British Columbia has largest share of small business employment

October 10 2003 - "Small business in British Columbia has posted notable gains in a number of services such as retail trade, the arts and recreation, countering other difficulties, such as the damage from this summer's extensive forest fires and the declines in small business employment already witnessed in the forestry sector," says Mary Webb, Senior Economist, Scotiabank.

According to the Bank's report, Small Business ... Supporting National Employment as Job Creation Slows, companies of all sizes have been vulnerable to the string of unforeseen events gripping Canada, from the SARS outbreak to the recent devastation on the East Coast from Hurricane Juan. Canada is also grappling with more fundamental developments, notably the slow global recovery, extended trade frictions, the Canadian dollar's sharp appreciation and increasing competition from the emerging economies in Asia. Canada's larger corporations are particularly sensitive to these fundamental changes, and their efforts to restructure and reinforce their bottom line are expected to constrain their hiring into 2004.

"Small business typically plays a counter-cyclical role," says Webb. "This was well illustrated during the early 1990s. When private-sector payrolls were contracting from 1990 to 1993, microbusinesses with less than five staff continued to hire. For the bigger players in the small business sector, the decrease in employees was less pronounced than for larger firms, and they returned to sustainable employment growth more quickly. In contrast, corporations with over 500 employees reported the most dramatic lay-offs during the early 1990s, and significant expansion of their payrolls did not resume until 1997."

Small businesses have the important advantage of being less exposed to export markets and to domestic industries where import competition is especially intense. "A basic driver of small business is population growth," observes Webb. "In addition, the areas of domestic spending that bolstered small business confidence over the past two years remain upbeat, such as the housing sector and its many domestic suppliers, information technology services, and a range of personal services. Current low interest rates - and the prospect that the Bank of Canada is expected to ease further if the Canadian economy remains sluggish and the Canadian dollar continues to climb - should help to maintain momentum in these areas of domestic expenditure as well as reducing the cost of small business financing."

"Recent federal and provincial tax cuts are also expected to encourage small business," states Webb. "New Brunswick now boasts a provincial small business corporate income tax rate of just 3.0%, and Alberta is expected to match this rate in April 2004. By 2005, seven of the ten provinces are expected to have a small business income tax rate of 5.0% or less."

"A continuing issue, however, is the jump in the corporate income tax rate and other taxes as small businesses make the transition to larger operations," remarks Webb. "An alternative to the sizeable gap in the current two-rate CIT system is a series of graduated rates for an expanding firm."

"As small business helps to carry Canada through a period of slower employment growth, it is important to foster the expansion of smaller operations as well as to encourage new start-ups," says Webb.

The report, Small Business ... Supporting National Employment as Job Creation Slows, can be found on www.scotiabank.com.