Tax cuts not labour market intervention creates jobs

National Post – news – Comment: Even Germans take a hands-off approach to labour markets
Published: Tuesday, March 25, 2008
Jacqueline Thorpe

The Ontario government has become a giant employment services firm.

Not only has the government become the province’s principal employer under a massive public sector hiring spree, but the 2008 budget unveiled Tuesday pours billions more dollars into shiny new worker retraining schemes, skills action plans and second-career programs.

The strategy smacks of the interventionist approach to labour management that even the German government has turned its back on.

A straightforward business tax cut would have been so much simpler; harmonizing the provincial sales tax with federal GST would have been so much more effective in achieving the budget’s aim: economic growth and job creation.

The budget continues the province’s public sector hiring boom, adding 8,000 more nurses by 2012 to the 8,000 that have been hired since 2003 and the thousands of police, judges, lawyers, auditors accountants, administrators and teachers that have been added to the public employment rolls in recent years.

While the private sector has shed a net 26,600 jobs in Ontario, or 0.6% in the year to February, the public sector has posted gains of 114,000, or a 9.8% increase. Education employment is up 8.1% over the year, health care and social assistance up 4% and public administration has soared 13%.

No doubt hiring in health care was needed and will continue as boomers age, but government rolls are swelling dramatically all across the board.

The budget moves beyond straightforward hiring however and deeper into job services. It adds $1.5-billion into a “Skills to Jobs Action Plan,” with $560-million to support skills for new careers. That comes on top of the Next Generation of Jobs Fund, the Ontario Automotive Investment Strategy (OAIS) and the Advanced Manufacturing Investment Strategy (AMIS), all introduced in recent years.

The budget outlines several examples, including a forestry worker moving to a new job in mining, a manufacturer moving to a skilled trades job and assembly worker retraining to a pharmaceutical technician.

Trouble is by the time the forestry worker gets retrained to be a miner under the government’s plan the commodities boom will be over and forestry back in vogue. The scheme runs the risk of becoming a bureaucratic nightmare as government employees try to decide where the next hiring boom is going to be. Worse, it sucks away money which could be more usefully put to work in the private sector, which has always had a better track record in deciding where the next job will be.

Retraining is essential for an economy facing stiff challenges like the high dollar and fierce international competition, but the government already has an extensive skills training infrastructure through universities, community colleges and apprenticeship programs.

Germany, which spent decades designing elaborate labour management schemes, ditched the effort in 2003 in favour of lower benefits for the long-term unemployed and tax cuts, which has increased flexibility and led to a big drop in unemployment.

Retrained workers need jobs, but the budget does not budge on two strategies economists say could much more simply boost job creation: lower corporate income taxes and provincial-federal sales tax harmonization.

Although Premier Dalton McGuinty’s budget eliminates the capital tax for manufacturing and resource firms, and creates a 10-year income tax holiday for new companies that bring products to market from universities, colleges and research institutes, the corporate income tax rate stays at 14%, the third-highest in the country.

Under a harmonized sales-GST tax, businesses would be able to claim a tax deduction for outlays on business inputs just as they do under the GST. Since a whopping 40% of provincial sales tax comes from business inputs it would be a huge boon to business investment.

The province would, however, have to broaden the base on which the tax is applied – to children’s clothes, electricity, diapers and heating oil for example, which the province has previously exempt from sales tax.

The optics of presiding over “a tax increase” is apparently what is making Mr. McGuinty quail, although the tax savings for businesses would eventually feed through and more than offset the increase on selected goods for consumers, just as they did when the GST was introduced in 1991.

But that would require Mr. McGuinty to actually persuade the electorate it is the best way forward. It is so much easier just to hire people.

Financial Post – Copyright © 2007 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.

Leave a Reply

Your email address will not be published. Required fields are marked *