If Ontario balances its budget, spending discipline remains mandatory

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Appeared in the Toronto Sun, March 1, 2017

In its upcoming budget, Ontario’s provincial government is forecasted to finally balance its budget after nine consecutive deficits. This is, of course, good news.

However, the provincial government has repeatedly signalled that it views the expected balanced budget as evidence that it’s time to begin spending more freely. This would be a mistake. In reality, Ontario continues to face real challenges, with both the state of its finances and the competitiveness of its tax system. Addressing these challenges should be the government’s next moves.

Let’s first stop to recognize the simple fact that a balanced budget in 2017/18 will not mean the end of Ontario’s fiscal problems. All of the debt accumulated over the past decade won’t disappear and, in fact, the province will keep racking up more debt going forward due to spending on capital projects that don’t fully appear in the annual operating budget.

Balanced budget or not, Ontario will remain the most highly indebted sub-national jurisdiction in the world, and its debt-to-GDP ratio is projected to hover near the historically high current level of 40 per cent. Cleaning up this mess requires spending discipline. Loosening the purse strings would simply mean even more debt.

Notwithstanding these concerns, to the extent a newly balanced budget affords the government some new degree of fiscal flexibility, the best thing it could do to promote economic growth would be to provide tax relief for Ontarians who have been saddled with tax hikes in recent years.

One logical place to start would be personal income taxes, an area of tax policy where Ontario is simply not competitive. Ontario’s top combined federal/provincial marginal income tax rate sits at 53.5 per cent.

That makes us one of only a handful of jurisdictions in North America where many professionals, entrepreneurs and skilled professionals see more than half of each additional dollar they earn flow to the government rather than their own pocketbook.

And that’s just the income tax—once the 13 per cent HST and other taxes are factored in, some Ontarians face a total marginal tax rate of about 70 per cent. This type of punitive tax rate discourages entrepreneurial risk-taking. Income tax relief could help address this problem.

On corporate income tax, Ontario is in better shape. Our 12 per cent provincial corporate tax rate is competitive compared to most provinces, and our combined federal/provincial rate matches up well with American states. Still, corporate income tax relief would be good for economic growth and could give Ontario businesses a desperately needed advantage in this area, particularly considering what they’ve endured in recent years (sky-high electricity prices, for example).

Tax relief to provide Ontario with the lowest corporate tax rate in North America would help offset some of these disadvantages and create a “calling card” that could help attract firms and entrepreneurs.

Simply put, a balanced budget in 2017/18 would certainly be good news, but it would be imprudent for the government to use this development to justify loosening the tap and start spending more freely. Important challenges remain with both public debt and tax competitiveness. Addressing those challenges should be the government’s top priorities once the budget is balanced.

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