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ADRIAN WHITE: Underground economy is thriving – The Journal Pioneer

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There is no doubt that COVID-19 has changed the way businesses function in Cape Breton. The pandemic has forced many entrepreneurs to reshape operating strategies for financial survival.  

Think of the new safety protocols for restaurants to protect staff and customers from virus transmission. Think sporting events playing out before near-empty stadiums and instead focused heavily on revenues generated from media broadcast of the event.  

There are just too many changes to business practices to list here in this column including the growth of digitization in our economy but I wanted to single out a few examples to illustrate some telling impacts. 

One major impact comes from folks not feeling safe to travel outside the province or eat out in restaurants due to the pandemic. Instead, they are using some of those cash savings to fund home improvement projects right here in the Cape Breton economy. That is a good thing for our community and our workers and it supports the “Shop Local-Buy Local” mantra being promoted by the local business community. 

Demand in the home improvement sector has soared and is so strong that it has led to a shortage of building materials, a rapid rise in material costs and a shortage of skilled labour to take on those home improvement projects.  

Many new contractors have entered the home improvement business in 2020 and many anxious homeowners are in hot pursuit of their services. Sometimes these contractors show up when expected to do a job and sometimes not. This has been a long-standing problem with small contractors in Cape Breton.  

Some contractors present an official written quote including HST for the project leaving a paper trail to follow while other contractors are quite prepared to take cash from the customer thereby avoiding HST. Cash leaves little trail for CRA to follow when it comes to reporting taxable income. 

This practice leads me to shed some light on the underground economy and its impact on our well-being as a province. Statistics Canada defines the underground economy as “consisting of market-based activities, whether legal or illegal, that escape measurement because of their hidden, illegal or informal nature.”  

I use the construction industry as an easy-to-understand example but you can imagine other opportunities for tax avoidance including buying illegal cigarettes, street sold cannabis, cash tips, paying cash for services, Airbnb cash rentals, or offshore bank accounts not being reported to CRA. 

In Nova Scotia, according to Statistics Canada, the underground economy was estimated to be $1.28 billion in 2018. That is near 3 per cent of provincial GDP. This is revenue that escapes government taxation. Nova Scotia’s underground economy as a share of GDP is higher than the national average which is troubling. Taxes on $1.28 billion would go a long way to offset the forecasted 2020 Nova Scotia budget deficit of $853 million due to the pandemic. 

Some of the underground economy is driven by the fact Nova Scotia has the second-highest personal income tax rates in the country. It remains one of three remaining provinces in the country that still practices “bracket creep” on your personal income tax deduction by not adjusting it to CPI on your annual income tax return.  

The higher the taxes the more incentive it provides for individuals and companies to embrace tax avoidance. Alberta has one of the lowest personal income tax rates in Canada and no provincial sales tax. It abandoned “bracket creep” on its residents decades ago. It also has one of the lowest underground economy as a share of GDP rates in the country running at 1.8 percent of provincial GDP.  

British Columbia has the highest ratio at 3.7 percent of GDP. In Canada, the underground economy was valued at a whopping $61 billion in 2018 amounting to 2.7 per cent of national GDP.  

I can only imagine with the increased demand for home improvement projects in Canada due to the pandemic that underground economic activity will likely increase 50 per cent rising close to $90 billion for 2020. 

In Nova Scotia, residential construction accounts for over 25 percent of the estimated underground economy GDP.  The next six largest contributors to the underground economy amount to about 50 per cent of Nova Scotia’s underground economy. They are retail trade, accommodation/food services, finance/insurance/real estate, manufacturing, professional/technical services and health care/social assistance.   

If we want to grow the Nova Scotia economy and thereby increase tax revenues to pay for the services we all expect, we are going to have to rethink the tax burden on individuals and businesses to bring balance and fairness to the tax environment. It is one of the reasons we struggle to recruit doctors to Cape Breton. Above-average taxes in Nova Scotia hinder economic expansion. High taxes will continue to drive the underground economy and tax avoidance until we address them. 

Adrian White is CEO of NNF Inc, Business Consultants. He resides Sydney & Baddeck and can be contacted at awhite889@gmail.com.

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Robust economy ailing after bout with pandemic – Business in Vancouver

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The year 2019 seems like a distant memory in the COVID-19 era, but provincial economic accounts data confirmed that, heading into 2020, B.C.’s economy remained among the strongest in the country.

On an expenditure basis, real gross domestic product (GDP) expanded by 2.7% compared with 1.9% nationally and was on par with 2018’s performance.

B.C.’s solid gain last year was achieved despite weakness in most key segments. Household consumption growth decelerated sharply to 1.7% in 2019, down from 2.8% in 2018. This was the slowest expansion since a 0.3% gain in 2009.

Slower consumption growth was driven by fewer vehicle sales, weaker ancillary spending related to housing, and flat non-durable goods purchases.

Household consumption makes up about 60% of GDP. Overall consumption expenditures growth of 2.1% was propped up by stronger government spending, which rose 3.1%.

Housing was a drag on the economy. Investment in residential structures shrank by 1.5% during the year, following a 2.5% contraction in 2018.

