Bickering could backfire on Flaherty

National Post
Published: February 20, 2008
John Ivison

OTTAWA — C’est fini, Jim Flaherty said triumphantly, as he unveiled last year’s budget and declared an end to the “long, tiring, unproductive era of bickering” between the provincial and federal governments.

Proof that a year is a very long time in politics came Wednesday as the self-same Mr. Flaherty inaugurated a brand new era of brannigans and donnybrooks by accusing Ontario Premier Dalton McGuinty of providing a lack of leadership because he hasn’t cut business taxes. “He doesn’t get it. He sounds like [former NDP premier] Bob Rae in the bad old days,” the finance minister said.

The day before, Mr. McGuinty also invoked a breach of the time-space continuum. “I think [the federal government’s] approach is caught up in a time-warp better suited to a day when change moved at a much slower pace,” he said.

So what’s going on, beyond a heated exchange between two men with a history who clearly don’t like each other? (The two men routinely traded barbs when Mr. Flaherty was at Queen’s Park; Mr. McGuinty once accused the former Ontario finance minister of racism over comments he made about aboriginal Canadians).

The obvious catalyst is that Ontario voters are angry about recent job losses in the manufacturing sector and are blaming the federal government. “They’re getting blamed and are looking to deflect the blame by saying that Ontario is turning into a rustbelt and it’s McGuinty’s fault,” one source at Queen’s Park said.

There may be some truth to this but Mr. McGuinty can hardly be absolved when it comes to the blame game. One of his beefs with Ottawa is that the federal government is not funding his Move Ontario plan for the Greater Toronto Area transit fund or helping with the Windsor-Detroit border crossing. “No, I’ve had no real expression of interest,” he told the Toronto Star. Which is true, if you don’t count the $1-billion the feds have committed for the York-Spadina subway. Or the $385-million for GO Transit. Or the $2.1-billion earmarked for the Ontario-Quebec trade corridor that includes the Windsor crossing.

But almost drowned out by the political invective is the sound of philosophies clashing. Mr. Flaherty believes Ontario is failing to adapt to a changing world because its business taxes are the highest in Canada. In a speech in Toronto yesterday, he offered as evidence Ontario’s declining share of national GDP; its weaker than average economic growth; and, an unemployment rate higher than the national average. He said the federal government has cut corporate income tax rates from to 15% from 22.1%, while Ontario’s rate is only half a percentage point lower than in 2000, “with no plans in place for further reductions.”

Mr. McGuinty’s response is that tax cuts are not enough on their own and that governments have to make targeted investments in troubled industries to stimulate growth. The Ontario government has created the $1.1-billion Next Generation Jobs Fund to help manufacturers develop new, greener technologies and wants Ottawa to match provincial funding. Companies that can demonstrate they are creating good secure jobs and are reducing greenhouse gas emissions can access the fund, which is modelled after the $500-million Ontario Automotive Strategy fund the Ontario government credits with delivering $7-billion of new investment, including the new Toyota manufacturing plant in Woodstock.

“There are sectors of the economy that are not helped by tax cuts because no one in manufacturing is making any money,” said one senior Ontario source. “Tax cuts are the Art Garfunkel of economic measures — great as long as they’ve got a solid partner but not so good solo.”

Mr. Flaherty dismisses such moves as “bail-outs and subsidies for favoured firms”, although even economists who favour broad-based tax measures say Ontario probably got value-for-taxpayers’-money from its auto fund.

At the end of the day, the approach of neither government will do much to ameliorate a perfect storm with which the Ontario economy is being assailed – slowdown in the U.S., high energy prices, a strong loonie and growing competition from China.

Doug Porter, deputy chief economist at BMO Capital Markets, says, nine out of 10 economists would side with Mr. Flaherty and advocate creating as favourable an economic environment as possible and then allowing the market to pick the winners and losers.

The Finance Minister is urging all provinces to reduce their corporate income tax rates to 10% by 2012, which would then give Canada a rate 3% below the U.K, more than 8% below France and 15% below the U.S.

Ontario could go a long way to meeting this target if it redirected its jobs fund toward corporate income tax cuts (a one percentage point cut is estimated to cost $450-million).

The problem for Mr. Flaherty is that voters are not economists and they want action from their politicians, even if it proves to be a substitute for achievement. Ontarians instinctively feel they have been milked by the rest of Canada for decades, and even those with no love for Mr. McGuinty are sympathetic to his crusade to get a better deal from Ottawa.

In this light, the strategy of instigating a new era of bickering with Mr. McGuinty runs the risk of back-firing. The Liberals have high hopes of stealing back the Whitby-Oshawa seat Mr. Flaherty won by just 3,400 seats last time around. If there is a backlash, the Finance Minister might be saying “fini” for real at the next election.

National Post
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