Bold budget in tough times

TheStar.com – Opinion – Bold budget in tough times
March 27, 2009

Premier Dalton McGuinty and the Liberal government at Queen’s Park have produced a “big idea” budget that lays the groundwork for a return to economic prosperity in Ontario.

The big idea is to make Ontario more competitive by reducing taxes on businesses, particularly on new investment. “Now is the right time to signal to the international investment community that Ontario is a great place to do business,” said Finance Minister Dwight Duncan in his budget speech yesterday.

Specifically, the government is planning to “harmonize” the provincial sales tax with the GST – a move that has long been advocated by the Ontario Chamber of Commerce and other business voices – and to reduce the corporate tax rate from 14 per cent to 10 per cent over the next few years. Taxes on small businesses will also be lowered.

Combined, the moves will save Ontario businesses more than $5 billion annually, much of which the government rightly says should be passed on to consumers in the form of lower prices.

There is irony in these moves, which were advocated by federal Finance Minister Jim Flaherty and rejected by the McGuinty government in a testy exchange just a year ago. Asked yesterday what had changed since then, Duncan noted that the federal government is providing $4.3 billion in transitional funding to help Ontario harmonize the two sales taxes.

There is also political risk in harmonizing, which is why no previous provincial finance minister (including Flaherty) dared to make the move. That’s because harmonization means the provincial portion of the sales tax (8 per cent) will be applied for the first time to products ranging from home heating fuel to new houses.

The opposition parties – even the Conservatives, who have repeatedly called for lower corporate taxes – were quick to attack harmonization as a shifting of the taxation burden from business to consumers. “He’s funding a business tax reduction on the backs of families just when they can least afford it,” said interim Conservative Leader Bob Runciman, signalling that his party will fight the move “as hard as we possibly can.” Echoed NDP Leader Andrea Horwath: “The government is adding to the burden of Ontario families who need help the most and giving the money to those who need it the least.”

To meet these objections, the government is exempting some products from the full 13 per cent weight of the harmonized tax. It is also pouring money into lower income taxes, sales tax credits and other breaks for households and individuals, including a one-time payment of $1,000, in three instalments, for every family with a combined income below $160,000 (94 per cent of Ontarians). The opposition called these payments “bribes.”

The opposition is playing political games with this issue. Harmonization is overdue. The current dual sales-tax system in Ontario is unwieldy and a deterrent to investment, which is why four other provinces have already adopted a single sales tax. The McGuinty government deserves credit for moving forward, despite the political risk.

Unfortunately, the move overshadowed other measures in the budget – some good, others worrisome, all of them leaked in advance.

Welcome is the hefty injection of cash for infrastructure projects – $27.5 billion over the next two years. That investment will both stimulate the economy and provide needed improvements in transportation and other public infrastructure, although the government took some of the green shine off the announcement by allocating more for highways than for transit.

Also welcome is the accelerated increase in the child benefit payment, providing up to $1,100 per child to low-income families.

But other fronts in the war on poverty have been short changed. There is no new money for child care, for example, and welfare benefits are being increased by a very modest 2 per cent. And the government chose not to ease the path to welfare for some needy families by ending the requirement that they first liquidate many of their assets.

Worrisome is the forecast that expenditures on health care will rise 16.4 per cent over the next two years while funding for other sectors, notably post-secondary education, will go up much more slowly. This suggests the health budget continues to crowd out other spending.

Also of concern is the red ink in the budget – not the record deficit for the coming fiscal year ($14 billion), which is arguably appropriate given the economic circumstances, but the projection of continued deficits until 2015. Duncan promised the deficit will be gradually reduced, beginning in the 2010-11 fiscal year. But that promise is dependent on the budget forecast that the economy will rebound next year, with 2.3 per cent real growth. That forecast is almost double what most bank economists are predicting.

The government – and, indeed, the public – have to hope that the budget measures will help spark that quick turnaround.

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