Austerity is holding back Ontario’s economy
TheStar.com – Opinion / Commentary – Ontario has the tax room to rebuild its fiscal capacity to protect the services we count
Mar 20 2013. By: Hugh Mackenzie and Trish Hennessy
American economists express grave concern that automatic spending cuts enacted through bizarre mechanisms like “sequestration” could seriously undercut economic recovery in the United States.
Economists estimate sequestration cuts could amount to 0.75 per cent of lost GDP growth in that country. Since U.S. economic growth in the fourth quarter was only 0.1 per cent, that could be enough to create a double-dip recession.
This dilemma is widely discussed in the United States, but Ontarians might be surprised to know we are walking toward a similar precipice ourselves. Canadian GDP growth was just 0.6 per cent in the fourth quarter. Here in Ontario alone, provincial program spending has been cut by about one full percentage point of GDP, without including additional cuts at the federal level.
More restraint is in the wings — especially if Queen’s Park continues to be guided by the doom-and-gloom projections of last year’s Drummond report, which was a prescription for full-on austerity.
It is entirely feasible that further cuts could tip the economic balance over to the negative side of the ledger, putting Ontario back into recession and throwing into sharp relief the self-defeating logic of austerity: the very measures intended to resolve a deficit could further harm the economy.
That’s pretty much been the story in Ontario. A global recession helped throw the province into deficit. Before Ontario fully recovered from recession, the province began to implement cuts to public services and to freeze public sector wages, resulting in a further drag on the economy. Meanwhile, we’ve been ignoring the fiscal elephant in the room: The underlying pressures on Ontario’s public services are directly attributable to a 15-year history of unsustainable tax cuts.
The provincial budget now loses about $17 billion a year in revenues to the tax cuts introduced since the mid-1990s. Talk about an expensive political agenda that runs at cross-purposes to deficit reduction goals.
Here’s the conversation we should be having: Ontario has the tax room to rebuild its fiscal capacity, to protect the services we count on. There are plenty of options at hand.
Just returning the corporate tax rate to its pre-recession 14-per-cent level could generate a potential $2.5 billion. Large corporations are simply taking the tax cuts and sitting on their growing profits. Besides, the corporate-tax-rate race to the bottom that the cuts were supposed to win is already over. The United States, with its own fiscal problems, has dropped out. It’s time for Ontario to do the same.
More low-hanging fruit: Ontario’s richest have been enjoying the lion’s share of economic gains. Ontario could ask them to contribute more. A two-point higher income tax rate for Ontarians earning more than $250,000 has the potential to generate up to $700 million in additional revenue.
Exempting some businesses from paying the full Employer Health Tax costs provincial coffers up to $2.5 billion in lost revenue. The exemptions are poorly targeted and make little sense.
A 10-cent-a-litre gas tax could raise up to $2 billion.
And finally, there’s the sales tax. The federal government opened up room for a two-point increase when it cut the GST rate by one point in 2006 and again in 2008. Each point of HST generates more than $2.6 billion in additional revenue, so moving into just half of the tax room vacated by the federal government would ease a lot of pressure on Ontario’s public services.
To be clear: We are not recommending that Ontario increase each of these tax measures today. We are simply saying there are plenty of revenue-generating options that would support a renewal of Ontario’s public services as an alternative to the current fixation on austerity.
And none of these ideas is the least bit adventurous. The increase in top marginal income tax rates would roughly match the increase in the United States as the Bush tax cuts on the wealthy expired.
The suggested corporate tax rate is the one that applied in 2008. Combined with the federal rate, it would still be well below corresponding U.S. rates.
The employer health tax rate wouldn’t increase at all. We’d just get rid of a system in which some employers pay and others do not.
The gas-tax rate hasn’t gone up since 1991, despite all of our increased concern about climate change and funding transportation infrastructure.
And a 15-per-cent combined sales tax rate isn’t new. That’s what the rate was before federal cuts.
At some point Ontario has to have a conversation about what matters more: some of the best public services the world has to offer, the ability to reduce poverty and income inequality, or more tax cuts.
One is a bottomless pit with low returns (see: tax cuts).
The other offers Ontario a world of stability.
That requires stepping down from the austerity ledge.
Hugh Mackenzie is an economist and research associate with the Canadian Centre for Policy Alternatives (CCPA). Trish Hennessy is director of the new CCPA Ontario office.
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