Federal budgets aren’t nearly as exciting as they used to be. Carefully planned leaks reveal their main features long before the Finance Minister goes shopping for new shoes. There was one zinger in our recent budget, however: the elimination of the 30 per cent foreign-content limit on tax-subsidized pension plans and RRSPs.

Bay Street lobbyists have been begging for this for years. Suddenly, surprisingly, their wish came true. And they waxed enthusiastically about their good fortune: “Look at the gifts we’ve been given by the federal government,” raved one CEO thankfully.

For the Liberals, the politics of this move are superb. It’s a pleasing sop to a constituency that might otherwise criticize the government. And because it doesn’t cost anything, the government can do it immediately (unlike other budget goodies, which are delayed by as much as five years).

But what does it mean for the Canadian economy?

The foreign-content rule was originally justified as a quid pro quo for the generous tax subsidies received by registered investors (worth a net $16-billion this year from Ottawa alone, and more from the provinces). Because these investments are so generously supported by Canadian taxpayers, it seemed reasonable that they should be pumped mostly into developing the Canadian economy.

Trouble is, there’s almost no relationship at all between what happens on Bay Street, and the nitty-gritty business of growing the real Canadian economy. Indeed, trying to “push” financial capital into the real economy is a lot like trying to push on a piece of well-cooked spaghetti. Without “pull” from real businesses, in the form of demand for growth capital, nothing happens. And in this regard, the lifting of the foreign cap says as much about the failure of Canadian corporations as it does about the unpatriotic greed of money managers.

In theory, when you invest in a mutual fund, you’re supplying real savings to finance the expansion of growing businesses. In practice, you’re doing nothing of the sort. Stock markets are 99 per cent irrelevant for financing real growth. Almost all business investment is financed from internal cash flow, not from the stock market.

In fact, rather than individuals advancing new funds to support growing companies, Canadian corporations have been sending money back the other way — lending a cumulative $125-billion back to Canadians since 2001. Businesses currently reinvest just two-thirds of their available cash flow in new projects, the weakest showing ever. This slowdown in real investment by Canadian companies adds to the mismatch between the incoming waves of financial capital, and the outgoing trickle of real, job-creating projects.

The failure of Canadian corporations to put money into motion in our real economy created an overhang of financial capital, spurring money managers to complain loudly about the shortage of good Canadian companies to invest in. This is getting worse, with the disappearance of Canadian head offices through international mergers, and the fall from grace of our rare home-grown success stories (like Nortel and Bombardier). Lifting the foreign cap may slightly increase long-run returns for financial investors. But it will make it just a little harder still to grow our own companies and our own industries.

I supported the foreign-content limit as a potentially useful limit on the often-destructive meanderings of the capital markets. (I think there were at least two other Canadians who agreed with me.) But the content limit on its own couldn’t force companies to actually invest that money in the real Canadian economy.

And the deeper failure of the private sector to use our own capital to develop our own economic potential becomes more obvious every passing year — all the more so, given the abject failure of corporate tax cuts (another $4.5-billion of which were teed up by Ralph Goodale in this budget) to stimulate more investment and innovation.

Goodale’s surprise package for Bay Street is simply more proof that our financiers have abandoned any pretence of fulfilling their nominal function as handmaidens of our national economic development, in large part because of the corresponding failure of Canadian businesses to grow our industries and companies like they were supposed to. Worse yet, our government seems to be throwing in the towel right along with them.

Jim Stanford

Jim Stanford is economist and director of the Centre for Future Work, a progressive labour economics institute based in Vancouver. He has a PhD in economics from the New School for Social Research in New...