The one predictable thing about Prime Minister Stephen Harper is that he is unpredictable. Just when you think you know how he will respond on an issue, he surprises you. Whether in his decision to tax income trusts, his decision to pull out of Afghanistan or his blocking of BHP Billiton’s takeover bid for Potash Corp., he is constantly confounding critics who try to put him in an ideological box. Canadian businesses should keep that in mind as they await this year’s budget.
Beyond managing the current economic situation to meet looming demographic challenges such as an aging population and a declining workforce, the Harper government is increasingly focused on driving economic growth. Sharing the views of a broad consensus of academics and policy-makers that Canada must close its “innovation gap” with other countries, Harper has been sending the business community some consistent messages.
He wants to see business improve its productivity, increase its R&D investment and grow its exports to new foreign markets— particularly to emerging markets, which for the first time in 2012 will import more goods than will the developed countries.
The federal government believes it is putting in place the right policy environment to encourage businesses to act. It fought an election on a platform to keep corporate and personal taxes low. It has signed an unprecedented number of trade agreements and launched new comprehensive free trade discussions with Europe and Asia that could upset important domestic constituencies in agriculture and government services. It has directed public research institutions to focus on collaboration with business to commercialize research and generate economic growth. And it has weathered the usual suspicions from Canadian nationalists that it is selling Canada out via the recent border security arrangements with the U.S.
So, in the federal budget, expected at the end of March, look for the government to continue to align it s policy agenda to stimulate business. We’ll likely see a lid clamped on government spending, with some department budgets cut by as much as 10%.
Expect some of the business recommendations from the Jenkins report on productivity to be reflected, including reform of the Scientific Research and Experimental Development program, and a stipulation that public sector procurement foster innovation and nurture globally competitive Canadian companies.
We can also expect the government to look beyond the potential backlash from environmentalists and push to reform regulatory processes that slow down the development of our natural resources. Harper’s decision to withdraw from the Kyoto accord is a reminder of his focus on Canada’s economic interests.
But there is a political price to be paid for all of these policies, and if the Canadian economy continues to sputter along, the Harper government will not appreciate fat-cat CEOs sitting on corporate wealth. According to RBC, in normal times excess cash on corporate balance sheets is equal to 10% of GDP. Today, that figure is 30%. The government can create a business friendly environment, but the onus is on Canadian companies to once again start spending.
Harper is a politician first, and if business does not step up he will adjust his economic plan to suit political reality. There is no point in fattening up corporate balance sheets via low taxes if that money is not going to be reinvested. The Occupy movement may have failed to trigger a middle-class tax revolt against the rich, but the issue of tax fairness is gaining political traction. The preferential tax treatment now given to CEO stock options and the current inheritance tax structure are not beyond reconsideration for a government interested in deficit reduction. Business would do well to listen to the signals that Mark Carney, Jim Flaherty and Harper himself have been sending—or it could well find that government policy will take some unpredictable turns.
Mike Coates is the president and CEO of Hill+Knowlton Strategies Canada