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March, 2010

Executives say it's time to raise taxes Add to ...

Canada's business executives, not usually a tax-friendly bunch, have acknowledged that it may be necessary for Ottawa to boost taxes in order to get rid of the deficit.

Almost three out of five of the senior executives who responded to the latest C-Suite survey agree that in order for the federal government to balance its books, some form of tax increase may be necessary.

While executives are almost unanimous that the recession is over and economic growth is under way, they are worried about how the government is going to deal with the stimulus-induced deficit. Half don't believe Ottawa will be able to balance the books in five years, and that's why so many think a tax increase is necessary.

"I think it is in the country's best interest in the short term to suffer a little bit and perhaps pay some higher taxes in order to try to get things back under control and back on an even keel," said Chad Ulansky, chief executive officer of Metalex Ventures Ltd., a diamond exploration firm based in Kelowna, B.C.

Mr. Ulansky was one of 151 top executives who responded to the C-Suite survey, which was conducted just after federal Finance Minister Jim Flaherty tabled his budget in early March.

The survey was conducted for Report on Business and Business News Network by Toronto research firm Gandalf Group.

While almost two-thirds of the executives surveyed said they had a favourable view of the budget, half of respondents said it did a poor job of reducing the deficit and almost two-thirds oppose running a deficit through 2015.

Mr. Ulansky, who believes consumption levies are the fairest form of taxation, said a temporary boost to the GST might be the best way to get the country out of the red - partly because it would involve the fewest administrative headaches.

Other tax increases would also be acceptable to Mr. Ulansky. "I'd be willing to pay a little more on my income tax" and even a boost in corporate taxes might be palatable for the short term, he said. "If we could somehow have consensus around the country to all suffer through a bit of higher taxes for the next five or 10 years, we'll be a far stronger country on the other side of it."

Philip Deck, executive chairman of Waterloo, Ont.-based software firm MKS Inc., said he, too, feels a tax hike may be necessary, and raising the GST makes the most sense.

Personal and corporate taxes are now at levels that give Canada a valuable competitive advantage, so it would be a mistake to increase them, he said. But boosting the GST would not hurt competitiveness at all, he added.

Mr. Deck acknowledges, however, that Ottawa is very unlikely to bite the bullet and raise the GST because that would be politically unpalatable. Any attempt to get the government to move on this issue "will fall on deaf ears," he said.

Other executives are less in favour of taxes and believe they should be a last resort.

"I'd hope that the government would have the discipline to cut back on their expenditures as the economy improves and pay down the money they spent stimulating the economy," said Bruce Waterman, chief financial officer at Calgary-based fertilizer giant Agrium Inc.

He is sympathetic with Ottawa's go-slow approach to restraint and cutbacks, because there is no certainty yet there won't be a second economic dip.

"I understand why they are being cautious [with spending cuts]" he said. "But there will come a time when they will have to be much more rigorous in terms of the restraint and the cutbacks, as the economy picks up and the recovery becomes quite strong."

Otherwise, he said, "we're going to build ourselves a structural deficit problem that is only going to be solved by higher taxes."

Executives polled in the C-suite survey are torn on the issue of spending cuts. Forty-eight per cent said the proposed freeze on the federal government's departmental spending - which is supposed to save $17-billion over five years - is the right amount of restraint. Forty-one per cent, however, said it is not enough.

Peter Lacey, CEO of Cervus Equipment Corp., a Calgary-based company that owns agriculture equipment dealerships in Western Canada, said he thinks the government is being extra cautious in its projections, and the deficits might not last for five years.

"I think as the economy starts to improve, it won't take that long," he said. "I think they'll be able to do it [eliminate the deficit] faster than that."

Indeed, corporate executives are the most positive about impending economic growth than they have been since the C-Suite surveys began four years ago.

Fully 99 per cent said they expect the Canadian economy to grow in the next 12 months, with 7 per cent predicting strong growth. That is a massive turnaround from the survey taken in February, 2009, when almost 90 per cent expected an economic decline.

Even the weaker U.S. economy gets a vote of confidence from Canadian executives. More than three-quarters say the economy south of the border will grow in the coming year, although 20 per cent expect it to shrink further.

A year ago, 95 per cent of respondents expected the U.S. economy to shrink in the following year.

Mr. Deck, whose company exports 95 per cent of its software to markets around the world, said his global view is that "Europe is still a weak spot, the U.S. is getting better but may be slow going, and Asia is on fire."

When it is all added up, "it looks like not bad growth, probably not as good as you'd like to see in Europe and North America, [but that's]made up for in Asia. On average, things are improving."

He also noted that the G20 countries' implicit backing of financial institutions "generally gives people comfort that we're not going to have another financial lockup."

One clear sign that the recession is receding in Canada: A solid majority of C-suite respondents - 56 per cent - say it is easier to secure access to credit and financing than it was a year ago.

"Everybody got pretty scared last year and it all turtled a bit," Cervus Equipment's Mr. Lacey said. "[The money]is coming out now. ... We've had several banks approach us. It's a different environment than it was a year ago."

*****

ABOUT THE SURVEY

The quarterly C-Suite survey was conducted for Report on Business and Business News Network by the Gandalf Group, and sponsored by KPMG.

The survey interviewed 151 executives between March 5 and March 22, 2010. Respondents represent ROB 1,000 companies from across Canada in the manufacturing, service and resource sectors.

The margin of error is plus or minus 8.0 per cent, 19 times out of 20.

Each quarter, a $1,000 charitable contribution is made on behalf of a survey participant. For the December survey, a donation will be made on behalf of Phillip Walford, president and chief executive officer of Marathon PGM Corp., to a charity of his choice.

Want to know more about what the nation's business leaders think? Join host Michael Hainsworth Monday on Business News Network for the C-Suite Survey at 8:30 p.m. (EDT).

WHAT THE EXECUTIVES SAID

ECONOMY

In a sharp turnaround from the dismal outlook they held a year or so ago, almost all Canadian executives surveyed now think the domestic economy will expand in the next 12 months. Their outlook for the U.S. economy isn't quite as bright, but is still much improved. However, with the possible threat of inflation, many executives are ready for reasonable interest rate hikes from the Bank of Canada.

Charts by: KATHRYN TAM/THE GLOBE AND MAIL / SOURCE: GANDALF GROUP

BUDGET

Almost two-thirds of executives were favourably impressed by the recent federal budget. There is strong support for many of the government initiatives in the budget and Throne Speech, such as loosening foreign investment restrictions in the telecommunications sector, eliminating tariffs on imports of equipment used in manufacturing, enhancing training, and creating a national securities regulator.



DEFICIT

If there is one aspect of the budget where business executives have misgivings, it is in the handling of the deficit. A majority of those surveyed are uncomfortable with the size of the deficit and the five years it's going to take to eliminate the red ink. Most think it is not even possible to make realistic forecasts over that time frame. Still, about half of the executives support Ottawa's spending restraint.

NOTE: CHARTS MAY NOT ADD UP TO DUE TO ROUNDING

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