For over half a century, Canadian governments have attempted to build the nation's economy through targeted tax incentives for manufacturing and processing industries. According to prominent economist Jack Mintz, this approach has consistently failed and continues to undermine genuine economic progress in the 2025 budget.
The Historical Pattern of Failed Industrial Policy
The current Liberal government's approach to nation-building echoes past failed policies. Mintz recalls that in the weeks preceding the September 1984 federal election, deputy finance minister Marshall Cohen developed economic policies designed to address Canada's poor economic performance and sluggish productivity growth.
This historical initiative took a fundamentally different approach than the 2025 budget, which emphasizes government-directed economic development rather than market-led growth. The critical question remains: which strategy truly serves long-term economic prosperity?
Cohen's platform featured comprehensive corporate tax reform that lowered rates while broadening the tax base through eliminating exemptions and deductions. As former finance minister Michael Wilson articulated in his 1985 budget, which implemented many of Cohen's recommendations, the objective was not to increase corporate tax revenues but to collect the same funds more efficiently while reducing government interference in market decisions.
Manufacturing Preferences: A Fifty-Year Experiment
Under Pierre Trudeau's government, the corporate tax system distinctly favored manufacturing and processing, partially to counterbalance a manufacturers' sales tax that harmed the industry's competitiveness. When the United States introduced manufacturing export incentives in 1971, Canada responded with both accelerated depreciation and a 10-percentage-point reduction in the corporate income tax rate specifically for manufacturing and processing.
This preferential treatment persisted for decades until the Chrétien government finally eliminated the special tax rate thirty years later, though Ontario maintained its version. Remarkably, accelerated depreciation provisions remain in effect today, despite the implementation of the sector-neutral GST replacement for the manufacturers' sales tax in 1991.
The Trudeau II and Carney governments have continued this tradition of favoring specific sectors, including manufacturing, clean energy, and critical mining. In 2018, the Liberals reintroduced accelerated depreciation for clean energy investments, manufacturing, and computer equipment. They also returned to differential sectoral taxation, establishing varying rates: 18 percent for financial firms and 7.5 percent for clean energy, compared to the general federal rate of 15 percent.
The 2025 Budget Intensifies Sectoral Preferences
The latest budget significantly heightens preferences for manufacturing and processing. The 2018 accelerated depreciation package returns, while a new "productivity super-deduction" permits the sector to expense structures alongside equipment. However, both preferences are scheduled to phase out by 2034.
This approach creates an even more pronounced advantage for central Canadian manufacturing. Updated estimates of marginal effective tax rates on investment conducted by Philip Bazel and Jack Mintz reveal striking disparities across sectors.
Unlike Finance Canada's calculations, their analysis includes oil, gas, and mining investments, which increases the Canada-average METR by 1.6 percentage points. The results demonstrate that manufacturing companies face a negative tax rate of -2.2 percent, effectively meaning they receive subsidies on marginal investments.
Meanwhile, other industries bear substantially heavier tax burdens. Alberta's oil and gas industry confronts a METR of 29.5 percent, while service industries in the province face rates exceeding 20 percent. Across all industries, the average METR stands at 15.8 percent, projected to rise to 21 percent by 2034 when current investment preferences expire.
Mintz concludes that Canada's half-century experiment with targeted industrial policy has demonstrated its ineffectiveness. True economic growth emerges from improving productivity through market mechanisms, not government attempts to pick winning sectors through tax favoritism.
