New Brunswick Gets Economic Stimulus Right

-- (historic), Commentary, Role of Government, Taxation, Uncategorized

Over the past year, much of the political class around the world acted as if talk would help beaten-down economies speed through the recession. So the world’s most high-profile orator, the American president, has been nothing if not loquacious in attempts to verbally prompt the economy back to health. Did it work? Except for the recent uptick in stock markets thanks to a few banks with less-than-horrible quarterly results, the markets have turned thumbs-down on the U. S. federal budget.

The lesson is that pleasant words can win a campaign for the White House but chatter alone won’t give investors reason to hand over their money. That’s problematic as businesses need capital to build, expand, and hire; if potential investors think governments will likely cheapen their investment, it then becomes safer to keep money in the bank — at least if the bank isn’t failing.

Unclear signals from governments to business, or worse, hostile emanations, are the wrong way to stimulate an economy. So too is trying to rescue individual companies.

When the overall economy contracts and sends tens of thousands (or hundreds of thousands in the case of the U. S.) to the unemployment office every month, throwing public money at a specific sector can only be justified if its collapse would pose a systemic risk to the entire economic system if not rescued: interbank lending falls into this category (though not most individual banks). Few others do.

Beyond exceptions, a neutral approach to business and specific sectors works better. It’s an approach the New Brunswick government just revealed it understands. In that Maritime province, Liberal Premier Shawn Graham and his Finance Minister Victor Boudreau made it clear that province will become a more attractive place to live and in which to invest.

Between now and 2012, the province will eliminate the four-bracket personal tax system in favour of a two-rate system with lower rates. The province, in its backgrounder, properly brags this will make that province the one with the fewest tax brackets in the country after Alberta. New Brunswick explicitly defends the reduction and simplification with the aim of allowing people to keep more money. It also wants to improve that province’s ability to attract better-paying jobs and highly skilled labour. Memo to Premier Graham and his caucus: You’re correct on the method, justifications and goal.

On the business side, New Brunswick will drop the corporate rate to eight per cent in 2012 compared to 13 per cent now. “New Brunswick’s goal is simple,” says the Finance Department’s circular on the tax changes: “to have a globally competitive tax system that lays the foundation for the province to experience economic growth and create more jobs, moving the province toward its goal of self-sufficiency.”

Contrast that with much of what else is spun out elsewhere as ostensibly helpful policy in a recession. Federally, in Ontario, and south of the border, tens of billions of dollars are being sent (or will be) to General Motors and Chrysler. That creates uncertainty in the boardrooms of other, healthier automotive companies.

That interference in the competition for customers is the great enemy of economic recovery. One never knows which competitor will be helped next and in which sector.

Today, governments “help” out selected companies in the automobile sector and harm Honda, Hyundai, Ford and Toyota and their employees; tomorrow, some enterprising politician throws money at someone else’s competitor and it drags down a perfectly healthy business. The result is that all businesses freeze plans to spend money on new equipment, plants and jobs until they can figure out what governments will — and won’t do, next.

It’s not that rhetoric, in the best sense of the word, isn’t useful in restoring economic confidence. A president, prime minister or premier who scares the wits out of citizens by predicting a depression would exacerbate the downturn. But even positive words alone won’t do it, nor will policy that throws out billions or trillions of dollars in an ineffective manner.

In contrast, the right words combined with actual helpful policy will make a positive difference to investment intentions and then to economic and employment growth. New Brunswick, with its stated goal of self-sufficiency and smart tax policy, is an example of the latter.