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editorial

Trade is Ottawa’s economic preoccupation of the moment, but another storm is brewing.

A study commissioned by the Business Council of Canada suggests the urgency is mounting to address the ramifications of the Trump administration’s massive 2017 tax cut.

Until Congress passed the reductions, Canada’s overall corporate tax rates were lower than their U.S. counterparts. With the stroke of a presidential pen, a key competitive advantage was erased.

According to research commissioned by the Business Council of Canada, the loss of that advantage means as much as $85-billion – 4.9 per cent of Canada’s gross domestic product – is at risk of disappearing as investment capital flows toward the United States over the next decade.

The authors say up to 635,000 jobs could be lost, along with $20-billion in foregone government revenues.

As with all economic studies, caveats apply. But the issue nonetheless merits a serious examination and reasoned response, especially since the Trump tax cuts could exacerbate existing trends.

Direct foreign investment in Canada has dipped for three years running, and another recent study – this time by the C.D. Howe Institute – delves into a sharp drop in overall capital investment since mid-decade.

The paper estimates Canada’s per-worker capital spend for 2018 at $13,900, far behind the United States, at $23,200. It points to trade uncertainty and bottlenecks for resource exports as causes but mainly fingers fiscal policy as “a likely culprit.” It warns that “weak capital spending is a threat to Canada’s future prosperity."

So what to do? Short-term solutions could include measures such as accelerated capital-cost write-offs, deductible interest payments and the streamlining of regulatory approvals. Corporate-tax reductions may also be required.

Finance Minister Bill Morneau is reportedly poring over multiple options to boost Canada’s competitiveness, but remains cool to a tax cut. Circumstances may yet force him to change his mind. At the very least, he must come up with a credible response to this latest economic threat.

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