Skip to main content
subscribers only

NDP leader Thomas Mulcair.Ryan Remiorz/The Canadian Press

Politics Insider delivers premium analysis and access to Canada's policymakers and politicians. Visit the Politics Insider homepage for insight available only to subscribers.

New Democrats love to rail against Dutch Disease and corporate tax cuts. The Official Opposition party blames the Canadian dollar's status as a petro currency for sapping the competitiveness of the country's manufacturing sector, while accusing the Harper government of favouring "corporate giveaways."

But what if the solution to Canada's case of Dutch Disease was even more corporate tax cuts?

The idea comes to us by way of none other than France's left-leaning Socialist president, François Hollande, who is slashing corporate payroll taxes, while raising sales taxes, in a move that economists refer to as an "internal devaluation." The aim is to make French exports cheaper, and imports more expensive, providing a boost to domestic growth and employment.

The policy, also known as fiscal devaluation, is increasingly being touted as a better way out of the European crisis. Without their own currencies, troubled Euro-zone countries such as Greece, Spain and Italy have been unable to resort to traditional devaluation to restore their competitiveness and balance of payments. They have been forced to implement punishing, and deeply unpopular, budget cuts.

It could be more than a year before France's experiment with fiscal devaluation yields results. Mr. Hollande unveiled the plan in November after a report by the former head of Airbus called for a "competitiveness shock" to bolster the country's lagging economy. But the corporate tax cuts and an accompanying hike in the country's value-added tax are being introduced in phases. The VAT increase comes last, and takes effect in 2014.

So could fiscal devaluation be the answer to Canada's own competitiveness problems?

Last year, NDP Leader Thomas Mulcair sparked a heated national debate by suggesting federal policies favouring the development of Alberta's oil sands had driven up the value of the Canadian dollar to the detriment of central Canada's manufacturing industries. While several studies have since provided additional explanations for the high-flying loonie, the dollar does usually move in sync with oil prices.

Unlike France, Canada has its own currency. But its value is set on foreign exchange markets. Formal devaluation is possible in theory, but politically verboten. So, like Europe, Canadians are forced to live with a strong currency that creates regional economic disparities.

That makes fiscal (or internal) devaluation worth considering as a policy option – especially for New Democrats, who tend to be more preoccupied by the high dollar than Conservatives. Indeed, many on the right favour a strong dollar, since it keeps inflation in check and serves as an incentive for businesses to improve productivity. (Not to mention making life a whole lot easier for snow birds.)

But if the NDP thinks the high dollar is a problem, fiscal devaluation might be one solution.

Canada depends far less on employer payroll taxes than France. But by reducing the overall corporate tax burden, including corporate income taxes, while raising the goods and services tax (GST), Canada could produce the same effect as France's fiscal devaluation. Manufacturers, provided they take advantage of a lower tax burden to lower prices, would improve the competitiveness of their exports.

There are trade-offs, however. As with a true devaluation, the purchasing power of consumers would be reduced. Higher sales taxes would discourage the consumption of imported (and domestic) goods. But since the GST is not applied on exports, lower production costs would make them more attractive to foreign buyers.

So, how about it Mr. Mulcair? Could you learn to love corporate tax cuts?

Konrad Yakabuski writes on policy for The Globe and Mail from Toronto.