In Ontario, obstacles to growth remain

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Appeared in the Toronto Sun, September 27, 2017
In Ontario, obstacles to growth remain

The Toronto Sun recently published a column by Omar Khan, former senior staffer for several Ontario Liberal cabinet ministers. Mr. Khan defends the record of Premier Kathleen Wynne, rejecting the notion he says has been put forward by “firebrand columnists” that Ontario policies are producing something close to a “second Bolshevik revolution.”

And it’s true that Ontario’s policy environment easily clears this low bar. In Ontario, like all Canadian provinces, property rights are generally respected, the rule of law is enforced, and the basic political and economic conditions that make growth possible are generally met. That’s why Canada consistently ranks among the top 10 most economically free countries in the world and Ontarians, like other Canadians, enjoy more economic freedom and opportunity than most people on Earth. So Mr. Khan is thankfully right that Ontario is far from Bolshevism.

But the right question for Ontario isn’t whether we are on a road to serfdom; it’s whether policies from Queen’s Park maximize the province’s potential for growth and opportunities for Ontarians and future generations. On this test, Ontario comes up short.

Consider personal income taxes. Ontario, once you factor in federal taxes, maintains one of the highest top marginal income rates in the developed world. Indeed, top earners face a tax rate of 53.5 per cent on any additional earnings.

Economic research shows this sort of punitive tax undermines growth. What’s more, it makes it harder for Ontario to attract talent. One recent study from Ontario’s Institute for Competitiveness and Prosperity notes that some CEOs, when recruiting employees from other countries, report that they often receive little more than a “courtesy call” from top talent, due largely to Ontario’s high tax rates.

And high tax rates may be with us for a while. Ontario carries a huge public debt. The cost of servicing this debt makes it harder for the provincial government to consider tax relief (at least without prolonged spending restraint or cuts). In short, debt is an obstacle to tax competitiveness.

Mr. Khan himself notes Ontario businesses remain burdened by high energy prices that restrict growth—especially in the north. Now many of these same firms are threatened by increases in labour costs, as the minimum wage is set to increase 32 per cent.

Moreover, Mr. Khan correctly observes that Ontario’s economic recovery has been geographically uneven, so it’s troubling that negative effects on employment from a minimum wage hike are likely to be especially severe in smaller cities where average wages tend to be lower than in Toronto. For firms that employ lower-wage workers in cities such as London, Kingston and Sudbury, a higher minimum wage will make it harder to keep young Ontarians working.

Finally, while it’s true that after a prolonged period of weakness, Ontario’s economy has recently picked up steam, there are reasons to be concerned about whether positive trends will continue and the lengthy period of growth required to undo the damage of the past decade will materialize. Specifically, as of 2016, business investment in Ontario (a key indicator of long-term growth prospects) still had not recovered to pre-recession levels. And there are ongoing risks Ontario’s housing sector will continue to cool down.

Of course we should root for Ontario’s hot streak to continue. But these data, and the policy obstacles to growth, should temper any optimism. In several key areas, Ontario’s policy environment is preventing the province from reaching its full potential.