills on Vancouver Island \u2013 than it is about attracting substantial new investment. In effect, Ottawa is mirroring Mr. Trump\u2019s economic nationalism and protectionism, with the costs and inefficiencies that implies. <\/p>\n

But the promised surge in government spending on home construction and on the military could be a significant catalyst for private capital if done right, economists say. <\/p>\n

St\u00e9fane Marion, chief economist at National Bank of Canada, said that Mr. Carney\u2019s pledge to spend 5 per cent of gross domestic product<\/a> on defence and defence-related items presents \u201ca formidable opportunity\u201d to build up Canada\u2019s industrial base that has withered over the past two decades. <\/p>\n

But to really boost investment in manufacturing, Ottawa needs to rethink rules around using natural gas as a \u201ctransition\u201d fuel for electricity generation, he said. \u201cYour comparative advantage has to be in having available energy. And if you\u2019re going to do industrial sector manufacturing, you need natural gas.\u201d<\/p>\n

Tyler Meredith, who was an economic policy adviser to former prime minister Justin Trudeau and former finance minister Chrystia Freeland, said that Mr. Carney has long been seized with the question of how to get companies to invest more.<\/p>\n

Back in his time as governor of the Bank of Canada, Mr. Carney ruffled feathers on Bay Street by castigating companies for sitting on what he called \u201cdead money,\u201d rather than investing it or giving it back to shareholders. <\/p>\n

But actually getting companies and investors to put their money to work in Canada isn\u2019t simple, particularly when the United States is cutting taxes, deregulating and backing new industries such as artificial intelligence<\/a>. <\/p>\n

\u201cThe challenge is, we can compete and even exceed the U.S. on taxes. We can streamline our regulatory processes. But it just doesn\u2019t feel like it\u2019s as aggressive as what you have in the U.S.,\u201d Mr. Meredith said. <\/p>\n

\u201cAnd then it comes down to: Are Canadian investors and Canadian businesses willing to look at themselves as Canadians, and this opportunity to invest in themselves and invest in this country, differently than they did before? I\u2019m not sure how that will net out.\u201d<\/p>\n

Whatever economic growth strategy Mr. Carney and Mr. Champagne pursue, it will come wrapped in a very expensive bow.<\/p>\n

Weak tax revenue growth combined with a surge in spending on defence, housing and infrastructure is expected to produce a deficit in the $70-billion to $100-billion range.<\/p>\n

That led to warnings in September from interim Parliamentary Budget Officer Jason Jacques that the fiscal path is \u201cunsustainable\u201d and the country\u2019s finances are on a \u201cprecipice.\u201d <\/p>\n<\/p>\n

International Monetary Fund managing director Kristalina Georgieva offered a more optimistic assessment a few weeks later at the annual IMF meeting, suggesting that Canada, alongside Germany, has more fiscal wiggle room than its peers to make investments. <\/p>\n

Former parliamentary budget officer Yves Giroux said in an interview that the important thing to watch isn\u2019t the deficit in a single year. It\u2019s whether the government has a credible path for bringing the deficit down over time. <\/p>\n

And it\u2019s just as important to look at where the money is going as the overall level of spending, given that investments that boost economic growth also help improve tax revenues over time, Mr. Giroux said. <\/p>\n

\u201cIf it was spending to build or expand existing infrastructure that will facilitate trade diversification, it would be less worrying to see a bigger deficit,\u201d he said. <\/p>\n

There\u2019s little doubt that the size of the deficit will capture headlines and drive political debate in the House of Commons, where Conservative Leader Pierre Poilievre<\/a> is hammering the government on its spending. <\/p>\n

But from a business investment standpoint, the size of the deficit begins to matter when debt rating agencies get nervous and investors start demanding risk premiums to hold government debt, driving up interest rates across the economy. <\/p>\n

\u201cI\u2019m not seeing, and I haven\u2019t read any credible analysis, suggesting that there is a rising risk premium being built into Canadian federal debt,\u201d said Trevor Tombe, an economics professor at the University of Calgary. <\/p>\n

Opinion: Should Carney, the businessman, really run Canada like a business?<\/a><\/p>\n

But that doesn\u2019t mean Ottawa can ignore size of the deficit and continue blowing through its fiscal anchors, as happened frequently under then prime minister Justin Trudeau, without consequences, he said. <\/p>\n

\u201cThere is no cliff where you get to and everything\u2019s fine, then all of a sudden you fall off. It\u2019s about changes at the margins, small changes in risk premium over time, that adds fiscal pressure to the government,\u201d driving up debt-servicing costs and limiting the government\u2019s ability to make choices, Prof. Tombe said. <\/p>\n

Ultimately, many economists appear willing to give the government the benefit of the doubt when it comes to piling on the red ink this year. <\/p>\n

Massive deficits certainly aren\u2019t sustainable in the long run. But for many economists, the biggest risk right now is that Ottawa misses the chance to flip the script on economic growth and get serious about business investment.<\/p>\n

\u201cWe\u2019re shooting our last bullets right now. So go big or go home, and show me 3 per cent of GDP,\u201d said Mr. Marion of National Bank, referring to the size of the deficit as a percentage of the economy. <\/p>\n

\u201cInvestors will accept this to the extent that you\u2019re showing you really mean to unleash potential GDP growth.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Open this photo in gallery: Prime Minister Mark Carney and his Finance Minister Fran\u00e7ois-Philippe Champagne are set to…\n","protected":false},"author":2,"featured_media":254832,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[901,888,902,879,877,903,45,49,48,876,895,896,891,878,875,46,549,295,894,887,914,880,881,893,889,890,884,904,885,909,910,912,907,911,905,908,882,898,899,714,897,906,865,61,900,892,886,883,913],"class_list":["post-254831","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-alberta","tag-arts-news","tag-bc","tag-breaking-news","tag-breaking-news-video","tag-british-columbia","tag-business","tag-ca","tag-canada","tag-canada-news","tag-canada-sports","tag-canada-sports-news","tag-canada-trafficcanada-weather","tag-canadian-breaking-news","tag-canadian-news","tag-economy","tag-education","tag-environment","tag-federal-government","tag-foreign-news","tag-globe-and-mail","tag-globe-and-mail-breaking-news","tag-globe-and-mail-canada-news","tag-government","tag-life-news","tag-lifestyle","tag-local-news","tag-manitoba","tag-national-news","tag-new-brunswick","tag-newfoundland-and-labrador","tag-northwest-territories","tag-nova-scotia","tag-nunavut","tag-ontario","tag-pei","tag-photos","tag-political-news","tag-political-opinion","tag-politics","tag-politics-news","tag-quebec","tag-sports-news","tag-technology","tag-travel","tag-trudeau","tag-us-news","tag-world-news","tag-yukon"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/254831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/comments?post=254831"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/posts\/254831\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media\/254832"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/media?parent=254831"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/categories?post=254831"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ca\/wp-json\/wp\/v2\/tags?post=254831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}