Did politics trump prudence on budget day?
The 2011 federal budget was surrounded with drama as all political parties postured for an impending election.
If there’s one thing that’s sure to dampen business investment and growth in an advanced industrial economy, it’s uncertainty.
And that’s exactly what was created on budget day 2011 mere minutes after the plan was announced, when all three opposition parties stated their unwavering contempt for the policy document.
In an ironic twist of fate, the 2011 federal budget represented the first time in years when the plan contained numerous items aimed to help manufacturers and other small businesses. Read an outline of the goodies here.
The biggest boon to the manufacturing sector would have been the accelerated Capital Cost Allowance (CCA), which was extended by an additional two years. This measure alone would have saved manufacturers nearly $620 million over the two year span of the program, and Jayson Myers, president and CEO of Canadian Manufacturers and Exporters (CME) says it’s no sure thing we’ll see that tax measure implemented again.
“A lot of companies are looking past December, and this would have given them a vote of confidence to continue investments,” says Myers.
“As it stands now, why would anyone invest if you think the write off is up in the air. If these tax measures are not implemented this year it will put a lot of investment that we rely on to sustain growth in jeopardy.”
Myers contends this will slow growth because business investment and export competitiveness will likely be the key drivers of the economy over the next few quarters.
“Even just delaying [the CCA] until after an election and a new budget is in place still means lost months in terms of investment planning,” he says.
Any delay would be poorly timed, as companies are currently in the midst of an investment window where planning and capital spending decisions will result in spending that occurs past the end of 2011, when the current CCA will expire.
“The extension of the capital cost allowance is particularly important now as the auto industry is still climbing out of the big recession of 2009,” says Steve Rodgers, president of the Automotive Parts Manufacturers Association.
“There was a lot of downsizing during the downturn and in order to maintain capacity, we need to make investments in machinery and equipment.”
Any uncertainty on this front means firms will likely think twice about investing in machinery for productivity and new products in an economy where many global competitors are hamstrung with economic recovery measures.
Add to that the uncertainty of corporate tax rate reductions, also included in the budget document so loudly denounced by the opposition.
First off, removing the CCA for manufacturing equipment would probably offset any benefit the sector would get from corporate tax rate deductions already booked over the next couple of years.
But what would happen if that move was combined with a new government putting an end to the corporate rate reduction scheme currently being implemented?
Myers says that could probably cost manufacturers more than $3 billion over the next five years.
Try planning for that.
Indeed, just when it looked like the government finally understood that a strong manufacturing base was a critical node in our economic matrix, you get tossed another round of guess work.