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Letter to The Honourable Charles Sousa, Ontario Minister of Finance, on the provincial budget

Date: March 1, 2017

Publication Type: Letters

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Macroeconomic and Fiscal
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Publications Archives: Letters

Dear Minister,

I am writing on behalf of the Business Council of Canada to offer our perspective on the government’s fiscal situation and several priority recommendations for your upcoming fifth budget.

First let me commend you on your determined efforts to eliminate the provincial deficit.  Ontarians are counting on you to achieve your target of a balanced budget in 2017-18 – an important milestone after nine straight years during which Ontario has doubled its debt burden.

A balanced budget, however, is just the first step toward ensuring Ontario’s long-term fiscal sustainability. Indeed, the hard work is arguably just beginning. With the deficit almost erased and an election due to be called by mid-2018, you are bound to face growing demands – from within your party’s ranks as well as from many other quarters – for new spending. I urge you to resist these pressures and to keep your focus squarely on the bigger challenge of tackling the provincial debt.

Ontario’s net debt now stands at $318 billion and is projected to hit $350 billion by 2020-2021. Even in today’s low interest-rate environment, the cost of servicing the debt rivals what the government spends on all provincial post-secondary and training programs and the justice sector combined – some $12 billion a year. When interest rates rise – as they are forecast to do soon – Ontario’s debt-servicing costs are likely to increase sharply.

In our view, the responsible course of action is to commit to driving down Ontario’s debt-to-GDP ratio from today’s 40 per cent to the pre-recession level of 27 per cent. Doing so would greatly reduce the risk that Ontario will be forced to slash spending on vital programs or hike tax rates to keep pace with rising interest payments on the debt.

The good news is that, at least in the near term, the province’s relatively bright economic outlook should make it easier for you to meet your fiscal targets. With GDP growth of 2.6 per cent last year and 2.1 per cent projected for 2017, Ontario is currently one of the fastest-growing economies in Canada.

Having said that, Ontario may be hard-pressed to maintain this pace of growth given the recent surge in protectionist sentiments in the United States and elsewhere. Fully 49 per cent of the province’s GDP depends on U.S. trade. Ontario’s motor vehicle and parts industry is particularly exposed to protectionist measures given its high dependence on the U.S. market: in 2016, shipments across the border totalled $75 billion, accounting for over 90 per cent of motor vehicle and parts exports.

Minister, I and my colleagues at the Business Council – a group that includes most of Ontario’s largest private-sector employers – are convinced that the province can thrive in the face of these challenges. The key is to adopt a broad and ambitious agenda aimed at strengthening Ontario’s competitiveness, attracting new investment and reducing the level of public debt. The Business Council urges you and your government to focus on the following priorities:

  1. Targeted spending on infrastructure projects – Your government can bolster Ontario’s long-term competitiveness through carefully targeted spending on productivity-enhancing infrastructure. The province should prioritize projects according to their anticipated productivity returns, adopt a streamlined approvals process, consider user fees as required and leverage private investment.
  2. Lowering the cost of doing business – Ontario’s competitiveness as an investment destination will be seriously eroded if the new U.S. Administration follows through on promises to cut corporate taxes and simplify the regulatory environment. The 2009 Ontario budget included a promise to trim the provincial corporate income tax (CIT) rate to 10 per cent by 2013. In light of the province’s challenging fiscal situation, the government decided in 2012 to freeze the rate at 11.5 per cent until the budget was balanced. Five years later, with the deficit nearly eliminated and comprehensive U.S. tax reform looking increasingly likely, Ontario must be ready to fulfill its tax-reduction commitment so as to preserve the province’s ability to attract and retain investment. At the same time, the province can promote new business activity and job creation by following through on commitments to regulatory reform. Business leaders welcomed the 2016 announcement of a Regulatory Modernization Committee and Regulatory Centre of Excellence and look forward to tangible results.
  3. Implementing the Canadian Free Trade Agreement – Unnecessary and costly barriers to internal trade impede the competitiveness of businesses and hurt workers in Ontario and across Canada. We are encouraged by reports that the federal government and provinces and territories are close to announcing a sweeping new interprovincial trade agreement that will significantly liberalize trade within our country’s borders. Establishing a common Canadian marketplace that is free of internal barriers will create jobs, drive investment and make it easier for Ontario-based firms to achieve the scale they need to become global champions.
  4. Using revenues from cap-and-trade to support competitiveness – The Council supports the overall direction of provincial policy on climate change, including the use of carbon pricing to reduce greenhouse gas emissions.  At the same time, policymakers must recognize that several of Ontario’s major export markets and competitors – notably the United States – are headed on a different path.  As much as possible, Ontario needs to ensure that jobs and investment do not simply move to less restrictive jurisdictions, with no net reduction in carbon emissions. The new cap-and-trade regime will generate significant revenues, money that can help the province meet its climate goals while also bolstering the competitiveness of Ontario industry. A portion of these funds should be used to offset the increased operating costs facing companies and to assist the development and adoption of innovative technologies that will be necessary for the successful transition to a lower-carbon economy.
  5. Strengthening skills training for workers and recent graduates – Workers and recent graduates who are now entering Ontario’s labour force are confronted with a rapidly changing economy in which secure, well-paying jobs can be hard to find. Meanwhile, employers frequently face challenges in hiring workers with the technical and soft skills they need to succeed in an increasingly competitive global marketplace. Your government’s commitment to expanded work-integrated learning opportunities for post-secondary students represents an important step toward ensuring that young Ontarians are prepared for the 21st century labour force. We encourage you as well to provide older, dislocated workers with enhanced access to high-quality training and skills development programs that will improve their ability to adapt to technological and organizational change.We trust you will find these recommendations useful and would welcome an opportunity to discuss them with you in more detail.Sincerely,The Honourable John Manley