Budget falls short and will hurt sentiment, says IIAC

President and CEO believes government has missed a chance to offset slowing late-cycle economy

Budget falls short and will hurt sentiment, says IIAC

This year’s Federal Budget was a missed opportunity to stimulate economic growth and did nothing to cultivate positive sentiment in the markets, according to the president and CEO of the Investment Industry Association of Canada (IIAC).

Ian Russell told WP it fell short of addressing Canada’s sliding corporate and personal tax competitiveness and the declining trend in business investment.

He added that the Budget does not provide the stimulus to sustain strong growth and job creation, which is so important in offsetting a slowing late-cycle economy.

Despite the overall disappointment at the Liberal’s financial plan for 2019 – dubbed a typical election year Budget by many – Russell highlighted some positive measures: expanding access to tax credits under the SR&ED program, expanding the Home Buyers Plan and introducing the First-Time Home Buyers Incentive.

However, he said the government failed to support growing business by not introducing an incentive for the purchase of shares of small businesses, patterned on the UK Enterprise Investment Scheme.

He said: “What we see is a weakening economy and we see that weakening trend continuing. So, the underlying numbers that Ottawa is talking about – the growth numbers and employment numbers – are probably going to fall away. And in our view, there was an opportunity because of the extra cash to have focused on more growth stimulating policies and, first and foremost, bring down the tax rates.

“Our tax rates are getting more and more uncompetitive, which has a negative impact on business investment and growth of business, and in some cases a similar negative impact on productivity among individuals because of the very punitive rates.”

Russell said there was nothing in the Budget that recognised we are in the late stage of the cycle and believes they expect the growth numbers – propelled by residential construction and consumer spending – to continue.

For advisors, there was little leeway given on the RRSP or personal tax side, which may have provided them with more savings from baby boomers but overall, given the globally diversified portfolios, Russell said there should be little short-term effect.

However, he said there is statistical and anecdotal evidence that sentiment is being affected negatively by Canada’s relative inertia when it comes to stimulating capital growth.

Russell said: “[The Budget] has a negative sentiment on both the Canadian market and internationally. It’s negative sentiment or an erosion of confidence and there are some indicators to suggest that is the case.

“In the Canadian context, just the continued slide in investment spending or reluctance to start adding to investment and committing to expanding your business in Canada. The other indicator is very substantial outflows of capital from Canada from foreigners – you saw that in the oil patch. There is a reluctance to put new money into Canada.

“In my view, where the real problem happened was in the economic update which came out in November. Investors in Canada and outside the country were looking for a positive signal that this continued deterioration in relative tax rates, and this continued deficit financing and focus on broad spending, was going to come to an end or at least going to fall away.

“I think business was looking for a signal there was going to be a change in fiscal policy. That didn’t happen in the sense there wasn’t much of turnaround in investment behaviour, portfolio stocks and bonds, or in real investment.”

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