RBC CEO: Postponing Taxes on COVID-19 Spending Will Encourage Investment
Don’t try to tax back COVID-19 spending right away, RBC CEO says
Canada’s largest bank is urging caution on immediate tax measures to address the massive spending undertaken in response to the coronavirus pandemic. RBC CEO Dave McKay argues that focusing on incentives for investment and business creation – particularly speed to market – would be a more effective strategy than immediately implementing tax policies to recoup these costs.
The remarks, made during a digital panel for the Collision conference, reflect a growing sentiment among business leaders and come as Canada’s credit rating was downgraded by Fitch Ratings. Fitch lowered Canada’s rating to AA+ from AAA, citing a deterioration of public finances due to the pandemic. Simultaneously, the International Monetary Fund revised its outlook for the Canadian economy, forecasting a contraction of 8.4% for 2020, a steeper decline than previously estimated. This downgrade and the IMF’s revised forecast have heightened concerns about the long-term fiscal implications of the significant government spending intended to mitigate the economic fallout of the pandemic.
McKay’s focus on incentives aligns with a broader view among economic observers. He advocates for prioritizing policies that encourage risk capital investment and the growth of businesses, highlighting the critical importance of rapid market entry. This approach recognizes the substantial investments already made to support the economy and seeks to leverage them for sustained economic recovery. Specifically, he argues that a quick imposition of taxes would stifle these efforts.
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The sentiment underscores a period of heightened fiscal scrutiny. Concerns were previously raised by corporate directors regarding potential tax increases, as evidenced by an Environics Research survey which found that 78 per cent of directors believed Canadian businesses might face higher corporate and payroll taxes. The federal finance minister, Bill Morneau, had previously ruled out tax increases aimed at covering pandemic spending costs, but these assurances were made before the recent downgrade and the IMF’s revised forecast.
Canada’s debt is projected to climb significantly, with Fitch estimating consolidated gross general government debt will reach 115.1 per cent of GDP in 2020, up from 88.3 per cent last year. This increase reflects the substantial spending undertaken to support businesses and households during the crisis. However, Fitch maintained a “stable” outlook, anticipating a gradual stabilization of the debt-to-GDP ratio and economic recovery fueled by monetary and fiscal policies.
The IMF’s revised outlook, anticipating a 8.4% contraction in the Canadian economy for 2020, further amplifies the pressure on policymakers. The IMF’s updated projections highlight the significant challenges facing the Canadian economy and underscore the need for a carefully calibrated approach to managing the country’s fiscal position. The economic situation is complicated by a broader global economic downturn, with the IMF projecting a 4.9% contraction in the global economy for 2020. This paints a challenging picture for Canada’s economic recovery and reinforces the need for strategic investments and targeted support.
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