Cautious steps amid fragile recovery

The Harper government’s new budget offers $300-million in cost cuts for Canadian manufacturers by cutting tariffs on a wide range of imports used in production, a move designed to prompt companies to invest in up-to-date equipment and boost productivity.

But businesses – including manufacturers – will also face some higher expenses in coming years because of lower writeoffs for capital equipment and higher employment insurance premiums.

In the budget’s single biggest measure aimed at making Canadian companies more competitive, Finance Minister Jim Flaherty moved to virtually eliminate tariffs on a broad range of imported goods, including machinery and equipment, used by businesses....

"It will greatly reduce costs and paperwork for manufacturers in Canada. It will lower costs for consumers of Canadian manufacturing goods.” [Mr. Flaherty said in his budget speech.]

While the Finance Minister says the measure will encourage Canadian firms to invest in productivity-enhancing equipment, he declined to extend a key tax measure that industry wanted to keep: the extension of the accelerated capital cost allowance (ACCA), which allows business to rapidly write off investments in plant and equipment.

The ACCA expires at the end of 2011, and a number of business groups had encouraged the government to extend it for another five years.

The government’s action in 2007 to extend the ACCA through 2011 cost the federal treasury $535-million this year in foregone business taxes.

Jayson Myers, president of Canadian Manufacturers & Exporters, welcomed the reduction in tariffs, but said it is a “pretty marginal benefit” to manufacturers who rack up $500-billion in annual sales. The savings will be $210-million in the coming fiscal year, growing to $300-million when the tariffs are fully phased out in five years.

The ACCA, on the other hand, provides a more-direct incentive for businesses to buy machinery and equipment that will boost productivity....

Most businesses will also have to pay higher employment insurance premiums starting in 2011, as Ottawa is ending a freeze that kept the payments – made by employees and employers – from rising. Rates will go up to pay for the increasing support that has gone to the legions of unemployed, many of whom have still not found jobs....

The tariff reductions in the budget are an extension of moves made in the 2009 budget, when Mr. Flaherty eliminated tariffs on 214 items for a annual saving of $88-million.

The tariffs range up to 14 per cent for textiles that are used in making furniture and car seats. Industrial chemicals can carry tariffs of between 5 and 6.5 per cent. The government projects the tariff cuts will create 12,000 new jobs.

Derek Burleton, economist with Toronto-Dominion Bank, said the tariff measure complements efforts by Ontario and B.C. to make Canadian firms more competitive through the implementation of the harmonized sales tax (HST)