2018 federal budget stifles tech industry growth, CATA says

The federal government’s 2018 budget takes some admirable steps toward securing Canada from cyber criminals, but is otherwise a fiscally irresponsible, red-tape happy document that will stifle, rather than encourage, growth in the country’s tech sector, industry association Canadian Advanced Technology Alliance (CATA) says.

In addition to failing to create a fiscally responsible budget, Prime Minister Justin Trudeau and Finance Minister Bill Morneau have failed to create a consistent support net to support their much-vaunted “innovation superclusters,” nor have they accounted for the changing circumstances in Canada’s business relationship with the U.S., CATA CEO John Reid told ITBusiness.ca.

CATA CEO John Reid thinks the newest federal budget comes up short in more ways than one.

“The prime minister should be seen as a champion of strengthening all balance sheets in Canada, whether it’s you or I in debt situations, whether it’s the provinces, or whether it’s the federal government, because you cannot sustain a social envelope without an economic envelope,” Reid said. “[The budget] adds to red tape and complexity, when we should be moving in the opposite direction to stimulate enterprise growth.”

Announced Tuesday, the 2018 federal budget features several big-ticket items, including $750 million for cybersecurity; $2.1 billion over six years to modernize the federal government’s IT services, systems, and infrastructure; and $572 million over five years to develop a “Digital Research Infrastructure Strategy”; but Reid said their impact pales in comparison to the budget’s tax incentives, and their likely impact on the “superclusters” receiving $950 million in federal funding.

What the budget got right

In Reid’s opinion, the budget took two (small) steps in the right direction, by investing in cyber security and adjusting passive income rules to target only the richest corporations, which will likely be seen as a win for owners of small- and medium-sized businesses (SMBs).

“We’re very much in a hyperconnected world, so whether you’re an individual, a corporation, or in the public sector, you have to be committed to protecting your assets, which includes citizens,” Reid said of the government’s focus on cyber security. “It’s very much a global responsibility, and I’m glad that’s a key message of the budget.”

“We’re also trying to grow lead sectors in Canada, and the estimated market for goods and services in the cyber security sector in $135.2 billion by 2023,” he continued. “So while we’re all concerned about being breached, corporations are concerned about their brand, and the public sector is concerned about services to citizens, you’re also looking at a sizeable global marketplace where Canadians can create solutions and really get their fair share.”

As for the passive income changes, which will give Canadian business owners who earn less than $50,000 annually from passive investments access to a lower small business tax rate, with gradual reductions for annual earnings between $50,000 and $150,000 from passive investments (those earning $150,000 or more will not be eligible for the deduction), Reid says they address some of the issues raised by SMBs last year, but not all.

“[The budget] gave us a bit of a break on passive income, but a bit of a break is not the same as creating a message and an incentive that says ‘come and do business in Canada.’ That’s an entirely different thing,” he said. “Some businesses that are currently claiming the small business rate will now be paying the general rate, which fits the government’s public narrative and leads to immediate revenue, but doesn’t change the fact that there will be complexity regarding what constitutes passive income – for example. sale of IP, or investment income generated from personal shareholder loans.”

“However, it’s palatable enough and should not affect angel investors or VCs,” he said.

…And what it got wrong

Trudeau and Morneau are essentially ignoring the current U.S. trading climate, Reid said, by not adjusting Canada’s tax laws in a manner comparable to the legislation recently passed down south.

“You cannot avoid the new terms and conditions of doing business with the States,” he said. “They have shifted in a way that is much more favourable to capital flight, as we’ve already seen… Quebec’s made an announcement about how they’re planning to deal with capital flight [the province announced that it would be phasing out input tax refund restrictions for large businesses in January], and the rest of the country should follow suit.”

More importantly, he said, the Trudeau government has not created a consistent environment to support innovation through efforts such as Scientific Research and Experimental Development (SR&ED) funding, which a CATA study found last year had essentially been reduced by more than $5 billion between 2009 and 2016.

“It should be very clear that we provide all of the strategies and resources necessary to support our job creators, and I think it’s a fair to say that right now the government has not created a consistent environment,” Reid said. “Its consultation processes have been flawed, and it puts us in a situation where we have one arm saying we want superclusters, and another arm creating tax policies that make it less advantageous to create new businesses in Canada.”

The financial element

Finally, Reid said, the budget ignores the fact that strong balance sheets go hand and hand with sustainable social programs and safety nets.

“The 2018 federal budget was not a budget, it was a social engineering plan,” he said. “Lacking in the [plan] was a chapter on the importance of financial literacy for all Canadians.”

According to a Fraser Institute report cited by Reid, Canada’s combined federal and provincial net debt nearly doubled from $833 billion in 2007 and 2008 to a projected $1.4 trillion in 2016 and 2017, for a combined debt that equals 67.5 per cent of the Canadian economy, or $37,476 for every man, woman, and child in Canada.

As a result Canadian governments, including local governments, collectively spent $62.8 billion on interest payments in 2015 and 2016, the report found, which works out to 8.1 per cent of total government revenue during that fiscal year and $1,752 for each Canadian, an amount approximately equal to Canada’s total spending on public primary and secondary education ($63.9 billion as of 2013 and 2014, the last year for which finalized data is available, according to the Institute).

“This is a far cry from the prime minister’s election campaign vow to balance the public books before the end of his government’s four-year mandate — a pledge that was central to the Liberal election platform,” Reid said. “While the PM is not responsible for the finances of every province and municipality, his government is setting the pace.”

“Simply put, we are over leveraged,” he continued. “Faced with these realities, we need a Prime Minister who is focused on strengthening, as opposed to weakening, Canada’s balance sheets and addressing the realities of the international, interconnected marketplace that competes for capital and talent.”

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Jim Love, Chief Content Officer, IT World Canada

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