Canada’s Economy, Finance Minster Live in Different Worlds

By Paul Baiocchi | February 04, 2008 | 9:46 AM | 0 Comments

 

When Jim Flaherty speaks, it seems better to just ignore him at this point. On the back of a report showing Canadian GDP slowed to 1% in November, Flaherty was up to his usual tricks of speaking out of both sides of his mouth. He warned of economic weakness stemming from a strong dollar and a slowing U.S. economy while at the same time criticizing the economic policies of both those in Washington and those on the homestead. This is coming from a guy who recently lowered bank rates to stem the tide of a rising loony and cautioned investors about declining surpluses.

The latest example of his policy backtracking is his admission that the deferral of capital gains taxes, which he promised to include in his budget at the time of his government's election, will not be added this round of the budgetary draft.  This is obviously no surprise because, contrary to popular belief, Canada's economy cannot perform without sufficient governmental support.  In order for Canada to truly thrive corporate tax policy must foster an environment in which resource companies can invest in the technological infrastructure necessary to maximize the potential of their reserves. Back in October when the Canadian Dollar reached all time highs, Flaherty and company urged corporations to use it as an opportunity to invest in technology. The problem with this argument is that it comes from the same person who set in place tax policies which hamper the ability of these companies to make those investments.

While it is obvious that Flaherty's act is wearing thin, it is unclear if he realizes as much. After all, he tooted his own horn while condemning the U.S. saying, "Our housing sector remains strong in Canada in stark contrast to the United States..." He would do well to look at the amount of sub-prime exposure his country's banks have had, and how that is likely to affect the extension of credit in his country and consequently the price of housing. Indeed, that pressure is already showing up as home sales began declining at the end of 2007-hardly the stark contrast Flaherty professes. In addition, the Canadian Housing Corporation is forecasting a 6% decline in new housing starts and a 4% decline in re-sales. This may be another source of pressure undermining the advertised independence of the Canadian economy.

If Canada's surplus is truly at risk, as was warned by Flaherty on Thursday, then policies such as cutting capital gains taxes would be a step in the right direction. Unfortunately, in the eyes of this conservative government, taxes are apparently a good thing, especially since it will need the votes of the minority liberal parties to survive the budget process this spring and avoid national elections.  Last year, the Conservatives bought the votes of the Bloc Quebec with massive transfers to it from the other provinces. Principles will almost certainly fly out the window in this year's budget policies in order to hold onto power once again; it will be interesting to see how, and at what cost to Canadian taxpayers.