Skillful turn to economic reform

Posted on March 28, 2009 in Governance Policy Context, Policy Context – Opinions/Editorial – Skillful turn to economic reform
March 27, 2009

For five years, Dalton McGuinty governed Ontario as an incrementalist – a capable manager with limited ambitions to dramatically change his province. With yesterday’s budget, in response to a global recession that has hit his manufacturing-reliant province especially hard, the Premier refashioned himself as an economic reformer. It is an overdue transition, but one that for the most part appears to have been skillfully executed.

The Ontario budget does not represent a conversion to hard-line fiscal conservatism. It includes $27.5-billion in provincial funds for infrastructure over the next two years, the details of which remain unsettlingly vague. It targets poverty through such measures as an accelerated increase in child benefits, a boost to the minimum wage, and – in conjunction with the federal government – an investment in social housing. It also includes the usual scattershot spending to accommodate various interests.

Nevertheless, the budget’s centrepiece represents a bold commitment to tax reform that, until recently, Mr. McGuinty had insisted was not needed. Belatedly, he has accepted much of the wisdom of Jim Flaherty, the federal Finance Minister, who impolitely – and inaccurately – claimed in 2008 that Ontario’s high taxes made it the “last place” in the country to invest.

Most controversial in this regard is Ontario’s decision to harmonize its provincial sales tax with the federal Goods and Services Tax, which Mr. Flaherty has been advocating for years. Already, the issue has proved a boon to the provincial opposition – particularly the NDP, which claims that it punishes the poor by adding provincial tax to necessary items from which it was previously exempt.

In an encouraging display of a newly mature intergovernmental relationship, the federal and provincial governments have negated much of that criticism by ensuring that many some items – including children’s clothes, diapers and women’s hygiene products – will remain exempt from all but the 5 per cent GST. The government will further attempt to avoid a backlash by using most of the $4.3-billion in federal transitional funding to send cheques totalling up to $1,000 to taxpayers in the 2010-11 fiscal year. Although politically understandable – harmonized taxes have helped bring down governments in other provinces, and this one will take effect little more than a year before the next Ontario election – these one-off rebates make little policy sense for a government that has made much of focusing on long-term economic strategies.

Nevertheless, the good in introducing the harmonized tax greatly outweighs the bad. Research in provinces that have adopted a single tax has shown that savings passed down by businesses to consumers ultimately ensure that it does not add to their net costs. It will help create a more business-friendly climate not only by extending corporate tax exemptions on investments such as machinery and equipment, but also by vastly reducing the amount of paperwork businesses are forced to contend with. Perhaps the greatest benefit is symbolic – a clear message that Mr. McGuinty is prepared to take bold (and politically risky) action to revitalize his province’s economy.

That same message has been sent, to less controversial but perhaps even stronger effect, with major reductions to business taxes. With a cut to the general corporate rate from 14 per cent to 12 per cent in 2010, and 10 per cent by 2013 (manufacturers, who currently pay 12 per cent, will begin paying 10 per cent next year), Ontario-based businesses will shift from being some of the country’s most heavily taxed to some of its least. If Ontario wishes to go from losing businesses to attracting them, this was an important step.

Of more debatable merit is a lowering of the personal income-tax rate from 6.05 per cent to 5.05 per cent on the first $36,848 of income. While putting more money in the hands of lower-income groups, who are likeliest to spend it, it will also provide extra money for higher earners – a questionable way of strengthening the economy. Still, that cut will require a small enough hit to revenues that it should not have a major bearing on the province’s ability to pull itself out of deficit once it has recovered from the recession.

Indeed, a key virtue of this budget is that the projected series of deficits are sustainable, because the vital ratio of debt to gross-domestic product is being kept within manageable limits, if economic projections are reasonably sound. Looking ahead as far as 2016-2017, the plan shows no figure as high as the 32.9 per cent reached as recently as 1999-2000, a proportion which Ontario clearly survived. The government is responsibly holding itself by a vital fiscal anchor.

There are one or two almost audible silences in this budget. The automobile industry is praised for its contribution to the economy, but is unnamed when it is most importantly present: in the $3.4-billion provided as a contingency fund for 2009-10, in case the economic downturn is worse than expected. This is doubtless a reference to the possible effects of a shrinkage of the automobile industry and of its suppliers, and of a fall in consumer demand due to the consequent unemployment. By itself, this number contributes little knowledge of the Ontario government’s approach to the auto sector.

As well, the budget’s minimal investment in research and in post-secondary education may come as a surprise after Mr. McGuinty’s repeated vows to convert his province to a knowledge economy.

A single budget can only do so much, however. Mr. McGuinty clearly intended to use this one to send a signal that Ontario’s era of relative complacency is over; that his government is prepared to dramatically shift course to adapt to changing economic realities. He has succeeded in delivering that message.


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