Federal policies will compound Ontario’s problems
Ontario’s economy has been hobbled over the past decade by provincial tax hikes, a run-up in provincial government debt induced by marked spending increases, and other poor policy choices by the provincial government. Last week’s federal budget shows that Ottawa is poised to pursue similar policies placing new burdens on Ontario’s economy.
Take, for example, the federal government’s plan to increase its net debt by $123 billion over the next five years. This will bring net federal government debt to $819 billion. As troubling as the increase in federal indebtedness is, it's made worse by the fact that the string of planned deficits has no end in sight. Indeed, the government has provided no plan to return to a balanced budget. In short, the task of balancing the books is left to a future government.
Ontario taxpayers should take notice, as they are ultimately responsible for servicing and repaying roughly 40 per cent of all federal debt (Ontario’s approximate share of Canada’s population and economic output). And remember, Ontarians are already burdened by a $300 billion provincial net debt that has ballooned over the past decade.
All of this government debt ultimately has to be paid back in the future, potentially resulting in some combination of higher taxes, reduced public services, and diminished economic prosperity.
Unfortunately, the run-up in federal debt isn’t the only example of a recent policy choice at the federal level that will have a harmful effect on Ontario’s economy. On tax policy as well, the new Liberal government has taken actions that will make it more difficult for Ontario to prosper.
For example, consider the decision to create a new top federal tax bracket of 33 per cent, increasing the top marginal rate by four percentage points. This decision will reduce economic growth across the entire country, as evidence-based research clearly shows that high and increasing personal income tax rates weaken the incentives for working hard, expanding skills, investing, and being entrepreneurial.
The federal tax hike is especially problematic for Ontario because it comes on top of recent personal income tax increases at the provincial level. Since 2011, Ontario has increased its top marginal income tax rate from 17.41 to 20.53 per cent.
The combination of provincial and federal tax hikes has caused Ontario’s top personal income tax rate to jump to 53.53 per cent. Ontario now has one of the highest top personal income tax rates in the industrialized world and the second highest among G-7 countries, behind only France.
With a global market for highly skilled labour, having a competitive tax system is of crucial importance. Unfortunately, recent federal and provincial tax hikes will undermine Ontario’s ability to compete globally and attract and retain highly skilled workers such as doctors, engineers, entrepreneurs and other professionals. They will also discourage Ontarians from realizing their full potential.
There’s no doubt that recent federal policy choices will hinder economic growth across the entire country. However, coming atop similar mistakes in Ontario, the damage here may be worse.
The last thing Ontario needs is federal policies that will undermine the province’s economic performance. Provincial policy mistakes are already doing more than enough damage on their own.
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