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Budget 2009 – Prebudget Submission: Weathering the Storm, Building Value for the Future

January 9, 2009 ( Ottawa, ON )

WEATHERING THE STORM, BUILDING VALUE FOR THE FUTURE

  

INTRODUCTION

At the start of 2009, it is widely accepted that the world economy is facing a crisis of historic proportions. Canada is not immune. The Government of Canada has joined other governments in stating its intention to commit to an appropriate policy response to mitigate the impact on jobs, families, communities, and the wider economy. Strengthening the business conditions for the private sector is essential to meet this objective. 

Budget 2009 is a key milestone in setting Canada’s course to weather this economic storm. Accordingly, the Canadian Steel Producers Association (CSPA) appreciates the opportunity to provide its Budget recommendations to the Government. As a capital-intense, major industrial sector with significant linkages to many important segments of the national economy, the strength of the Canadian economy and the steel industry go hand-in-hand.  From the automotive cluster and advanced manufacturing to housing, physical infrastructure and all parts of the energy sector, steel is an essential industry that supports growth and economic development across Canada.

By way of background, the $13 billion-plus steel industry in Canada employs some 30,000 Canadians in high-wage, highly-skilled jobs in all regions of the country. A significant player in international trade, our exports exceed $6 billion annually while competing fiercely with products from around the world in our domestic market. Because of its importance to the national and North American economies, the governments of Canada, the United States and Mexico have recognized the steel industry as “strategic” to the future prosperity and success of the North American region. 

With these factors in mind, our recommended measures to address the challenging economic circumstances contain two major elements: (i) effective infrastructure programs that will deliver strong economic benefits to Canadian industry and (ii) measures that will strengthen the basis for value-added economic activity for the longer-term. In short, Canada needs decisive actions to weather the economic crisis in the short-term, and to prepare itself to emerge stronger for the longer-term. Our recommendations address both challenges.

Canada’s approach must also take note of our international competitiveness and the actions taken by our major trading partners. A key test of success in responding to this crisis will be our ability to participate in the eventual recovery and enhance our competitive position as a leading industrial economy on a global basis.

   

SHORT-TERM STIMULUS: EFFECTIVE INFRASTRUCTURE PROGRAMS

Significant spending on public infrastructure by all levels of government is an attractive and expected policy response to the economic crisis for a number of reasons. Most immediately, in many cases these investments in critical physical infrastructure – roads, bridges, and transportation systems, among others – are urgently needed due to underinvestment in recent years. As a counter-cyclical stimulus, such investments have the potential to deliver sizable and timely economic impacts in terms of jobs, purchased goods and services, and improvements in essential economic and social infrastructure. These are direct benefits that employ Canadians and strengthen multiple industrial sectors (e.g. steel, mining, cement, transportation and engineering services). 

At the same time, making the right investments can position an economy for long-term success by strengthening the efficiency of our public infrastructure, increasing competitiveness and the basis for future investment. Projects that offer enduring benefits to the economy and society are to be preferred over those that are simply “make work” initiatives, which has been a shortcoming in some historical programs.

In this context CSPA makes the following recommendations for principles that must be included in any infrastructure framework: 
  • Short-term projects must deliver clear long-term benefits, particularly with respect to facilitating commercial activity, private sector investment, and competitiveness. Needed social infrastructure is also an important investment in the future.
  • Targeting improvements in the Canada-United States border would benefit many key sectors, including steel and its industrial customers. Every effort should be made, for example, to accelerate a new crossing at Windsor-Detroit as soon as possible, and other border sites should be examined on a priority basis to ensure the facilitation of continental trade – a key driver of the Canadian economy. The leverage of available short-term funding should be used to overcome project roadblocks.
  • Funds should be made available for readily-available alternative and/or clean energy projects such as windfarms, enhanced oil recovery, and carbon capture and storage. These projects can deliver significant short and long-term economic, environmental and technological benefits. Similarly, mass transit investments offer both immediate stimulus and longer-term economic and environmental benefits.
  • Project criteria must seek to ensure the maximum use of Canadian materials, equipment and services wherever possible. It would greatly undermine the effectiveness of a stimulus measure if the industrial benefits were to accrue needlessly or unfairly to offshore producers and foreign economies rather than to the benefit of Canada. Canadian supply-chains are world-class and capable of rising to the current needs and opportunities. Program and project funding criteria should provide comparable preferences for domestic suppliers as those our major trading partners will undoubtedly include in their economic stimulus packages. In tandem, the government must remain vigilant against allowing unfairly traded imported products to benefit from stimulus funding provided by Canadian taxpayers to the detriment of competitive Canadian suppliers.
    

