Business subsidies on the block in Drummond report

Tax savings partly to blame for Ontario’s $16B deficit

February 16, 2012   by MATT POWELL, ASSITANT EDITOR

TORONTO: Sunsetting direct and indirect business subsidies would balance Ontario’s budget, at least according to Don Drummond’s sweeping review of the province’s economic position.

One thing is clear, balancing Ontario’s books requires significant spending cuts in everything from education to healthcare and support for private sector businesses. The report also makes it clear that Ontario can no longer depend on economic growth to keep the province’s deficit in check.

Urging Ontario’s government to develop what he’s called an “economic roadmap”, Drummond’s report suggests Ontario lucrative tax savings are partly to blame for the province’s $16 billion deficit.

By 2019, that deficit hits $30.2 billion if spending goes unchecked.

He says Ontario’s manufacturing sector is partly to blame for the eventual doubling of the province’s deficit and net debt rise of 50% by 2017. As a share of the province’ output and employment, manufacturing has fallen, and Drummond believes that fall will continue.

He suggests that Ontario’s manufacturing base has not yet grasped just how important it is to the well-being of its economy, and how it affects Canada’s economic advantage as well as its ability to finance public services. A stronger Canadian dollar and less demand for manufactured products in the US, the sector’s main customer, aren’t helping either.

For businesses this means tax credits that saved Ontario companies more than $8 billion may be put on hold until the deficit is contained. Drummond says those cuts would be justified because many of Ontario tax credits, which are shared between 44 programs across nine ministries, are outdated. Many of them took effect before the corporate tax rate was cut and haven’t changed since. Now those subsidies have become so expensive, they’ve become more of a burden than a benefit.

In his report, Drummond concedes that the level of support provided through tax credits may have made sense at one time when provincial tax rates were high. Now that corporate tax rates are lower, part of the province’s many efforts to attract foreign investment, those credits make less sense because the tax system is already competitive.

For example, Drummond has suggested cutting Ontario’s Clean Energy Benefit immediately, a subsidy designed to cut rising energy costs for businesses and households. The report also suggests capping spending for social programs at 0.5% and decrease spending in all other areas by 2.4% until 2017.

But while spending cuts across the board were a common thread in Drummond’s report, he’s also called for a change in Ontario’s economic culture, suggesting the provincial government take a long hard look at not only how it can provide help for businesses financially, but how it can also change workplace practices to improve productivity and improve trade relations with emerging economies.

A number of factors play into that change in culture Drummond’s called for, from improving productivity to understanding Ontario’s dwindling labour force. Fortunately not all is lost for the province’s aging labour force, as Drummond suggests the majority of new workers will be immigrants.

But that also means revamping the province’s immigration system to ease work requirements for those immigrants—another recommendation in the 543-page report.

The McGuinty government must now evaluate Drummond’s recommendations to decide whose ox gets goared.

To read an executive summary of the report, click here.

Click here for the full report.

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