Trade was also dismal. Real export growth slowed to 0.9% from 3.5% in 2018. This was partly offset by slowing imports, which decelerated to a gain of 2.7%, from 3.3% in 2018. 

Weaker growth across key segments was offset by a huge increase in investment spending. Private-sector investment jumped 22% from 2018 on a 35% increase in structure investment. Machinery and equipment was flat. Private investment contributed about 74% of headline growth. This surge reflected build-out of liquefied natural gas projects. Government investment, which gained 8.8%, also outperformed, reflecting investment in schools, hospitals and other infrastructure.

Nominal GDP came in at 4.3%, compared with 4.9% growth in 2018. Economic growth largely accrued to employees during the year. Aggregate wages and salaries were up 5.7%, as net operating surplus or profits fell 7%.

With mixed gains in 2019, headline growth marked a modest handoff to 2020 – but a short-lived one, as COVID-19 ravaged the economy this year. Economic output is forecast to contract by nearly 6% in 2020 due to the pandemic-driven shuttering of parts of the economy earlier in the year and the continuing effects of health measures. Rising COVID-19 cases in the fall and winter will pause the recovery phase observed since May, but growth is forecast to reach about 4% in 2021. •

Bryan Yu is deputy chief economist at Central 1 Credit Union.

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Robust economy ailing after bout with pandemic – Business in Vancouver

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The year 2019 seems like a distant memory in the COVID-19 era, but provincial economic accounts data confirmed that, heading into 2020, B.C.’s economy remained among the strongest in the country.

On an expenditure basis, real gross domestic product (GDP) expanded by 2.7% compared with 1.9% nationally and was on par with 2018’s performance.

B.C.’s solid gain last year was achieved despite weakness in most key segments. Household consumption growth decelerated sharply to 1.7% in 2019, down from 2.8% in 2018. This was the slowest expansion since a 0.3% gain in 2009.

Slower consumption growth was driven by fewer vehicle sales, weaker ancillary spending related to housing, and flat non-durable goods purchases.

Household consumption makes up about 60% of GDP. Overall consumption expenditures growth of 2.1% was propped up by stronger government spending, which rose 3.1%.

Housing was a drag on the economy. Investment in residential structures shrank by 1.5% during the year, following a 2.5% contraction in 2018.

Trade was also dismal. Real export growth slowed to 0.9% from 3.5% in 2018. This was partly offset by slowing imports, which decelerated to a gain of 2.7%, from 3.3% in 2018. 

Weaker growth across key segments was offset by a huge increase in investment spending. Private-sector investment jumped 22% from 2018 on a 35% increase in structure investment. Machinery and equipment was flat. Private investment contributed about 74% of headline growth. This surge reflected build-out of liquefied natural gas projects. Government investment, which gained 8.8%, also outperformed, reflecting investment in schools, hospitals and other infrastructure.

Nominal GDP came in at 4.3%, compared with 4.9% growth in 2018. Economic growth largely accrued to employees during the year. Aggregate wages and salaries were up 5.7%, as net operating surplus or profits fell 7%.

With mixed gains in 2019, headline growth marked a modest handoff to 2020 – but a short-lived one, as COVID-19 ravaged the economy this year. Economic output is forecast to contract by nearly 6% in 2020 due to the pandemic-driven shuttering of parts of the economy earlier in the year and the continuing effects of health measures. Rising COVID-19 cases in the fall and winter will pause the recovery phase observed since May, but growth is forecast to reach about 4% in 2021. •

Bryan Yu is deputy chief economist at Central 1 Credit Union.

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Bank of Canada: Vaccine Could Trigger Swift Economic Rebound – Voice of America

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OTTAWA, ONTARIO – Canada’s economy could rebound faster than expected if consumer spending jumps in the wake of a successful coronavirus vaccination effort, Bank of Canada Governor Tiff Macklem said Thursday.

On the other hand, if the economy weakens amid a second wave of infections, Macklem indicated the central bank could, if necessary, cut already record-low interest rates.

In late October, the bank said it assumed a vaccine would not be widely available until mid-2022. Since then, several manufacturers have announced potential vaccines that could be distributed starting early next year.

“It is possible, especially when there is a vaccine, that households will decide to spend more than we have forecast, and if that happens the economy will rebound more quickly,” Macklem said in response to questions from the House of Commons finance committee. He described the news about vaccines as promising.

In late October, the bank forecast the economy would not fully recover until sometime in 2023, a forecast Macklem repeated in his opening remarks.

The path to recovery still faces risks, he said. Earlier this year, the bank slashed its key interest rate to 0.25%.

“We could potentially lower the effective lower bound, even without going negative. It’s at 25 basis points. It could be a little bit lower,” Macklem said, repeating that negative interest rates would not be helpful.

The U.S. Federal Reserve has a target for its key rate of 0 to 0.25%. The Reserve Bank of Australia this month cut its policy rate to 0.1%.

Some other central banks also have benchmark rates that are less than 0.25%, such as the European Central Bank and the Bank of England.

“We want to be very clear – Canadians can be confident that borrowing costs are going to remain very low for a long time,” Macklem said.

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