MEASURES IN SUPPORT OF VALUE-ADDED ACTIVITY IN CANADA

Beyond direct spending by the public sector, the Government has a range of policy tools at its disposal to enable the private sector to contribute to economic recovery and a return to growth. The advantage of many of these measures is the immediacy of impact to the economy – in many instances companies are in a position to move forward with expenditures much more quickly than governments or other public institutions. There may be similar short-term opportunities available through the use of public-private partnerships (P3s).  

Particularly in the manufacturing sector, the urgent and critical support required to survive in the short-term requires strong action to ensure that credit remains available to businesses and consumers in Canada. Without such measures, many other policy measures will become moot if businesses cease operations altogether. Viable businesses are struggling to cope with customer liquidity challenges and reduced orders.

The Minister of Finance and the Bank of Canada have already taken important steps in this direction – but unfortunately, credit remains unavailable or highly restricted for too many businesses (including steel-using industries). Recent efforts to work with the financial industry are commendable. More is needed, however, and urgently. The government should introduce temporary guarantees for loans and lines of credit to ensure commercial activity can continue for otherwise healthy businesses. The Business Development Bank (BDC) and Export Development Canada (EDC) should be more proactive in providing support in this area. 

Beyond this, CSPA urges the government to devote a sizable component of its stimulus package to measures that will encourage the private sector to hire, retain and/or retrain Canadian workers during the economic crisis. Keeping Canadians employed in their current roles is preferable to lay-offs followed by the hope of new employment elsewhere.

Investment tax credits are one measure to stimulate private sector benefits to flow in the near-term. Improving the economics and cash flow for “in-house” projects in the private sector will help position Canadian industry as more competitive for the future while delivering immediate benefits and sustaining jobs and incomes. Creating or maintaining employment in private enterprise offers clear and evident advantages by sustaining a skilled workforce that will be required in a post-recessionary environment.

In a similar vein, targeted credits for environmental and efficiency projects would help create both environmental and economic benefits for companies seeking to improve further their emissions profile or reduce water use and other environmental impacts of their industrial operations. 

These types of private-sector solutions complement public investments in a number of important ways and offer important advantages. The private sector has a greater capacity to create and sustain productive employment for the long-term. Creating incentives for immediate private sector activity serves both economic and other longer-term policy interests, and does not require inter-governmental agreement or a lengthy approvals process for projects to move forward. These measures would not entail an ongoing operating expense for the public sector, an important factor in light of the need to avoid structural (or permanent) deficits going forward.

On the tax side, the CSPA is a member of the Canadian Manufacturing Coalition, which is recommending a range of key measures to be implemented immediately (all of which have the unanimous support of the Parliamentary Committees on Finance and Industry, Science and Technology): 
  • Planned corporate tax reductions should be accelerated.
  • The two-year depreciation for investments in machinery and equipment – a key driver of wealth creation – should be extended for at least five more years to allow sufficient time for companies to take full advantage of this measure.
  • The Scientific Research and Experimental Development (SR&ED) system must be administratively streamlined and made fully refundable. The Government must reaffirm the policy importance of having a strong industrial research system in Canada.
  • An Employers Training Tax Credit should be created to unlock the strengths of human capital development in the private sector, and train current workforces for the industrial economy of the future.
  • The EI Work-Sharing Program should be extended beyond the current 38 weeks so that companies can preserve more jobs.

These proposals are elaborated upon in the Coalitions submission, which the CSPA endorses.

  

CONCLUSION

The ongoing and unprecedented economic crisis will require a significant policy response from Government and industry alike. Neither can solve the problem alone, but can work in partnership on the foundation of a comprehensive and substantive economic stimulus package. Canada must act urgently, and in full recognition of similar efforts by its major trading partners to strengthen their economic performance. 

A public policy response that supports both effective short-term stimulus and longer-term, value-added economic activity is the most desirable plan of attack. While the near-term may present continued economic challenges for Canada, any and all measures that improve the competitiveness of our industrial base and strengthen our human capital resources will help position Canada to compete and win on the global stage. This should be the focus of a bold and decisive Budget 2009.