Priority One: Improve Ontario’s Investment Climate

One of the most notable observations from the race for Queens Park was the lack of meaningful discussion of how to get Ontario’s economy back on track. Ontario, the traditional economic hub of Canada, is being replaced by new economic leaders in the West. Indeed, the biggest challenge facing the re-elected Liberal government is to revitalize Ontario’s lagging economy. To achieve this end, the priority must be to re-establish Ontario as one of the most attractive places to invest in Canada.

There is no doubt Ontario has experienced a shift in economic performance over the past 10 years. From 1997 to 2002, Ontario’s rate of economic growth was consistently higher than the national average. Since then, the trend has reversed as Ontario has consistently posted a rate of growth below the national average. Unfortunately for Ontarians, economic forecasts indicate more of the same going forward.

While part of the explanation for Ontario’s economic woes stem from external factors such as the rising Canadian dollar and a declining manufacturing sector, it is worth looking inward at the policies implemented by the Ontario government. Instead of mitigating the economic impact of external factors, provincial policies have contributed to Ontario’s plight by degrading its investment climate. The marked deterioration in Ontario’s investment climate is particularly worrying as business investment is increasingly acknowledged as critical to a jurisdiction’s economic success.

Prior to 2004, Ontario and Alberta consistently ranked above all other provinces in terms of maintaining a positive investment climate. Since then however, Ontario has fallen behind Alberta, British Columbia and Saskatchewan. In fact, a 2007 empirical assessment of investment climates, the Canadian Provincial Investment Climate Report, ranked Ontario’s investment climate 4th among the 10 provinces with a score of 5.0 out of a possible 10.

To understand how Ontario can turn its investment climate around, it is important to examine what has happened over the past four years.

For starters, the Ontario government increased its corporate income tax significantly from 12.5 per cent to 14 per cent. In contrast, Alberta decreased its rate from 12.5 per cent to 10 per cent; British Columbia decreased from 13.5 per cent to 12 per cent; and Saskatchewan – led by an NDP government – decreased its rate from 17 per cent to 13 per cent. In other words, while Ontario significantly increased the cost of investing in the province, governments out West were moving in the opposite direction.

The Ontario government has also delayed the planned elimination of the corporate capital tax to 2010. Tellingly, Alberta has no such tax, British Columbia eliminated its general corporate capital tax in 2001, and Saskatchewan has planned a much more aggressive elimination by 2008.

An increase in provincial personal income taxes through the introduction of the Ontario Health Premium and the cancellation of the planned elimination of the surtax on personal income also adversely affected the province’s investment climate. In fact, Alberta, British Columbia, and Saskatchewan all maintain lower top marginal personal income tax rates than Ontario which significantly impacts the incentives for effort, risk-taking, and investment and the ability to attract and retain professional and skilled workers.

Changes to Ontario’s labour laws—a critical but often overlooked contributor to the overall investment climate—have also contributed to the province’s decline. In 2004, the government legislated a marked shift in labour relations laws making them more biased in favour of unions over workers and employers. For example, the government eliminated the requirement to use democratic secret-ballot votes in the construction sector as a means by which workers indicate their desire to become unionized.

Higher taxes and a more biased labour relations environment are key reasons why Ontario has experienced a marked deterioration in its investment climate. This decline over the last four years has discouraged and impeded productive activity which helps explain in part why Ontario is no longer Canada’s economic leader.

Thankfully the roadmap to recovery is simple: the re-elected Liberal government must undo much of what it implemented in its first term. An immediate elimination of the corporate capital tax and significant reductions of personal and corporate income taxes would be a good place to start. The province must also introduce more balance in its labour laws. These changes will help turn the tide on Ontario’s lacklustre performance and place the once economic leader of Canada on a new trajectory of economic opportunity and success for its citizens.