Ontario budget ignores past promises, offers no plan to enhance economic competitiveness
Predictably, many of the headlines on Ontario’s 2018 budget, released today, focus on Premier Kathleen Wynne’s so-called “free” child care plan and other big-spending items. It is, after all, a big-spending budget. But crucially, the budget is conspicuous for what it excludes—a credible plan to enhance Ontario’s economic competitiveness and prospects for future growth.
Let’s start with the most obvious problems. According to the budget, Ontario will run budget deficits of nearly $7 billion in each of the next three fiscal years. Keep in mind, though, that given the auditor general’s past critiques of the Wynne government’s accounting methods, the true operating deficits may be much larger.
In effect, the Wynne government is choosing not to spend within its means and to simply pass the cost of current day-to-day spending onto future Ontarians. And while this year’s budget promises to eliminate these deficits seven years from now in 2024/25, last year’s budget promised balanced budgets every year after 2017/18.
Clearly, this government lacks fiscal credibility.
And this is problematic. The province already suffers from weak business investment. And uncertainty about Ontario’s growing and unrestrained debt could make matters worse. Growing debt today raises concerns about tax hikes in the future, making Ontario a less attractive place for investors and entrepreneurs.
The budget also represents a lost opportunity to finally provide pro-growth tax reform for Ontarians—another unfulfilled promise.
Ontario’s personal income taxes are nothing short of a growth-restricting disaster. With a combined federal/provincial top tax rate of 53.5 per cent, our tax system creates all the wrong incentives for high-skilled workers in prime earning stages of their careers by taking more than half of every additional dollar they earn. The economic research is clear: high marginal tax rates undermine economic growth. Ontario has the second highest top personal income tax rate in North America, making it more difficult for the province to attract and retain entrepreneurs, business owners, investors and professionals. This is just one of many crucial reasons that the province struggles to attract investment, which helps propel the productivity and incomes of workers.
But it’s partly why the government promised that the current top rates were temporary—an emergency deficit-reduction measure to be reversed in 2017/18. This budget tinkered around with the personal income tax system, but did not deliver on its overdue promise of meaningful pro-growth relief.
The budget also failed to address new competitiveness challenges emanating from the United States as a result of recent sweeping U.S. business tax reforms. Ontario once enjoyed a substantial business tax advantage over many American jurisdictions. But this is changing, as some states with which we compete—Michigan, for example—have benefitted from recent corporate tax reforms at both the federal and state level. And yet, despite these new competitiveness challenges, this budget took no meaningful action to make Ontario’s business tax environment more attractive for entrepreneurs and investors.
Ontario’s Liberal government once understood the importance of competitive business taxes. In its 2009 budget, the government reduced the general corporate income tax rate from 14 per cent to 12 per cent, with promises of further gradual reduction to 10 per cent. Dwight Duncan, Ontario’s then-finance minister, said “tax cuts for people and businesses” would create jobs, and as a result, “we will all benefit.”
Unfortunately, most of the promised future reductions never materialized and the rate has been stuck at 11.5 per cent.
A recent Fraser Institute study examined Ontario’s “lost decade” from 2007 to 2016, when economic growth rates, private-sector job creation, and other measures of economic progress languished near the bottom of the Canadian pack. This latest budget is, first and foremost, a missed opportunity to enhance Ontario’s prospects for stronger growth in the future and respond to the competitive challenges we face.
And unfortunately, Ontarians will pay the price with lower levels of prosperity.