Ontario’s deficit woes

Is the sun setting on business subsidies?

March 30, 2012   by Matt Powell, Assistant Editor

Ontario, awash in red ink, has some tough decisions to make about how to spend taxpayers’ money, one of which will involve the ways government supports its beleaguered manufacturing base.

Sun setting direct and indirect business subsidies would help balance Ontario’s books, according to Don Drummond’s review of the province’s economic position, and there’s some support from SME’s and manufacturers for doing so, but they urge the government to proceed with caution.

Drummond’s nearly 700-page report offers more than 460 recommendations that provide a roadmap for eliminating the province’s $16 billion – and counting – deficit, and they involve a lot of cutting.

The former federal civil servant and TD Bank chief economist appointed by the McGuinty government to identify the choices that will have to be made is clear balancing Ontario’s books requires significant spending cuts everywhere from education to healthcare, which accounts for about 70% of public sector spending. But he is also recommending cutting business subsidies and tax credits that have saved the province’s corporations billions.

Ontario and its manufacturing base, once responsible for 40% of Canada’s economy, is now a have-not province that can no longer depend on growth to keep its deficit in check. If the McGuinty government chooses to do nothing, the deficit will balloon to $30.2 billion by 2019.

A TD Economics report pegs the province’s economic growth at 2% and revenue growth of 3.2%, a full percent short of the McGuinty government’s 4.2% forecast last year.

Drummond observes the declining fortunes of the manufacturing sector, so key to the economy and the province’s ability to finance services and government, have been a major contributor to the eventual doubling of the deficit and net debt by 2017.

For businesses this means tax credits that saved Ontario companies more than $8 billion may be put on hold until the deficit is contained.

He argues those cuts are justified because many of Ontario’s tax credits, which are shared between 44 programs across nine ministries, are outdated and haven’t been updated since the corporate tax rate was cut to 11.5%.

Ian Howcroft, vice-president of the Ontario division of Canadian Manufacturers & Exporters (CME), agrees a thorough analysis of those credits and subsidies is necessary to cull the losers.

A call for change
“We recognize a need to change,” he says. “But we need to analyze these credits thoroughly and ensure we’re getting valuable returns for the province’s investments and focus on programs that improve productivity, job creation and economic growth.”

He warns that rushing into program cuts would be detrimental to fixing Ontario’s problems.

Satinder Chera, vice-president of the Canadian Federation of Independent Business (CFIB) in Ontario, agrees that jumping into programs cuts would be devastating.

“We need to be careful how we approach these recommendations, they are only recommendations,” he says. “They need to be implemented in a methodical way that has a vision towards improvement.”
Ontario’s small business tax deduction is another issue.

“We need to look at that small business tax rate and wonder if it’s actually holding companies back from attracting new growth opportunities,” he says.

That credit, which provides Canadian-controlled, privately owned corporations a tax rate cut of almost 8% on the first $500,000 of active business income, could be holding Ontario back from export opportunities and growth in emerging markets.

“The benefit, of course, is that it allows companies to keep more of their earned dollars to invest,” he says.
But small firms typically have more difficulty raising capital than larger companies do, so they focus on raising capital rather than exploring growth opportunities.

Howcroft says there has to be incentives to attract foreign investment to Ontario, a high-cost jurisdiction.
“We’re not operating a 65 cent dollar anymore and while the tax rate has improved, the cost is still too high,” he says. “Improvement will depend on providing more incentives for companies because other countries are revamping their tax situations as well. We need to show more of a benefit for companies.”

Improving productivity, which brings innovation, R&D and job creation into the mix, is another issue.

Ontario’s innovation tax credit, which provides a 10% rebate for innovation expenditures could be gone. So too the province’s Apprenticeship Training credit, which pays for 10% of a new employee’s salary and a hiring credit that pays out $1,000 per employee.

He’s also called for a change to Ontario’s economic culture, suggesting the provincial government not only look at how it provides help for businesses financially, but how it can change workplace practices to improve productivity and trade relations with emerging economies. That includes taking a serious look at the aging workforce and future labour needs.

The McGuinty government is looking at $2 billion in business-subsidy cuts, including $1.3 billion from 50 support programs and $1 billion in tax credits. A budget is due at the end of March. Manufacturers will soon see how seriously the minority government takes Drummond’s recommendations, and how effective the business support that survives will be.

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